Why you must invest in your business, and the tax credits that can help

The U.S. isn’t a low wage nation. We have to make things and serve people better, smarter, faster and with more skill. Therefore, business owners are always working to improve their offering for customers. What equipment or methodology will technologically put you ahead of the curve?

The good news is that a few helpful tax credits have been made permanent or extended out several years, says Floyd Trouten, tax partner at BDO USA, LLP. Now, you won’t have to wait until the end of the year to plan your investments, worrying whether or not you can get the credit.

“That’s a heck of a way to run your business, especially with long-term investments that can costs hundreds of thousands of dollars,” Trouten says.

Smart Business spoke with Trouten about long-range planning and investment, as well as tax provisions that help offset these costs.

Why do U.S. manufacturers, distributors and service providers need to invest in themselves?

The U.S. dollar is high against a lot of currency right now, so it costs more to buy our finished goods. We have to ensure that we’re more efficient — better and faster — to stay attractive. At the same time, foreign companies can sell their goods cheaper because a dollar buys more finished product in the European Union or South America.

As another example, China now faces dumping duties on coiled steel. As a result, they’ll probably send more completed parts, which won’t have duties. Before, the Chinese might ship the steel and your company would convert and sell it to the user. Now, the Chinese are going to say, ‘OK, I’ll just make the part and sell it to the direct user.’

Having state-of-the-art equipment and the ability to find niches with expanded offerings is critical in today’s market.

What do companies need to know about the R&D tax credit?

The R&D credit for growing research and development has been made permanent, after 14 separate extensions. Employers can better plan and take more risk because the government is venturing with them.

The R&D credit applies to more than just product improvements or testing. It can be used for sales, general and administrative costs, as long as it’s continual improvement.

There are two calculation methods. The simplified method requires three years of data for a 14 percent credit. The full credit is 20 percent and requires five years of data. If you’ve incurred time from your engineers, line employees and management on a new product, you can do an R&D study to ensure you’re picking up all costs, in order to maximize the credit.

Also, if you’re a small company, typically $5 million in revenue or less, you have the option to use up to $250,000 of the credit to offset what you pay in Social Security and Medicare taxes.

How has bonus depreciation and Section 179 changed?

With bonus depreciation, in the initial year of service you can write off 50 percent of an asset. The bonus now extends through 2019. Employers will get 50 percent through 2017, and then it goes down to 40 percent in 2018 and 30 percent in 2019. This is particularly useful for employers with capital-intensive equipment needs.

A subset of this, Section 179 allows a company to expense up to $500,000 in the initial service year, as long as it’s not putting in more than $2 million in fixed assets. This has been made permanent and it will adjust for inflation. Also, companies can now expense off-the-shelf software under Section 179, rather than amortize it.

So, if you buy equipment, you could get a tax deduction, whether it’s 50 percent bonus depreciation or Section 179 immediately, even though you’re still paying the bank and the asset will benefit you for years to come.

Are there other tax credits that might apply?

There are additional credits, but one to consider is the Work Opportunity Tax Credit (WOTC). The WOTC or other similar programs, found on federal, state and local levels, are designed to help those who face barriers to employment, such as veterans, disabled, people on government assistance, etc. There’s a lot of paperwork and detail that you need to pay attention to, but it is something to think about if you have a talent shortage, whether you’re a manufacturer or restaurateur.

Insights Accounting & Consulting is brought to you by BDO USA, LLP

IRS, Lockheed fight over R&D “rocket science” tax break

WASHINGTON, Fri Jan 25, 2013 — Lockheed Martin Corp. is challenging the U.S. government in court over $13.6 million in research tax credits in a case that tests the often hazy line between research and production, with future R&D claims by other companies possibly at stake.

The aerospace group argued in December in U.S. District Court that the Internal Revenue Service had wrongly rejected research tax credits Lockheed claimed for two projects: a space rocket launcher and a New York City surveillance system.

The IRS disallowed Lockheed’s claims in May 2012. Lockheed has challenged the IRS’ position that some retroactive R&D credit claims were impermissible because they involved costs not for research, but for making prototypes resulting from research.

