Category

Tax Credits

metal fabrication and machine shops r&d tax credit

R&D Tax Credit for Fabrication and Machine Shops

By | Tax, Tax Credits | No Comments

The R&D tax credit is one of the most beneficial tax incentives available. Businesses can leverage this benefit to recover costs associated with research and development. Fabrication and machine shops, in particular, can also offset expenses related to developing new parts or designing a new fabrication process from new materials.

The business activities you engage in that require research and development of new products or processes are eligible for the R&D Tax credit. The tax incentive can enable you to become more successful and increase profit margins.

Benefits of the R&D Tax Credit

The R&D Tax credit is the largest credit for companies in the United States. It enables companies to save money, reinvest, and stay competitive.

Businesses have been able to continue with operations even in times of uncertainty, like in the period after the 2008 financial crisis. The credit has also led to growth in profit margins, increased high-paying technical jobs, and a high employment rate in the U.S.

It has the potential to help your business stay competitive and drive the economy in the right direction.

History of the R&D Tax Credit

The R&D Tax credit was introduced in 1981 to encourage businesses to invest more in innovation and increase technical jobs. This allowed companies to develop new products, improve, design, or process products, and even software to claim the R&D Tax Credit.

The credit act was introduced due to the growing concern that businesses’ research spending had declined and negatively impacted the economy. Low growth rate and lack of competitiveness led to this decline.

This was evident when the American automotive industry was overtaken by Japan. The R&D tax credit was introduced as a stimulant to encourage automakers in America to reinvest and recover their competitiveness.

Increased Eligibility for R&D Tax Credit

The tax incentive continued to evolve over the years. In 2003, new regulations were passed that marked a significant turning point for businesses in the U.S. The “Discovery Rule” was eliminated. This rule required research activities to be “new to the world” as a qualifying criterion unachievable for most businesses.

With the elimination of the rule, business activities only have to be new before you can claim the tax credit. Whether your business has iterative steps necessary to improve the production process or update software, the activities will enhance business operations. These will still help in keeping your business competitive.

R&D Tax Credit Qualifying Activities in California

Companies can qualify activities from the development of a concept to the completion stage where the product or process or even formula is ready to be released into the market. You can benefit from the R&D tax credit, depending on your state’s qualifying criteria.

Many states offer the tax incentive which follows specific federal regulations and the IRS guidelines. The rules and guidelines will help you to know what constitutes QREs (Qualified Research Expenditures).

California business owners benefited from the R&D tax credit for over 30 years and use the criteria for developing a new or improved product, processes, or software. Your processes or production have to be technological in nature, eliminate uncertainty, and be a process of experimentation.

Many businesses are not aware of the R&D tax credit, or business owners do not know how to go through the process. To be successful and remain profitable, you can use this incentive to offset costs, reinvest, and stay competitive. Businesses can consult experienced tax experts on how to leverage the tax benefit. Contact us and find out how you can utilize the R&D tax credit.

WOTC concept

The WOTC is a Win-Win For Employees and Businesses

By | Tax Credits, Uncategorized | No Comments

Today’s businesses always seem to be facing complex tax issues as they try to keep pace with changing regulations. As a result, several credits and deductions that would benefit the company’s tax bill may be overlooked. The Work Opportunity Tax Credit (WOTC) is one such program that your business can qualify for. 

What is the WOTC?

The WOTC was enacted as a federal tax incentive program in 2015 to give employers tax credits to hire candidates with special employment needs. Initially signed in 1996, the act has been extended several times and is authorized until December 31, 2020.

The program is jointly administered by the Department of Labor and the Internal Revenue Service (IRS). State agencies oversee the certification progress to ensure that employers hire candidates who meet the WOTC tax credit criteria.

The Department of Labor has recently awarded additional WOTC grants to states experiencing backlogs in the program. 

WOTC grants employers a tax credit between $1,200 and $9,600 per worker from one of the targeted groups. These include veterans, ex-felons, vocational rehabilitation referrals, summer youth employees, as well as those receiving Temporary Assistance for Needy Families (TANF), and government assistance recipients. 

