Businesses need to make money, and one of the ways to do this is to safeguard against spending too much; this includes taxes. Not only are there gads of state and federal tax credits out there for small and medium-size businesses, scores of them go untapped by many eligible entities.
The U.S General Accountability Office (GAO) estimates that only one in 800 businesses claim tax credits for which they are eligible. For small-to-medium-size businesses (where revenues don’t exceed $50 million annually) that means $4.2 billion in state and federal tax credits going unused. There are more than 3,000 tax credit programs, so it’s understandable that some of them are being under-utilized or completely overlooked; but it is pertinent that companies do their research, or access the services of qualified professionals who know the logistics of these programs.
One of the most widely encompassing tax credit programs available for businesses is the Work Opportunity Tax Credit (WOTC). The WOTC is a hiring-based incentive that offers up to $9,000 in tax credits for businesses that hire individuals from any of the below-listed groups of people:
- A member of a family that is a qualified recipient of Food Stamps
- A member of a family that is a qualified recipient of Aid to Families with Dependent Children (AFDC)
- Qualified veterans
- Qualified ex-felons or persons that are pardoned, paroled or on work release
- Vocational rehabilitation referrals
- Qualified summer youth
- Qualified Supplemental Security
- SSI recipients
- Qualified persons living in an Empowerment Zone, Renewal Community, Enterprise Community or Rural Renewal Community
- Long-term TANF recipients – formerly known as Welfare to Work
- Qualified unemployed veterans
- Qualified disconnected youths
The WOTC program can be traced back to the Reagan administration, so it’s nothing new, in premise. Providing work opportunities for disadvantaged individuals is the basis of WOTC, with roughly one of five workers qualifying for these credits.
Throughout the country, Federal Empowerment Zones have been created by state and federal governments in order to boost the economies and job creation levels of those communities. Federal Empowerment Zones provide for up to $3,000 in credits and incentives per year for all workers who reside in and are employed in these areas.
In 1994 the Clinton administration established 9 original empowerment zones, and the New York Empowerment Zone (NYEZ) was one of these first regional recipients. New or existing businesses located in or moving to the South Bronx or Upper Manhattan areas qualify for many federal, state and city incentives. In addition to employment credits, businesses in this zone qualify for a 0% tax on capital gains and increased tax deductions on equipment.
State Enterprise Zones offer other incentives and tax credits as determined at state level. These enterprise zones across the country are tied to specific industries and a company’s hiring, purchasing of equipment or building materials, or other business-related expenses.
The Research and Development Tax Credit allows for tax incentives and expensing for costs for investments for qualified companies involved in research or development of new or improved products or processes. These credits don’t merely apply to companies involved in technological research, as may be a common misconception.
The issue of unclaimed tax credits has been resolved by the IRS, which allows for a business to amend prior years’ (up to 3 years) returns in order to benefit from specific federal credits. Credits may also be carried forward for up to 20 years.