As the year draws to a close, it’s important for businesses to take advantage of every opportunity to reduce their tax liability. One of the most effective ways to do this is by leveraging available tax credits. Tax credits directly reduce the amount of taxes your business owes, making them more beneficial than tax deductions in many cases. In this post, we’ll provide an overview of year-end tax credits for businesses and how they can be utilized to boost your savings before tax season. We’ll also offer industry-specific tips for manufacturing, real estate, healthcare businesses, and more.
A tax credit directly reduces the amount of taxes you owe, while a tax deduction reduces your taxable income. Tax credits are generally more beneficial because they provide a dollar-for-dollar reduction in your tax liability.
Your business may qualify for the R&D tax credit if it is involved in activities that seek to develop or improve products, processes, or software. Qualifying expenses include wages, materials, and contractor costs related to these activities.
Yes, small businesses that make energy-efficient upgrades to their buildings or invest in renewable energy systems can claim energy efficiency tax credits. This includes investments in solar energy, lighting, insulation, and HVAC systems.
The R&D tax credit is one of the most valuable credits available to businesses that invest in innovation. Contrary to popular belief, this credit isn’t just for high-tech or research-heavy companies. Many small and medium-sized businesses in industries like manufacturing and software development can benefit.
How It Works:
The R&D tax credit provides a percentage of eligible R&D expenses as a credit against your tax liability. Qualified expenses include wages paid to employees involved in research, materials used in the research process, and even certain third-party contractor costs. By reviewing your business activities and expenses, you can identify opportunities to claim this valuable credit.
The Work Opportunity Tax Credit (WOTC) is designed to encourage businesses to hire individuals from certain targeted groups, such as veterans, long-term unemployed individuals, or those receiving government assistance. This credit can help businesses lower their tax liability while also supporting the employment of disadvantaged workers.
How It Works:
The credit is available to employers who hire individuals from specific target groups, such as qualified veterans, ex-felons, or recipients of public assistance programs. The amount of the credit varies based on the employee’s hours worked and wages earned, but it can range from $1,200 to $9,600 per employee. Employers must submit Form 8850 to the IRS within 28 days of the employee’s hire date to claim this credit.
Energy efficiency tax credits are available to businesses that make environmentally friendly upgrades to their buildings. This can include investments in solar energy, energy-efficient HVAC systems, or other improvements that reduce energy consumption. These credits can help businesses save on taxes while also reducing operational costs over time.
How It Works:
Businesses that invest in renewable energy systems, such as solar panels, or make energy-efficient upgrades to their buildings, can claim the energy efficiency tax credit. For example, the Investment Tax Credit (ITC) offers a 26% tax credit for investments in solar energy systems. There are also tax credits available for energy-efficient building upgrades, such as improvements to lighting, insulation, and HVAC systems.
If your business provides health insurance to employees, you may be eligible for the Small Business Health Care Tax Credit. This credit is available to small businesses that offer health coverage to their employees and pay at least half of the premiums.
How It Works:
The Small Business Health Care Tax Credit offers a credit of up to 50% of the premiums you pay for employee health insurance. To qualify, you must purchase the insurance through the Small Business Health Options Program (SHOP) marketplace. This credit is especially helpful for small businesses looking to offset the costs of providing health coverage to their employees.
Manufacturers can take advantage of multiple tax credits, including the R&D credit, energy efficiency credits, and deductions for new equipment purchases under Section 179. The Section 179 deduction allows manufacturers to deduct the full cost of new or used equipment purchased during the year, which can provide significant year-end savings.
Real estate developers and property owners can benefit from energy efficiency credits, as well as the Low-Income Housing Tax Credit (LIHTC), which encourages the development of affordable housing. Additionally, real estate investors may benefit from depreciation deductions on properties to reduce taxable income.
Healthcare businesses, especially those investing in new medical technologies or treatments, can benefit from the R&D Tax Credit. Additionally, healthcare providers offering health insurance to employees may qualify for the Small Business Health Care Tax Credit, helping to offset insurance costs.
The oil and gas industry can benefit from several tax credits and deductions, including the Percentage Depletion Deduction, which allows producers to recover capital investment based on the production of natural resources. Additionally, the Enhanced Oil Recovery Credit provides incentives for investments in technologies that improve oil extraction efficiency.
While cannabis businesses face unique challenges due to federal restrictions, certain tax-saving opportunities are still available. For example, some states offer tax credits for cannabis businesses that invest in community development or sustainability efforts. Additionally, cannabis companies can take advantage of the Section 280E workaround, which involves maximizing deductions for the cost of goods sold (COGS) to reduce taxable income.
Year-end tax credits can be a powerful tool to help businesses reduce their tax liability and improve their cash flow. By taking advantage of credits like the R&D Tax Credit, Work Opportunity Tax Credit, and energy efficiency tax credits, businesses can significantly lower their year-end tax bills. Additionally, industry-specific credits provide tailored opportunities for savings in manufacturing, real estate, and healthcare.
Ready to maximize your year-end tax savings? Contact Vertices today to learn how our expert accounting services and tax services can help you identify and claim the tax credits that are right for your business.