The reasoning behind this tax incentive is to assist persons who are often left behind job-wise. Employers who may hesitate to hire from this group can benefit from tax incentives to include them in their recruitment plans. 

Credit Requirements and Amounts

How much a company can receive in tax credits is largely dependent on which classification the worker is in, as well as their total earnings and hours worked. This credit can be claimed for two years for each eligible employee as follows:

  • Hired recipients enable employers to take the tax credit for up to two years. The first year’s tax credit claimed is 40%, up to $6,000 of the first year’s wages, once the employee has worked 400 hours. If the employee has worked between 120 and 400 hours, a 25% tax credit is taken. An exception to this is that long-term family assistance recipients enable employers to take 40% of qualified wages up to $10,000 and 50% of second-year wages up to $10,000. 
  • Employment of long-term family assistance recipients allows a 40% credit of the first year with qualified wages up to $10,000 and 50% the second year. 

IRS rules state that the WOTC must be applied against a tax liability. As in the case of general business credits, unused credit can be carried back one year and carried forward for 20 years. 

Applying For The WOTC

Businesses applying for the WOTC must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” on or before the applicant’s first day on the job.  Form 9061, The “Individual Characteristics Form,” must also be completed by the employer upon hiring the job candidate. Additional documentation may also be necessary to prove the applicant is part of a target group.

The forms are mailed to the state’s WOTC coordinator within 28 days of the employee’s first day on the job.  Once the state verifies the employee is WOTC-eligible, the company can take the appropriate tax credits. 

Employers can then claim the credit on Form 3800 against their income taxes, as detailed by the IRS. 

Incentax can assist your business in identifying and maximizing state and federal tax credits through a streamlined process. Our team of experts evaluates programs and incentives the business is eligible for to maximize returns. Contact us to start taking advantage of tax credits to increase your company’s bottom line. 

hiring manager explores WOTC

Does My Business Qualify for the Work Opportunity Tax Credit?

By | Tax, Tax Credits, Uncategorized | No Comments

The Work Opportunity Tax Credit (WOTC) is a federal tax credit designed to benefit businesses that hire individuals who are in “targeted groups” that have historically found it difficult to obtain employment. The WOTC benefits both employers and employees as it helps people in difficult circumstances find jobs. As an employer, you can hire as many qualified employees as you want. The IRS and Department of Labor have complete information about the WOTC.

Obtaining Certification For a Work Opportunity Tax Credit

Pre-Screening

Before you can claim this tax credit, you must obtain certification that the person you’ve hired is a member of one of the targeted groups listed below. The first step is to file Form 8850, a pre-screening form within 28 days of the eligible employee starting work.

Limitations on Credits

The amount of the credit is limited to business income tax liability or the amount of social security tax owed.

Claiming the Credit

Depending on your status as a taxable employer, tax-exempt employer, or tax-exempt organization, you may need to fill out Form 5884 as well as Form 3800, which is for General Business Credit.

What are the Targeted Groups?

The Internal Revenue Service provides guidelines regarding who qualified as a member of a targeted group. For you to be eligible for this tax credit, you’ll have to hire people from one or more of these groups.

Long-Term Unemployed

A qualified long-term unemployment recipient is someone who has been unemployed for at least 27 consecutive weeks. To qualify, they must have received unemployment benefits for at least part of this period.

Ex-Felon

A qualified ex-felon is someone who is hired within a year of being convicted of a felony or released from prison after serving time for a felony.

Recipient of Long-Term Family Assistance

A long-term family assistance recipient is a member of a family who fits into one of several categories. They must have received assistance under an IV-A program for at least the last 18 months; for 18 months beginning after 8/5/97, or they are no longer eligible for this assistance because a state or federal law limited the maximum time they could receive these payments. For the latter, cessation of payments must have been within the last 2 years.

Designated Community Resident

A Designated Community Resident (DCR) must be between the ages of 18 and 40, reside in an empowerment community, an enterprise community, or a renewal community. These are all federally designated locations with high levels of poverty and economic distress. They must remain in one of these areas after being hired.

