THINK YOU’VE CUT all of the corners and exhausted every small business savings vehicle possible? You may have another shot at saving with a handful of often-overlooked federal, state and local tax credits and exemptions.
Many of these tax perks are hard to figure out because they’re so complicated or just plain obscure. Rules can change from state to state, locality to locality and even industry to industry. But once you figure out which ones your business qualifies for, the savings can really add up. And you can even carry back certain credits four to five years depending on the rules in your state, says Jack Rothstein, a tax partner at PricewaterhouseCoopers in New York.
To make sure your business is getting all of the savings it can, seek out a trusted advisor with local and state tax expertise. They can often suggest a number of tax-saving strategies that are specific to your business needs. Also contact your local economic development council and chamber of commerce.
In the meantime, here are six often-neglected tax perks that can help your business save some cash.
Domestic Production Activities Deduction (Federal, State)
In 2009, companies that produce more than 50% of their products (including software and films) domestically are entitled to a federal tax deduction equaling 6% of either the income they receive from those products or an individual business owner’s adjusted gross income, whichever is less. In 2010, that deduction will rise to 9%.
As an added bonus: Some states, including Pennsylvania, Vermont and Virginia, offer the same deduction amounts for state taxes as the federal government, says Tarra Curran, managing director at accounting firm CBIZ Tofias in Boston.
Manufacturing Deductions, Credits (Federal, State)
Most small business owners take advantage of federal tax perks that let them write off the cost of new, depreciable assets like manufacturing equipment or light trucks: the Section 179 deduction and the 50% first-year bonus depreciation provision. But many don’t know that they may also be eligible for a state manufacturing credit. In New York, California and Illinois, for instance, companies that purchase qualified machinery or other equipment used in manufacturing may receive a credit against the cost of that new equipment. “It usually amounts to some percentage of the purchased equipment,” says Rothstein. Also, in New York, business owners whose companies didn’t earn profits can use this credit to offset the business’ net worth or capital taxes, he says.
Research and Development Credits (Federal, State)
Many businesses take advantage of the research and development tax credit, which refunds 20% of expenses associated with research projects. (President Obama is proposing that this credit, which needs to be renewed periodically, be made permanent). But what many don’t know is that they can qualify for a research and development credit on the state level as well.
States including Ohio, New Jersey, Pennsylvania and California all offer their own brand of research and development credits. In California, for example, if you paid or incurred qualified research expenses while in the state, you’ll receive a credit that’s worth 15% of those expenses.