Looking for good news about your future income taxes? As a business owner, you probably won’t find a whole lot at first glance. 2013 and 2014 have brought new taxes, tax rate increases, and the reduction or elimination of some valuable incentives for small businesses. But don’t lose heart. While it is certainly possible that your taxes might go up, it’s also possible that you’ve previously overlooked some valuable incentives that could offset or even outweigh the coming tax hikes.
Recent changes in the tax law make knowledge of opportunities and effective tax planning essential for all business owners. If you don’t want to find yourself on the wrong side of a frightening tax bill, you had better know the law and find the right opportunities. Here are two areas of opportunity and one big pitfall to avoid in 2014.
Changes have made general business credits more valuable than ever
General business credits have always been an important tool for businesses. But for the last few years, their importance for many small businesses was diminished. Reduced individual income tax rates coupled with the effects of alternative minimum tax (AMT) turned many general business credits into paper tigers – you could qualify for them, but in many cases you couldn’t actually utilize them.
Now, circumstances have changed. The top marginal tax rate has increased and the AMT exemption has been set to adjust with inflation. Without boring you with accounting talk, these changes will result in significantly greater utilization of claimed general business credits. Still, the fact is that businesses frequently fail to claim credits for which they qualify. Many are unaware of all of the credit opportunities, while others simply stopped claiming credits after years of low utilization.
Here’s the skinny. General business credits can provide a dollar for dollar decrease in your tax liability. They are extremely valuable, and often tragically underutilized. General business credits are generally activity based – meaning they reward business for specific activities. Credits include R&D tax credits, credits for hiring specific employees from target groups, green energy and energy efficiency credits, low income housing credits, credits for small employer health insurance premiums, employer provided childcare facilities, and many more. With recent tax increases and an aggressive enforcement environment, you can’t afford to overlook general business opportunities any longer.
Many less frequently used incentives are alive and well
Beyond general business credits, there exist other tax incentives that can dramatically decrease tax liability for business owners. Two examples are the IC-DISC, an export tax incentive, and negotiated state and local tax incentives for business expansion or relocation.
First, the IC-DISC provides a substantial incentive for U.S. based manufacturers who sell products for use outside of the country. The IC-DISC is especially useful as a tax savings tool for S-Corporation shareholders. This includes many small business owners. IC-DISCs provide an opportunity to pay a lesser tax rate on a portion of your income. What could this mean for your business? If you export, it could mean big savings.
Where else might you find savings? State and local tax credits and abatements certainly aren’t going away. In fact, the competition to attract businesses and jobs to local economies has caused many states and municipalities to aggressively pursue businesses by increasing the value of available incentives. Opportunities may include sales and use tax or property tax abatements, income or business tax credits or even grants for training or adding employees. These benefits can add up quickly and lead to tremendous savings. But there is a secret to unlocking these incentives. Many incentives have to be negotiated early in the planning stages of expansion or relocation. Once a final decision has been made to expand or locate in a certain area, local authorities have little motivation to give up future tax revenues.
Don’t count on investment incentives you’ve used in the past
Following the financial crisis of 2007 and 2008, financing dried up, investments slowed, and the economy moved at a snail’s pace. Congress viewed capital investments as critical to the future growth of the American economy. They needed American businesses to buy new equipment and move forward with expansion plans. In order to encourage new investment, Congress provided valuable incentives which rewarded capital investments with immediate tax benefits. These incentives included Section 179, which at its peak allowed for expensing up to $500,000 in purchases of qualified personal property, land improvements, and qualified leasehold improvements. Congress also provided for “bonus depreciation,” which created another opportunity to accelerate depreciation for qualified purchases. Combined with section 179, this stimulated investments and led to lower taxable income, lower taxes, and higher cash flow.
Unfortunately, 2014 brought with it the expiration of bonus depreciation and the reduction of the Section 179 limit all the way down to $25,000. In the last few years, many companies took advantage of these opportunities and may have even begun to rely on them. Assuming these incentives will be available in 2014 would be a big mistake, and could lead to an unexpected and unpleasant tax bill.
Given the current tax environment, it is critical for businesses to understand and maximize all available tax incentives. A thorough review of your business activities and an investigation of available incentives may uncover substantial savings. Presti & Naegele helps leading businesses and their owners identify and claim the right incentives for their organization. Avoiding the oncoming tax avalanche will require foresight and planning. Your best bet will be to find a tax advisor that will proactively look out for your best interests and find your opportunities for savings.
About the Author:
JOSEPH ROMANO, CPA joined Presti & Naegele in December 1996 and has been a partner at the firm since 2006. He specializes in corporate, partnership and individual taxation and is an Advanced Certified QuickBooks ProAdvisor. Throughout his career, Joe has assisted clients from a wide spectrum of industries, providing counsel in sophisticated tax planning as well as QuickBooks consultation and training. He is an active member of the New York City Chapter of Entrepreneurs’ Organization. Joe received his Bachelor of Science degree in Accounting from St. John’s University in 1995.