Supplemental Security Income Recipient

A qualified Supplemental Security Income (SSI) Recipient is someone who has received SSI benefits within 60 days of being hired.

Vocational Rehabilitation Referral

To qualify as a vocational rehabilitation referral, someone must have a physical or mental disability and presently or previously receiving services from a Department of Veteran’s Affairs program, an Employment Network Plan under the Ticket to Work program or a state plan approved under the Rehabilitation Act of 1973.

Supplemental Nutrition Assistance Program (SNAP) Recipient

Qualified SNAP recipients are between the ages of 18 and 39. They or a member of their family must have received SNAP benefits for 6 months or for a minimum of 3 of the last 5 months.

Summer Youth Employee

A qualified summer youth employee must be at least 16 and under 18, employed only between May 1 and September 15. They must also reside in an Empowerment Zone, Renewal Community, or a Renewal Community.

The WOTC Can Help Your Business Save on Taxes

The WOTC can help businesses save money on taxes while also providing jobs to people in targeted groups. If you want to claim this credit, make sure you hire employees who qualify. If you need help understanding the WOTC or any other tax credits that could benefit your business, you may want to consult with a professional.

The tax credit experts at Incentax help businesses take advantage of all possible tax credits. To learn more about our services, contact us.

new markets tax credit

Investing and the New Markets Tax Credit

By | Tax Credits, Tax Incentives | No Comments

Traditionally, the New Markets Tax Credit was claimed by investors comprised of large corporations or financial institutions. It is possible, however, for individuals, and even the Community Development Entities (CDEs), to invest themselves. Investor capital reaches financially distressed areas via the qualified CDEs in that locale.

The New Markets Tax Credit Encourages Economic Growth

A business or entity applies with the Community Development Financial Institutions Fund (CDFI) to become a certified Community Development Entity (CDE). Once this is achieved, the CDE can apply for tax credits with the Department of the Treasury. The Community Development Financial Institutions Fund is a bureau in the Treasury Department. This bureau oversees the allocation of the NMTC. There are several steps to becoming a certified CDE, but your business or institution may already qualify.

Many financial institutions and businesses are already certified CDFIs or SBICs. These two designations automatically qualify such companies and institutions as CDEs. Community Development Financial Institutions are usually community credit unions or banks. They are already helping provide access to lending for underserved communities. Specialized Small Business Investment Companies are companies designed to increase small businesses’ access to investment in low-income areas, which is also the aim of the NMTC.

Once the CDE has applied for credit with the U.S. Treasury, they can align investors with business projects in their community. The capital is invested in the CDE in exchange for the NMTC which the investor can claim against their federal income tax owed. Private entity CDEs efficiently and fairly extend this funding and recruit investment to meet the needs of the qualifying projects they choose within their communities. The recipients of the funding are designated as Qualifying Active Low Income Community Businesses or QALICBs.

Changes to the New Markets Tax Credit (NMTC)

The most recent change to the NMTC came in December 2019. Through the Fiscal Year 2020 appropriations bill H.R. 1865, President Trump signed into law a $5 billion extension of the NMTC. Designed as a one-year extension, it was a prescient move for the President. Businesses and communities were hit hard by the Coronavirus pandemic that came with the new year.

According to the New Markets Tax Credit Evaluation, investors are able to claim up to 39% income tax credit on their investment. $12.9 billion dollars were allocated in 9 rounds, over the first eight years of the program. This equals out to about $1.5 billion per allocation round. The recent extension will significantly increase that allocation amount at a time when communities and QALICBs need it most. 

Paul Anderson, of the NMTC Coalition, reported that funding for 2019 was $3.5 billion. As the program has continued to receive extensions, the allocation amount has increased. Many businesses and projects are in dire need of funds. Certain changes made to the NMTC Compliance FAQs were made in response to the Coronavirus pandemic.

