Tax credits and incentives offered at both federal and state levels provide startup founders with significant tax savings for their business, though it’s crucial that they understand all criteria and requirements associated with each one.
This article will detail some of these programs available from both federal and state sources.
R&D Tax Credit
Research and Development (R&D) tax credits offer your company a dollar-for-dollar reduction in federal income taxes. They apply to qualifying domestic expenses related to developing or improving products, techniques or software and don’t need to be successful for you to qualify. Just document that they were performed!
R&D tax credits help businesses manage the financial strain that comes with R&D expenses, freeing up resources for innovation and technological advancement. Unfortunately, however, recent legislation mandating amortization of R&D investments is creating much confusion and dismay among smaller enterprises.
Wilke CPAs & Advisors can assist your small business or startup navigate this complex area of tax law. Reach out today and discuss how upcoming legislative changes could alter their R&D tax credit options and what impact these may have.
Empowerment Zone Employer Credit
The Empowerment Zone Employer Credit is an annual tax incentive available to businesses that employ employees living in empowerment zones. This tax credit could save their business up to $3,000 per employee each year! This lesser-known incentive can be found both urban and rural empowerment zones, as well as Rural Renewal Communities (RCs).
To qualify for the credit, an employee must be employed full-time and their primary place of residence must lie within an EZ or RC. This credit does not apply to new hires or wages paid to existing employees who move into these zones.
To claim this credit, businesses must complete Form 8844. This form provides information about employees working within an EZ or RC and their home addresses; as well as the number of days that employee spent there working each year and then used this data to calculate the credit amount.
Job Creation Tax Credit
Federal and state levels offer many tax credits that cover everything from providing jobs for underprivileged people to supporting research and development initiatives.
Small businesses frequently face the difficulty of operating on razor-thin margins and contending with regulatory restrictions that limit their growth. Therefore, it’s essential that they keep an eye out for business tax credits which could help them expand without falling into unintended traps associated with expanding workforces.
The Job Creation Tax Credit offers manufacturers with five-year state tax credits based on either investment in depreciable property or hiring more full-time equivalent employees for facilities, and also provides higher credits in counties with annual average employment below 75,000 or median household incomes below two-thirds of statewide median.
State Tax Credits
Federal and state governments offer numerous tax credits to encourage business growth. Some require extensive documentation, so it’s critical for businesses to understand which credits apply and how to track information properly.
State tax credits offer startups a valuable tool in offsetting the social security payroll taxes and Medicare taxes that significantly eat into cash flow and restrict investment into operations.
New York State offers startups that conduct research and development activities within its borders an R&D tax credit that can offset income tax liability for qualified R&D expenses incurred, including salaries paid to employees involved with research efforts; supplies purchased; blueprints designed and patents produced during research activities; as well as salaries of any employees engaged with research efforts and design processes.
Holland & Knight has extensive experience helping entrepreneurs and investors leverage R&D tax credits with other state incentives, such as the EZ investment credit and wage credit. Holland & Knight works closely with them in structuring transactions to take full advantage of these state incentives.