Tax credits are a fundamental pillar of every business’ strategy.
…At least, they should be.
Here is what makes tax credits so frustrating: First, if you are a business owner, you are probably aware that certain incentives exist. You know they can be lucrative. You realize they are important for your future. And you understand that, if you are not taking advantage of every credit available, you are leaving money on the table. (How can anyone afford that?)
Then again, how can you possibly discover all of these opportunities? How can you be sure that you are getting every credit you deserve, that you are not missing something? Running a business is complicated enough – who has time to navigate the tax code?
We get it; tax credits can feel like a burden. But they are essential to the financial future of businesses of every shape, size
#1: Identify tax credits for which your business already qualifies.
Sounds easy, right? Well, not always…
Recently, we partnered with a new client in the technology industry. After looking through their business operations and finances, and cross-referencing this information with the IRS tax code, we discovered that they had been missing out on an R&D tax credit worth $250,000. $250,000! Their prior accounting firm had missed it, leaving hundreds of thousands of dollars just sitting there, unused. It was a massive missed opportunity. Unfortunately, this situation isn’t all that unique.
We see this all the time. Businesses are neglecting tax credits for which they clearly qualify, simply because they are not aware that these credits exist. It’s frustrating… but can you blame them? Business owners have enough on their minds, between employee culture, client relationships, day-to-day operations
Side-note: The story of our new technology client has a happy ending. After identifying their business’ missed opportunity, we moved fast. We immediately applied for the R&D tax credit and retroactively obtained credit worth hundreds of thousands of dollars. (Moral of the story: Partnering with the right business advisor is always worth it.)
#2: Check for new tax credits. They are always emerging.
Why does the IRS offer tax credits? Because they are encouraging certain behaviors that align with the government’s economic interests. For example: In 2018/2019, the IRS is incentivizing behaviors that lead to innovation, like R&D. Why? Because innovation is good for individual businesses and also good for the economy at large.
It is important to note that the desired behaviors are always changing – depending on economic trends, new administrations with new policies, etc. – and so are the incentives. As the government’s economic interests wax and wane, the IRS will offer new tax credits that reflect those interests. Therefore, as a small-business owner, it is not enough to be aware of the current tax climate. You must keep an eye on the future, monitor shifting legislation, and keep a finger on the pulse of the IRS. Oh, and you have to do all of this while maintaining the day-to-day operations of your business. No big deal, right?
(Or, if you are like most business owners and you do not have time for the dizzying array of financial considerations, you should partner with a business advisor who performs this work for you.)
#3: Know when a tax credit is on its way out.
This sounds fairly intuitive, but many businesses have made critical investments and decisions thinking they will receive a credit, only to discover (after the fact) that the credit no longer exists.
Here is an example: Until recently, the IRS awarded a tax credit to companies that renovated old, pre-1936 buildings. However, in 2018, the Tax Cuts and Jobs Act outright eliminated that credit. As often happens, many business owners were unaware that the credit no longer existed, and many expensive, time-consuming renovation projects continued. You can probably guess what happened next.
#4: Align your business practices with existing incentives.
Sometimes, by making deliberate, logical shifts in your business practices, you can benefit from tax credits that were previously just beyond your reach.
Here are a few business behaviors that can lead to credit:
Focus (at least part of) your company on innovation. This is especially prescient for technology companies, but it isn’t exclusive, either. Every industry needs innovation, from medical care to retail, and businesses of all shapes and size scan pursue this credit.
Go green. Businesses in any industry – especially those in commercial development – can benefit from major tax credits by reducing their environmental footprint. Before they build, construction firms should consider incentives like Section179D, the Energy Efficient Commercial Building deduction, which rewards eco-friendly building projects. There are plenty of opportunities for those of us outside the construction industry, too. Simply installing energy-efficient HVAC and lighting systems can lead to lucrative tax credits.
Hire individuals with barriers to employment. By hiring individuals who have faced employment barriers, such as disabled veterans or residents of certain economically disadvantaged regions, your business may qualify for resources via the WorkOpportunity Tax Credit.
Sponsor your employees’ childcare. As a small-business owner, you can claim up to 25% of your employees’ child-care expenses. Like the rest of the items on this list, some businesses are already doing this… but how many of them are tapping into this tax credit?
#5: Don’t just react. Make a plan.
Often, business owners evaluate their current situation and search for tax credit opportunities. That process is important – it helps your bottom line and empowers you to plan for the immediate future – but it is not enough. To maximize your incentives, like those mentioned above, you need to create a long-term strategy that incorporates both intimate knowledge of your business and your industry, as well as deep, specialized expertise of the tax code. Which brings us to our final point.
#6: Partner with a business advisor who knows the tax code as well as they know your business.
As a business owner, you have neither the time nor a long-term to identify and apply for tax credits – especially since those credits are constantly changing. That’s why you need a partner, someone who understands the day-to-day operations of your business and is actively preparing for tomorrow. You need a guide who draws connections between your business practices and the government’s incentive programs. You need a leader, a navigator who is always looking to the future of your industry and identifying creative opportunities to give your business an edge.
At Klein Hall, identifying lucrative tax credits for our clients is just the beginning. Our business advisors, CPAs and Certified Fraud Examiners (CFEs) help your businesses navigate today’s financial landscape and prepare for the financial future. Click here to learn more about our full suite of services.