Communities Become Candidates

The United States Census determines in large part which communities can qualify to receive NMTC qualifying investments.  Communities are judged to be qualifying investment opportunities by census poverty level. Some communities qualify because of their status as a “targeted population.” A population can receive this designation because of natural disaster as was the case with Hurricane Katrina and the subsequent Gulf Opportunity Zones

The New Markets Tax Credit intends to help underserved communities, devastated communities, and investors simultaneously. In 2004, the American Jobs Creation Act defined targeted populations in Subtitle C: Community Revitalization. It also set a precedent for identifying potential QALICBs, 

Americans have benefited from CDFI funding for almost two decades. In July 2020, the CDFI Fund awarded $3.5 billion in New Market Tax Credits. This amount brought the allocations awarded to a total of $61 billion. Contact us for more information on how your business can invest in America. 

tech company research and development

Does Your Business Qualify for R&D Tax Credits?

By | Research and Development Tax Credit, Tax, Tax Credits | No Comments

The topic of Research and Development (R&D) is often associated with images of scientists gathered around a table to discuss complex formulas and space-age discoveries. But did you know that if your company’s staff employs personnel such as software developers, engineers, and machinists, your R&D expenses could qualify for tax credits

Many companies fail to take advantage of this tax credit, unaware that they have qualifying R&D expenses that are approved by the IRS. These do not have to be pioneering inventions or innovative undertakings. Rather, this credit is available to companies that create or improve products and trade processes.  

IRS Criteria for R&D Credits

The federal R&D tax statute provides a credit of up to 10% of qualifying expenses. However, many states also have this credit which can bring the total percentage to as high as 20%. Rules for determining what qualifies as R&D expenses are listed under Internal Revenue Service Code section 41. 

The IRS has a predefined set of criteria that determines what activities satisfy the requirements of qualifying R&D expenses. These are as follows:

  • The activity must have a purpose such as improvements in function, performance, reliability, or quality. Projects related to the appearance of a product do not qualify. 

  • Technical uncertainty related to the capability, methodology, or design of the business. The uncertainty must be attempted to be resolved with experimentation. This does not include any economic uncertainties.
     
  • The project must rely on hard science such as engineering, physical/biological sciences, or computer science. 

Once all the above criteria are met, then related expenses in wages, supplies, and contract research that were incurred during the project can be considered qualified R&D expenses. 

Technology R&D Expenses

According to Accounting Today, here are some of the most commonly overlooked technology expenses that can qualify as R&D expenses: 

  1. Cloud-Computing Costs
    Many companies have harnessed the power of cloud computing which provides an efficient way of storing, processing, and analyzing data. The server, platform, and Software as a Service (SaaS) technology costs included in cloud computing may fall under qualified research expenses (QREs) for both federal and state R&D credits. Development platforms and beta-testing of software are also included in this classification.  

  2. Migration Of System Platforms 
    The complex project of migrating systems to the cloud often involves technical uncertainty and failure, qualifying it as an R&D expense. 

  3. Replacement Of Obsolete Parts
    Should a part from a product become obsolete, redesigning and testing are necessary for a replacement. This process involves technical uncertainty and failures which can be considered R&D expenses. Expenses can include wages of engineers and other associates involved in the redesigning process so long as their contributions are clearly demonstrated. 

  4. Automation Expenses
    Technology that is developed to improve the efficiency of the manufacturing process is considered a QRE. Robotic components are a good example of this as uncertainty exists as to where to place them and what they will do. The cost of the robot itself cannot be included, but the research into where and how they will fit into the process as well as the testing are qualified expenses. 

  5. Artificial Intelligence and Machine Learning
    Artificial intelligence and machine learning are used to improve manufacturing efficiencies. As a result, the research expenses involved in these aspects would also qualify as QREs. 

Other Industries Eligible For R&D Credits

There are many other industries and applications where qualifying R&D expenses can be claimed. The CPA Journal lists several of these in various areas.

Restaurants, for example, may have qualifying expenses such as ways to improve nutrition, safety, and preservation of food. The construction industry involves designing new heating and air conditioning systems as well as new construction techniques. Agriculture involves researching and designing new irrigation systems, harvesting improvements, and new feeding techniques for livestock.

