It’s a good time to start thinking about the tax credits and incentives that could lead to an increased cash flow for your company.
Below are five significant areas of opportunity to consider. You can also visit our pages for tax reform and tax planning and read our article 3 Possible Savings Opportunities and 3 Important Tax Requirements.
State and Local Tax (SALT)
While programs vary state to state, there are two credits that could potentially result in significant savings for your company at a local level:
- Employer credit for paid family and medical leave
- Work opportunity tax credit (WOTC)
Employer Credit for Paid Family and Medical Leave
This is a credit for eligible employers that voluntarily offer up to 12 weeks of paid family and medical leave annually to qualifying employees. However, it’s only available for an employer’s tax year that begins in 2018 or 2019. It’s part of the general business credit reflected on Form 3800 that reduces a taxpayer’s income tax liability.
For more information, read our Insight.
Depending on the percent of leave wages paid to a qualifying employee, the credit allowed could range from 12.5% to 25% of those eligible wages.
The credit is nonrefundable and could be used to offset federal income tax. However, determining eligibility and calculating the credit can be complicated.
Review and determine if your paid leave policies qualify for the program with your tax advisor. If they qualify, your tax advisor can help you calculate the credit amount and draft a detailed report for your federal income tax return.
The WOTC is a federal credit distributed at the state level. It is designed to encourage businesses to hire individuals receiving government assistance and encourage them to become more self-sufficient.
Target groups include:
- Families who receive Supplemental Nutrition Assistance Program benefits, also known as food stamps
- Families who receive short or long-term Temporary Assistance to Needy Families or Aid to Families with Dependent Children, also known as welfare
- Unemployed or disabled veterans
- Qualified ex-felons or pardoned, paroled, or work-release individuals
- Individuals who have completed or are completing vocational rehabilitation programs
- Qualified 16 or 17-year-olds living in an empowerment zone
- Individuals receiving Supplemental Security Income
- Individuals living within a rural renewal county
- Individuals who were unemployed for at least 27 consecutive weeks and received unemployment compensation under state or federal law during this period
Depending on which target group the individual belongs to, the maximum credit per new hire can range from $2,400 to $9,600. The value of the credit is determined by the target group the employee qualifies under, the number of hours worked, and the wages earned paid in during the first year period of employment.
The WOTC is a prospective program with a 28-day statutory filing window to apply for the credit.
It’s important for employers to implement a process sooner rather than later to ensure they increase their tax credit potential. For more information, please see this page.
Talk to your tax advisor and check that applications are filed on time.
If you need assistance, your tax advisor can perform any necessary denial appeals and work with the WOTC coordinators to obtain certifications and subsequently calculate the available credit.
Tangible Asset Incentives
Owning real estate represents a significant financial investment for any business or investor. When it comes to the tax advantages, are you managing these assets in a way that enhances your return?
Properly classifying your fixed assets and increasing property depreciation are key to sound real estate management—and through the tax deductions and deferrals they generate, they free up cash you can reinvest immediately.
Tangible Property Regulations (TPR)
Effective for tax years beginning on or after January 1, 2014, the TPR provide a framework to analyze whether an expenditure to existing tangible property must be treated as a capital improvement—a depreciable fixed asset—or a deductible repair expense. Taxpayers who file Form 3115 for accounting method changes under the automatic method change procedures generally aren’t able to file another accounting method change related to the TPR for five years.
Current tax return filings present a timely opportunity to revisit overcapitalized expenditures if taxpayers filed a TPR-related method change in 2014. Unfortunately, many building or real estate operators miss savings opportunities related to tax-deductible repair and maintenance expenses that had been treated as a depreciable capital improvement on a previous tax return.
Performing a fixed asset review of your business’s existing asset holdings can reveal associated improvement projects from prior tax years that could have been classified and expensed as repairs.
- Collect and organize important documentation necessary to complete a review of capitalized fixed assets and repair expenditures.
- Conduct interviews with key facilities and maintenance personnel involved with the construction and maintenance projects.
- Review current additions for repair expenditures and partial dispositions related to improvement capitalizations in the current year.
- Seek the assistance of an outside advisor to help streamline the process of identifying overcapitalizations.
