The Internal Revenue Service allows a number of tax credits that many businesses might not be aware of. Unlike tax deductions, tax credits are subtracted from the amount of taxes you owe. Most credits are broadly applicable, so there are usually more than one that cover a business’s expenditures and investments.
To claim most business tax credits, you’ll file Form 3800 with your annual business income tax return. Tax credits not used in the current year normally are carried back one year or carried into the future for up to 20 years.
Business owners should consult their tax advisors to determine the applicability and potential benefit of any tax credit to their situations.
Businesses can take advantage of a growing list of energy conservation and alternative energy resources credits offered to reduce dependence on fossil fuels. The credits for alcohol used as fuel and biodiesel and renewable diesel fuels provide additional benefits because businesses that use alternative fuels for transportation can file for the credits on quarterly returns (Form 4136) rather than waiting for the end of the tax year. Upgrading your heating and air conditioning systems, adding solar energy to buildings, and building alternative energy projects all trigger tax credits, helping lower these project costs.
Every year businesses can deduct the entire cost of new assets under Section 179 rather than depreciating them over time. Using Section 179 saves the cost of setting up depreciation schedules for relatively low-cost assets such as printers, cell phones, and office furniture but also applies to vehicles, machinery, and other equipment with a longer life. Businesses can elect Section 179 treatment on Form 4562 where they depreciate other assets. The limit on how much can be written off in a year increases annually, so look up this limit as part of your tax planning.
Hiring military veterans as they re-enter the workforce can reduce payroll expenses through the work opportunity credit, which reduces tax liabilities by as much as $2,400 of the first-year salary paid to a veteran. The amount rises to $4,800 if the new employee is a disabled veteran. There is no limit to the number of veterans an employer can hire. Work opportunity credits also support hiring nonveterans with disabilities, people who have received food stamps or other temporary public assistance, participants in welfare-to-work, low-income youth hired for the summer, and ex-felons. Use Form 5884 to claim these credits.
FICA Tax Credits
Food-service employers can receive credits for Social Security and Medicare taxes on the amount of tips that raise an employee’s pay above the minimum wage. While the minimum wage is now $6.55 per hour, the credit is for amounts more than the old level of $5.15.
Self-employed IRA plans permit contributions to these deferred-tax retirement programs of up to $49,000 per year for business owners and for any participating employee. This is much higher than the $16,500 limit for 401(k) contributions (participants over age 50 can contribute $22,000). Adding employees to a SEP-IRA can earn a credit for small employer pension plan startup costs that is $500 per year in each of the first three years of a new plan. The employer may elect to take the credit in the year prior to starting the plan.