Many taxpaying companies can benefit tremendously from the R&D tax credit. However, millions of dollars go unclaimed yearly since businesses fail to recognize exactly what qualifies for this credit. 

Incentax can help identify and maximize qualifying R&D expenses for your business. Contact us for more information on how you can take advantage of these tax credits.  

sb 1447 hiring employees covid

What California Business Owners Should Know About SB 1447

By | Tax, Tax Credits, Uncategorized | No Comments

Those of you with a business in California know all too well about COVID-19 wreaking havoc on keeping things afloat. There’s good news, though: if you still have not experienced a turnaround in your business due to the virus, some tax credits are now available to help you.

One bill passed in California this fall is SB 1447, or a $100 million hiring tax credit for small businesses. A lot of business owners are already taking advantage of this to help them get back on track, including those who had to let employees go.

What do you need to know about this new tax credit? Take a look at the details and how to use it to your advantage to avoid further crisis.

SB 1447 Explained

SB 1447 is defined as a small business hiring credit to give tax credits if employers hire more employees throughout 2020. It applies to the tax year beginning this year and going through January 1, 2021.

For businesses like yours, it helps save you exponential money if you need more employees to keep your business operating optimally. You might have held off hiring more employees since spring out of fear of the future tax burdens.

Three California Democrats put this bill in motion: Sen. Steven Bradford, Sen. Anna Caballero, and Assemblymember Sabrina Cervantes. It was just one part of California’s recent laws put in place to help the business community bounce back after COVID-19 hardships.

These legislators noted a sobering fact before getting the bill passed: Small businesses suffered a 21.5% loss of jobs earlier in the year. This new bill brings major relief, even if you need to know a few more things to qualify.

Are You a Qualified Small Business Owner?

To qualify for this tax break, you need to fall under two guidelines:

  • You’ve employed fewer than 100 employees since December 31, 2019.
  • You had a 50% reduction in gross receipts between April 1, 2020 and June 30, 2020.

Keep in mind the credit is capped at $100,000 per qualified small business owner. When you hire new people, the new employees need to be paid qualified wages and not paid through the Personal Income Tax law or the Corporation Tax law.

These provisions are just the basics. Calculating your tax credits has specific rules you need to look at more carefully. One thing to note is any new hires working full-time can not work for you more than 167 hours per month.

Calculating Your Tax Breaks

To figure the tax break you get back, know you receive $1,000 for each net increase in qualified employees. You have to compare your average number of employees for the 2nd quarter of this year with the average number you had between July 1 and November 30.

Another great thing to consider with this new bill: You can apply your credit against qualified sales and use taxes. If you are a retailer, this is a major benefit when you have a lot of other tax burdens annually.

The aggregate amount of credit available will also have a cap at $100 million, if covering the majority of California’s hurting small businesses.

What will the tax benefits really be, though? Will it lead to a brighter future for California’s small businesses? On a national scale, many small businesses likely wish for the same.

Bringing New Lifeblood to the Small Business Community

When California Governor Gavin Newsom signed the bill back in September, he said: “This is really about the lifeblood of California’s economy, it’s about a sense of pride and spirit that we all have. This is about the California dream.”

Now available as a tax credit for the next five years, you can bring your business back from the brink. This tax bill joins an exclusion of federal Paycheck Protection Program loans from gross income tax filings, giving Californian businesses further breaks.

Contact us at Incentax LLC so we can help educate you on the many tax breaks available to businesses today.

net operating losses farmer concept

What You Need to Know About Net Operating Losses (NOLs)

By | Tax, Tax Credits | No Comments

Net operating losses (NOLs) are not always detrimental to your business. The government has created ways for businesses to offset these losses. There are flexible options available for carrying tax assets forward into future tax years, or back depending on your businesses current cash flow needs.

NOLs Explained

Net operating losses are realized when businesses are expensing more than they take in. According to the IRS, “If your deductions for the year are more than your income for the year, you may have a net operating loss.” This is particularly relevant to businesses with annual incomes that were affected by the recent novel coronavirus restrictions. 