Lockheed said in its court filing that some of the credits were claimed for prototypes, but argued that the designs were new and unproven and should qualify as research.

“With Lockheed, you have the actual question of whether this is rocket science,” said William Schmalzl, a partner at the law firm Mayer Brown with clients facing similar issues.

The case also draws attention to the timing of R&D credit claims. Lockheed’s 2012 claims on the rocket launcher and surveillance system projects were both made retroactively for tax years 2004 through 2007, according to its court filing.

While retroactive claims are frequently allowed, they tend to attract closer IRS scrutiny, tax lawyers said.

When a credit is sought retroactively, “you really aren’t relying on it as an incentive” to do research, Schmalzl said.

Maryland-based Lockheed, a top Defense Department supplier, declined to comment. The IRS also declined to comment.

How to take advantage of a new state program by investing in small businesses

Mary Jo Dolson, Director in tax, SS&G

Under the InvestOhio program, a new resource for Ohio small businesses, those who invest in a small business enterprise  located in the state can receive a 10 percent income tax credit if the investment is held for two years. The small business enterprise must meet certain qualifications to be a qualified business for the credit.

And that credit applies even if the investor is the owner of the business,  says Mary Jo Dolson, CPA, director in tax at SS&G.

“It doesn’t have to be a new investor,” says Dolson. “You can invest in a company that you own, then get the credit on your individual income taxes. More and more businesses are buying equipment or expanding their buildings, both activities that would qualify. So why not invest as an individual and get the credit for dollars the business is going to be spending anyway?”

Smart Business spoke with Dolson about how to take advantage of the InvestOhio program by investing in your own business, or in someone else’s.

What is InvestOhio, and how does it work?

InvestOhio is part of the budget bill passed in June 2011 that took effect July 1 and runs through June 30, 2013.

To participate, an individual or a pass-through entity that wants to invest in a small business must register themselves as an  investor. The small business enterprise must also register itself as a small business entity. Then the two parties, the investor and the small business enterprise, decide how much to invest and when. The investor must receive an ownership interest in the small business enterprise.

For example, if someone decides to invest $1 million in a company, both sides register, and they each get an ID number. Together they would create one application that indicates that, for example, on May 1, that taxpayer is going to invest in that company. That investment then has to be made within 30 days before or after that date. The business entity then has to spend the  money invested on qualified items within six months of the investment, or that credit would potentially be  lost.

Finally, there is a two-year holding period. If a taxpayer invests on May 1, 2012, that investment and the assets acquired have to stay in place for two years, until May 1, 2014. As long as that condition is met, the taxpayer who invested $1 million then gets a 10 percent non-refundable tax credit, with $100,000 coming right off that individual 1040 return. And if you can’t take the whole credit amount in one year, it can be carried forward for seven years.

Individuals can invest up to $10 million, and the $100 million tax credit program is expected to generate at least $1 billion in new private investment in Ohio small businesses by 2013.

What kinds of companies are eligible to participate?

Qualifying entities need to have less than $50 million in assets, or less than $10 million in sales. Companies must also have employees who are located in the state. All registrations and applications for the credit are completed through the Ohio Business Gateway. The individual investors might have to set up an Ohio Business Gateway account but probably most small business enterprises will already have a gateway account.

How complex is the application process?

Even though investors and small businesses have to register, it is not a voluminous application. It is about 10 questions, and they are simple, such as your Social Security number, whether you are a pass through entity investing in another entity and your federal ID number. There are also a lot of links for small businesses to secure the information they need quickly from the state website.

Are there drawbacks?

As long as you follow through with the requirements of the application, there really are not any drawbacks for the credit. If you complete the application and say you’re going to invest $1 million, and then you only invest $250,000, the state has indicated they will deny the credit — at least 50 percent of what you indicated you were going to invest must be invested to secure the credit. Also, if you just own rental real estate and have no employees, you can’t participate. There is an employee requirement for the small business enterprise to qualify for the credit.

