Federal tax credits can help you pay part of the cost of running your business. Many businesses overlook them each year, even though they often qualify for one or more of these credits. Though both tax deductions and credits can save businesses money, they do it in different ways. A deduction lowers the income on which tax is figured, while a credit lowers the tax itself! An additional benefit of the credit is that in many cases, it can be carried-forward from prior years as well as carried back from later years to lower taxes.
There are many general business credits available, covering a wide variety of initiatives, such as alternative energy and employer pension plans. Here are few credits that may apply to your business:
Alternative motor vehicle – This credit is for alternative motor vehicles that you placed in service during the tax year. An alternative motor vehicle is a new vehicle that qualifies as one of the following four types of vehicles: qualified fuel cell motor vehicle, advanced lean burn technology motor vehicle, qualified hybrid motor vehicle, or qualified alternative fuel motor vehicle. The maximum allowable credit varies by vehicle, make, and model.
Alternative fuel vehicle refueling property -This credit applies to the cost of any qualified fuel vehicle refueling property you place in service. Qualified alternative fuel vehicle refueling property is any property (other than a building or its structural components) used to store or dispense an alternative fuel into the fuel tank of a motor vehicle. The credit for all property placed in service at each location is generally the smaller of 30% of the property’s cost or $30,000.
Biodiesel and renewable diesel fuels – This credit applies to certain fuels sold or used in your business. Those fuels include: Biodiesel, Renewable diesel, Biodiesel mixture, Renewable diesel mixture, and Small agri-biodiesel producer. The credit ranges from $0.10 to $1 per gallon of fuel produced or used.
Employees and Customers
Employer-provided childcare facilities and services – This credit applies to the expenses you pay for employee childcare and childcare resource and referral services. Qualified childcare expenditures are amounts paid or incurred to acquire, construct, rehabilitate, or expand property that is to be used as part of a qualified childcare facility of the taxpayer. This credit is 25% of the qualified childcare facility expenditures plus 10% of the qualified childcare resource and referral expenditures paid or incurred during the tax year. The credit is limited to $150,000 per tax year.
Small employer pension plan startup costs – This credit applies to pension plan startup costs for a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension. This credit equals 50% of the cost to set up, administer the plan, and educate participants about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan. The credit can be carried back or forward to other tax years if it cannot be used in the current year.
Work opportunity – This credit provides businesses with an incentive to hire individuals from targeted groups that have a particularly high unemployment rate or other special employment needs. An employee is a member of a targeted group if he or she is a: long-term family assistance recipient, qualified recipient of temporary assistance for needy, families (TANF), qualified veteran, qualified ex-felon, designated community resident, vocational rehabilitation referral, summer youth employee, food stamp recipient, or SSI recipient. This credit ranges from 25% to 50% of the wages paid during the first two years of employment.
Empowerment zone – You may qualify for this credit if you have employees and are engaged in a business in an empowerment zone or renewal community for which the credit is available. The credit amounts to 20% of the employer’s qualified wages (up to $15,000) paid or incurred during calendar year on behalf of qualified empowerment zone employees. Parts of Tucson, Arizona qualify as empowerment zones.
Disabled access – This credit is for an eligible small business that incurs expenses to provide access to persons who have disabilities. You must pay or incur the expenses to enable your business to comply with the Americans with Disabilities Act of 1990. The credit can range from $125 to $5125. Eligible access expenditures include amounts paid or incurred:
- To remove barriers that prevents a business from being accessible to or usable by individuals with disabilities
- To provide qualified interpreters or other methods of making audio materials available to hearing-impaired individuals
- To provide qualified readers, taped texts, and other methods of making visual materials available to individuals with visual impairments
- To acquire or modify equipment or devices for individuals with disabilities
Increasing research activities – This credit is designed to encourage businesses to increase the amount they spend on research and experimental activities, including energy research. This research must be undertaken for discovering information that is technological in nature, and its application must be intended for use in developing a new or improved business component of the taxpayer. This credit varies with calculation method.
Energy efficient homes – This credit is available for contractors of qualified new energy efficient homes, as well as reconstruction and rehabilitation of existing homes, whose construction is substantially completed before 2009. The homes are required to be certified to meet certain energy saving requirements. The credit is either $2,000 or $1,000 depending on whether or not the dwelling unit that is certified to have an annual level of heating and cooling energy consumption at least 50% or 30% below the annual level of heating and cooling energy consumption of a comparable dwelling unit and has building envelope component improvements that account for at least 10% of the 50% reduction in energy consumption.
Renewable electricity, refined coal, and Indian coal production – This credit is for the sale of electricity, refined coal, or Indian coal produced in the United States from qualified energy resources at a qualified facility. Generally, the credit is 2.5 cents per kilowatt-hour (kWh) for the sale of electricity produced by the taxpayer from qualified energy resources at a qualified facility during the credit period, which can range from 5 to 10 years. The 2.5 cents credit amount is reduced by 50% for open-loop biomass, small irrigation, landfill gas, trash combustion, and hydro-power facilities. The credit is $7.173 per ton for the sale of refined coal produced at a qualified facility. The credit for the sale of Indian coal produced at a qualified facility applies to the 12 year period beginning in 2006.
Each year, many businesses will overlook tax credits, even though they often qualify for one or more of them. There are many general business credits available covering a wide variety of initiatives! As with many government programs, there are some rules that you need to comply with in order to qualify, however, these can be managed with a little research and planning. So take a closer look at these federal tax credits, they can really impact your company’s bottom line!
Please let us know if you would like to discuss these tax credits or any other financial, accounting or tax issue further. We can be reached at (480) 980-3977.