Net operating losses in a farm context are easily visualized. A farmer who has a crop failure in his first of three years in the farming industry will have incurred a net operating loss. This loss will be counted as an asset against the hoped-for income of the next year. This asset is carried forward to the second year and applied to that year’s income. The deduction of up to 80% of the previous year’s loss is then applied in farming year 2.

Carrying forward the loss works in the farmer’s favor if farming year 2 is a bumper crop. His high income of the second year is tempered by the deduction of year 1’s loss, thus reducing his taxable income accordingly and saving him money spent in income tax. The remaining 20% of the NOL can be applied to farming year 3’s bumper crop reducing that year’s taxable income slightly. Losses incurred would be counted and discounted against future farming years until the losses were accounted for.

The disadvantages of being allowed to carry forward a loss rather than carryback are two-fold. First, if the loss is carried backward it can be applied to a previous tax year that had a higher rate and it could provide the company with a tax refund. Second, because of the time value of money, it is better to have cash now rather than in the future.

The TCJA (Tax Cuts and Jobs Act) caused a lot of changes to occur with regard to taxation in 2017. One of the changes made was a disallowance of carryback for excessive losses. This affected most taxpayers carrying large losses disadvantageously.

A two-year carryback period had been an option previously, but was no longer viable from 2018. Farmers were allowed a carryback period of up to 5 years. The option for most taxpayers carrying a large loss was for them to carry forward the loss indefinitely. The recent CARES (Coronavirus Aid, Relief, and Economic Security) Act made changes to the implementation of some aspects of the TCJA in regard to NOLs.

NOLs and the CARES Act

The CARES Act put a temporary suspension on the implementation of TCJA section 172 by allowing to carryback losses to 5 years. This effectively puts a hold on the elimination of the two-year carryback limitation present in the TCJA. The CARES Act makes it possible for businesses to carryback losses incurred in tax years 2018 through 2020. 

It is important for businesses to have proper documentation of NOLs. This is then disclosed in notes with the financial statements of the company when income taxes are filed. Between the changes that the TCJA made to the Internal Revenue Code (IRC) and the amendments that the CARES Act made to the TCJA, this year will be a doozy for business owners and their tax advisors. Tax strategies are available to take advantage of NOLs. Contact us to find out how your NOL can be a boon instead of a burden to your business this year.

research and development tax credit

R&D Tax Credits: An Added Benefit to the Next Relief Package?

By | Research and Development Tax Credit, Tax, Tax Credits | No Comments

A frequently overlooked tax deduction for businesses big and small is R&D tax credits. R&D stands for “Research & Development” for any business that managed such activities in the last year or prior years.

For some major business tax benefits, this is still one of the most significant. However, some changes to R&D taxes began in 2017. Through the Tax Cuts and Jobs Act, companies could no longer deduct R&D costs in the same taxable year.

Further, the new law now demands companies write down these expenditures over the next five years. Now manufacturers, in particular, look to Congress’s relief bills to see if R&D credits become restored.

How Did a Business Qualify for R&D Tax Deductions?

To qualify for R&D tax deductions prior to the 2017 law, a company had to develop new products and processes, enhance those products, or improve their prototypes. Manufacturers clearly fall under this category, making them one of the most important sectors to benefit from R&D tax deductions.

Now with the new tax laws, they may begin to hurt exponentially. Prior, manufacturers and all who qualified could prove various records to qualify for this tax credit.

It usually involved presenting payroll records, expense detail, notes on all projects being developed, plus any employee testimony. While this probably sounds a bit cumbersome, it was more than worth it.

Besides, many small businesses could also claim the credit against their Alternative Minimum Tax. As the economy falters, though, analysts wonder what the R&D tax reductions mean for manufacturers and small businesses.

The Hope for R&D Tax Relief in a Relief Bill

U.S. Congress is still going through the process of passing a relief bill to help businesses struggling through COVID-19 closures. Many business analysts contend that R&D tax relief in a relief bill is a must to help manufacturers survive in volatile times.