Finally, it has to be an individual or another pass-through entity investing. The small business enterprise cannot secure a loan and have the investors pay it off. This will not qualify.  The actual individual and/or entity investing must actually put the funds into the business. The individual and/or entity investing can borrow the investment money from a bank .

What can a business use the money to invest in?

Fixed assets, tangible personal property and real estate are included, among other items. A business can also spend the investment on wages, but it cannot be for wages for owners or officers of the company. Motor vehicles also qualify, as long as they are titled in Ohio. The key is the assets being purchased must be utilized and located in the state of Ohio.

How will businesses account for the money?

Reporting will be required after a company spends the investment through the Ohio Business Gateway. The state does not currently have those forms available, but they are anticipating they will be available by April 1.

Will the program continue after 2013?

As part of the budget bill, the program exists in the next biennium, as well, from July 1, 2013, to June 30, 2015. However, there is one major change: the holding period for assets goes from two years to five years. There is also supposed to be another round of funding in the next biennium, from July 1, 2015, to June 30, 2017, with the holding period increasing to seven years. Right now is the shortest holding period investors are going to get, so investing sooner rather than later will provide a bigger bang for your buck more quickly.

Mary Jo Dolson, CPA, is a director in tax at SS&G. Reach her at (330) 668-9696, (800) 869-1835 or [email protected]

How the Small Employer Wellness Program Tax Credit could help your business

Sally Stephens, President, Spectrum Health Systems

Savvy business owners are always looking for ways to improve the health of both their employees and their business.

However, for some small businesses, establishing and implementing a comprehensive wellness program may not be financially feasible. But they may find help through the Indiana Small Employer Wellness Program Tax Credit, says Sally Stephens, president of Spectrum Health Systems.

“The purpose of the credit is to help more companies reap the benefits of a healthier work force,” Stephens says. “The credit allows these employers to not only allocate the necessary funds toward wellness but also to consider partnering with a wellness provider to assist them.”

Smart Business spoke with Stephens about how to determine whether your business qualifies for the credit and how it could help your company succeed.

What is the Indiana Small Employer Wellness Program Tax Credit?

The Small Employer Wellness Program Tax Credit, introduced in 2007, provides the financial incentive for small employers to implement a comprehensive wellness program. In doing so, employers can receive a state tax credit of up to 50 percent of the costs incurred by an Indiana small business for providing a qualified wellness program to employees.

The credit is funded by the cigarette tax that was introduced the same year.

How can this tax credit help small employers?

The credit allows many employers who, in the past, did not have the internal resources or could not justify the expense of providing wellness services. The credit now allows them not only to allocate the dollars but also to consider partnering with a wellness provider to assist them with this initiative.

How can an employer determine if it is eligible for the tax credit?

The criteria and application process are well defined on the state website. The tax credit is available to employers with two to 100 employees that have received certification from the Indiana State Department of Health for a ‘Qualified Wellness Program.’

To qualify, the program must offer incentives for weight loss and smoking cessation and offer preventive screenings. According to the state Department of Workforce Development, companies with 99 employees or fewer represent nearly 41 percent of all private sector employment, or more than 1 million employees.

How businesses can take advantage of the tax credits available to them

Bill McDevitt, Tax Manager, Nichols Cauley & Associates

With the passage of several tax acts over the last few years — and the enhancement of existing acts — small, medium, and large businesses are in a strong position to claim tax credits, at both the federal and state levels.

The credits are designed to foster economic growth and job creation, and business owners should be aware of them so they can take advantage of a political environment that is making it easier to obtain these tax credits, says Bill McDevitt, tax manager at Nichols Cauley & Associates LLC.

“Politically, both sides of the aisle have more recently been working together to create a positive climate for business owners. As a result, the number of tax credits available to businesses right now is abundant and the barriers to claiming them are fewer,” he says.

Smart Business spoke with McDevitt about how businesses should now be taking advantage of the tax credits available to them.

Are tax credits more valuable to business owners than tax deductions?