Greater internal scrutiny should be applied for businesses that own real estate or leasehold improvements, such as multi-tenant office buildings, healthcare facilities, automobile dealerships, or restaurants.
100% Bonus Depreciation
Tax reform introduced significant changes to bonus depreciation. Under the new tax laws, bonus depreciation has increased to 100% for property acquired and placed in service after September 27, 2017, and before January 1, 2023—plus an additional year for longer production period property and certain aircraft.
The 100% bonus depreciation percentage phases down by 20% per calendar year in taxable years beginning January 1, 2023, and reduces to 0% by January 1, 2027. In order to qualify for 100% bonus depreciation, the property can’t have a written binding contract entered into prior to September 27, 2017.
Certain used property is also eligible for bonus depreciation, provided it is acquired in an arm’s length transaction.
Qualified improvement property (QIP) is assigned a 39-year depreciable life and doesn’t qualify for bonus depreciation, although it could be included as an expense under Section 179 of the Tax Cuts and Jobs Act. For more information, please see our Alert.
Bonus depreciation enables businesses making significant investments in their companies—whether through acquiring an existing property, constructing a new building, renovating an existing building, or purchasing equipment—to recover the costs of certain types of depreciable property and enhance cash flow.
- For acquired properties, a cost segregation study could identify assets eligible for bonus depreciation in a property transaction.
- For assets placed in-service after September 27, 2017, consider having a fixed asset review completed to identify assets with shorter recovery periods, making them eligible for bonus depreciation.
- Consider the Section 179 limitations to help determine if breaking out QIP from improvement projects would be beneficial to your business.
There are often tax credits available for work your company is already doing. Below is one R&D credit that tends to go unnoticed.
R&D Tax Credit Payroll Election
This provides an often overlooked tax benefit for companies that aren’t profitable yet and don’t have any income tax liability.
For example, many startups focus on growth during early operations. The result is a multi-year path to profitability and no income tax liability for several years after operations begin.
Despite having no income tax liability, startups do incur tax liability in the form of payroll tax. For these companies, up to $250,000 of the R&D credit could be applied to a taxpayer’s portion of social security tax each year provided specific criteria are satisfied.
By making a payroll credit election, startups can reduce annual cash burn up to $250,000 and shorten the path to profitability.
The two biggest limitations for the payroll election are:
- The taxpayer must have no more than 5 years of gross receipts.
- The gross receipts must be under $5 million in the year in which the election is made.
A 2014 startup that first accrued revenue in 2015 could make a payroll election in 2019 if its revenues are still below the $5 million threshold in 2019. While many startups do not have sufficient payroll tax liability to utilize the entire credit in a single quarter, any excess credits will rollover to future payroll liability until the credit is exhausted.
In addition, any credits in excess of the $250,000 limitation will be taken as a general business credit and can be carried forward for up to 20 years.
The IRS requires taxpayers to keep sufficient records to determine whether the taxpayer has adequately determined its credit for the year. Because no specific type of documentation is specified within the statute, Treasury Regulation 1.6001-1 provides additional guidance concerning the types of documentation that should be retained.
For taxpayers who wish to claim the R&D tax credit, the documentation may come in a variety of forms. The Audit Techniques Guide is clear that the IRS places specific emphasis on contemporaneous documentation—that is, documentation created when the activities identified as qualified were being performed.
A variety of documentation helps substantiate an R&D credit claim including the following:
- Business and technical requirements
- Code commit logs
- Quality assurance testing plans
- Release notes
- Meeting notes and agendas
- Email correspondence
- Technical drawings and revisions
- Build of materials
- Detailed quantitative financial records
Documentation should help establish a nexus between the project, qualified activities, and the individuals that contributed to its development.
It’s important to keep your documents as organized and detailed as possible, so the credit amount can be determined.
We’re Here to Help
To learn more about tax strategies and how they might affect or benefit your company, contact your Moss Adams professional or firstname.lastname@example.org.
You can also visit our dedicated tax reform and tax planning pages for a deeper dive, and you can read more about staying compliant in our article 3 Possible Savings Opportunities and 3 Important Tax Requirements.