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As you try to grow your business in today’s difficult economic environment, it may surprise you that there are several tax credits that can enhance your cash flow. There are elements of both the federal and your individual state tax codes that may actually yield your business cash benefits.
Research and Experimentation Credit
The most overlooked and underutilized federal tax credit by small- and medium-size businesses has to be the Research & Development Credit. If you can answer “yes we did that during the last three years” to any of the following activities then you may be eligible for a Research & Development tax credit.
Has your company invested time, money or resources in:
- Creating improved products, processes, formulas, software or techniques
- Consuming materials in improvement efforts
- Manufacturing new or improved products
- Implementing cost reduction initiatives
- Automating or improving internal processes
- Developing prototypes, first articles or models
- Designing tools, jigs, fixtures or molds
- Testing new materials or concepts
- Applying for patents
- Integrating new equipment
- Hiring outside consultants for any of the activities above
Unfortunately companies still equate Research & Development to “lab coat” activities in the bio science arena. Your friends in Washington have actually liberalized the activities that qualify for this credit and it is not too late to reap the benefits.
In 2003, tax regulations expanded the research credit opportunity by eliminating certain tests and expanding the definition of qualifying activities. Now many “process activities” that improve a manufacturing process may qualify and are available to many small- and medium-sized companies. Currently the research credit is a temporary part of the tax law and requires reinstatement every few years. In fact, it is set to expire on December 31, 2011. However there is strong sentiment and bi-partisan support in Washington to make the credit permanent.
The research credit applies to all types of businesses. Therefore, a C Corp is able to offset it’s corporate tax while “pass through” entities’ owners, members or shareholders can offset their individual taxes.
There are three components that qualify as Research expenditures:
- W-2 salaries and wages for direct research, supervision of research and direct support of research
- Supply costs for items consumed or destroyed during the qualifying activities
- 65% of qualifying outside contractor costs
In addition to the federal credits, more than 30 states also offer R&D credits. In fact, if your company operates in New York, Virginia, Arizona, Louisiana, Iowa, Minnesota or Hawaii, it may be entitled to a refund without having to generate taxable income!
Federal Empowerment Zone Credit
The federal empowerment zone (EZ) credit allows certain employers to claim up to a $3,000 income tax credit for wages paid to qualified employees. Eligibility for the EZ credit is dependent on confirming that the employee lives and works within one of over forty designated federal empowerment zones located across the country. The EZ credit is not a permanent component of the tax code and, in fact, is currently scheduled to expire on December 31, 2011. Therefore, it is frequently subject to expiration and retroactive reinstatement.
Federal Retention Tax Credit
Available for 2011 only, this credit migrated from being a payroll tax credit to a credit against income tax. The employer can take this credit up to $1,000 for each qualified employee. The following key points must be considered in analyzing this opportunity:
- If the employer did not claim the previous Payroll Tax Holiday Credit (PHTC), it may not be qualified to take the Retention Tax Credit (RTC)
- Additional “retention” requirements apply to PHTC “qualifying employees”
- Fiscal year taxpayers will report the total RTC over two taxable years
- Proper documentation is critical for supporting this credit
Federal New Jobs Tax Credit
On November 21, 2011 the Vow to Hire Heroes Act was signed into law, being quickly approved after a rare display of non-partisan politics. The new law is a tiered system of tax credits based on hiring veterans who have been out of work. The credits are as follows:
- $2,400 for hiring veterans out of work for four months
- $5,600 for hiring veterans out of work for six months
- $9,600 for hiring unemployed veterans who have a service-connected disability
This credit amends the current Work Opportunity Tax Credit (WOTC) and takes effect on the date of enactment (11/21/11) and is scheduled to expire at the end of 2012.
InvestOhio Tax Credit
This recent incentive offered by the State of Ohio would allow investors in companies with significant employee presence in Ohio to claim credits against their Ohio income tax liability of 10% of the amount of their investment. The company must have a minimum of 50 employees; revenues not exceeding $10 million or assets not exceeding $50 million. The investment made must be spent within six months on any of the following assets:
- Motor vehicles used in the business
- Intangible assets used in the business
- Real property used in the business
- Tangible personal property used in the business
- Compensation of new employees
We Can Help
Contact Decosimo's manufacturing leadership team and ask us how we can help you determine which credits may benefit your company. Click here to contact us.
Decosimo serves a wide range of privately and publicly held clients in many sectors of manufacturing and distribution – from the makers of Little Debbie® Snacks and the world’s largest manufacturer of towing equipment to Olan Mills Portrait Studios, Hardwick Clothes, Tandus Floorcoverings and Beaulieu Carpets. We’re the CPA of choice for more than 100 manufacturing clients with combined annual revenues of more than $4 billion. Our breadth of services and depth of expertise currently benefit manufacturing and distribution clients in transportation, industrial equipment, apparel, floorcoverings, furniture, metal fabrication, chemicals, food and beverage, healthcare and packaging to name a few.
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