Often, they are. Credits are dollar-for-dollar reductions in the amount of taxes owed. For example, if your business qualifies for a $12,000 tax credit for expenses incurred to develop a new or improved product or process, the IRS may give your business a credit for having already paid $12,000 in taxes, and that amount is subtracted from the amount of tax owed on your company’s federal tax return.

Tax deductions, on the other hand, are expenses subtracted from your company’s income during the year that lower your company’s taxable income. An example of a deduction would include the cost of a new network server that the IRS may allow you to expense rather than capitalize in the year it is placed in service. Deductions are subtracted from income to arrive at taxable income, which is then used to determine the amount of tax you owe.

As a simplified illustration, assume your business is eligible for either a $12,000 tax deduction or a $12,000 tax credit. Which would you choose?  If your company’s tax rate is 20 percent, the tax deduction may be worth about $2,400 after subtracting it from income to arrive at taxable income, and may only decrease the tax your business owes by $2,400. The tax credit, on the other hand, is subtracted dollar-for-dollar directly from the tax owed. So if the business made $100,000, subtracting $12,000 in deductions gets you a taxable income of $88,000, which, when taxed at 20 percent, means the company may owe $17,600 in tax. If, however, you chose a $12,000 credit rather than a deduction, the company may owe $20,000 in tax before the credit, but only $8,000 after $12,000 of the tax was paid with the credit. Choosing the tax credit rather than the deduction saved $9,600 in tax owed.

Are some tax credits only available to businesses of certain sizes?

While some credits are scalable to a wide range of businesses, others are limited to small businesses. For example, the Hiring Incentives to Restore Employment (HIRE) credit, which rewards employers for hiring and retaining employees, is allowed for large or small businesses. Also applying to businesses large and small: (1) the Work Opportunity Credit, a generous federal credit that encourages businesses to hire people from certain target groups — such as unemployed veterans, those with disabilities and convicted felons; (2) the Alternative Fuel Tax Credit, which may provide an incentive of 50 cents per gallon of alternative fuel sold by a retail dealer; and (3) the Georgia Retraining Credit, which allows employers to claim a tax credit for employee training.

In addition, the well-known Research and Development Credit has historically been pursued by larger companies, but new laws have made the credit cheaper and easier to obtain by mid-sized and smaller businesses.

Other credits, such as the Small Business Health Insurance Credit, only offer the maximum credit to employers with 10 or fewer employees who average $25,000 or less per year in wages. And the Small Employer Pension Plan Startup Cost Credit applies only to employers with 100 or fewer employees who received at least $5,000 in compensation in the preceding year.

Can tax credits offset Alternative Minimum Tax?

The HIRE credit cannot. However, the Work Opportunity Credit, Alternative Fuel Tax Credit, Small Employer Pension Plan Startup Cost Credit and the Research and Development Credit can. And in certain instances, the Small Business Health Care Tax Credit can also help offset Alternative Minimum Tax.

How can a business file for tax credits?

For the HIRE credit, employees simply complete an IRS Form W-11, ‘Hiring Incentives to Restore Employment Act Affidavit,’ which is kept on file with the employer and does not need to be sent to the IRS to certify the employee. Once the employee has been certified, the employer will file the easy-to-complete IRS Form 5884-B to claim the amount of the credit. This form is filed with the company’s federal income tax return.

For the Small Business Health Insurance Credit, an employer completes Form 8941 to calculate the credit and includes it with the company’s income tax return.

To claim the Work Opportunity Tax Credit, the employer should have the new hire complete IRS Form 8850 and U.S. Department of Labor Form ETA Form 9061 to obtain certification from its state work force agency that the new hire qualifies for the credit. These forms must be mailed to the state’s Work Opportunity Tax Credit coordinator no later than 28 days after the new hire begins work. The credit is claimed on IRS General Business Credit Form 3800 that is filed along with your company’s income tax return.

Filing these forms may seem like a complicated process, but is not. Given the favorable political environment to create jobs, this is low-hanging fruit that qualified business should take advantage of.

Bill McDevitt is a tax manager at Nichols Cauley and Associates LLC. Reach him at (404) 425-5338 or [email protected]