Congress clearly did not see COVID-19 coming when they enacted the 2017 tax law changes. Now the need to carefully document their expenditures over the next five years is sure to create some big problems for manufacturers in an age of economic uncertainty.

As Bloomberg Tax points out, competitiveness in manufacturing could become affected by 2022, leading to those same manufacturers going overseas to find relief. Over in Europe, R&D tax credits continue without any cuts, making it a more attractive place to base operations.

Still, Congress might fix the R&D tax issue here since one particular bill is on the table. The problem is convincing Congress to include it in the relief bill everyone hopes becomes a reality.

A Proposed R&D Tax Bill

A rare bipartisan bill is out there waiting for passage related to R&D tax relief. Back in 2019, Reps. John Larson (D-Conn.) and Ron Estes (R-Kan.) created a bill asking for the restoration of the original R&D tax law.

This bill seems to have become lost in the shuffle recently with various lobbyists pushing to include it in a future relief bill package. One major lobbying group is Intel. Sharon Heck, Intel’s CTO and Treasurer (and head of the R&D Coalition) is at the helm of getting this bill passed.

Last spring, Heck and the entire R&D Coalition sent a letter to Congressional leaders asking them to take action. Without some kind of passage soon, it could end up cutting 23,400 R&D jobs through 2022, leading to numerous ripple effects in the U.S. economy.

As with everything else, this is up in the air, though we continue to look in on it to update you with the latest tax information.

Contact us here at Incentax LLC to learn more about today’s most pressing tax issues.

startup tax tips credits advice

How to Calculate Your Startup Business Taxes

By | Tax, Tax Credits | No Comments

All tech startups face one common issue: paying taxes to the IRS. You are still trying to find your footing in the business world, and just when you think you couldn’t spend more money, the government steps in to remind you that you have a statutory obligation to pay taxes.

Keeping up with your tax obligations can be tedious, but any misstep can result in huge tax bills.  Here are the most common taxes you should always keep in mind.

Are Tech Companies Tax Exempt?

No. Tech companies are required to pay federal tax. For a company to be tax-exempt, the founders shouldn’t make any profits from it. These companies generally fall under religion, public social benefits, culture & arts, human services, or health organizations.

Even though tax-exempt companies don’t have to pay federal tax, they are still liable for local income & state tax, and all donations made to them are tax-deductible.

Which Types of Taxes Should Tech Companies Calculate?

The type of taxes you pay are mainly dependent on your business structure and not the industry. Tax obligations often change on an annual basis, so it’s important to keep yourself regularly informed.

As a business owner, you must start planning for the following taxes.

1.   Employment tax

If your startup already has employees, you will have to file employment taxes to the federal government.

These taxes include income taxes that you withhold from the employees and submit it to the IRS on their behalf, including; Federal Insurance Contribution Act (FICA) taxes, Additional Medicare Tax, Federal income tax, and Federal Unemployment Tax Act (FUTA) taxes.

2.   Income tax

These are taxes imposed by the government on individuals and businesses based on their income. According to the law, income taxes should be filed annually, so that one is able to determine their tax obligations.

Income taxes are calculated based on the structure of your business (sole proprietorship, partnership, corporations). If your tech startup is a partnership, you won’t have to pay income taxes but will be required to file an information return.

3.   Excise tax

Excise tax is not mandatory for all businesses. It is only imposed on businesses that deal with manufacturing-specific goods (fuel, tobacco, alcohol, etc.) or those that use certain facilities and equipment or businesses. Most often, the excise tax translates as increased prices for the consumer. If you also sell tech products, find out if they are liable for excise tax and the forms you have to file.

4.   Self-Employment tax

For employees, the employer withholds a certain amount of money from their paychecks for Medicare taxes and social security. As an entrepreneur, however, you have to pay these taxes on your own via self-employment taxes.

Only 92.35% of your net income is subjected to this tax, and to calculate this, you deduct all your expenses from your gross earnings. There are exemptions to this tax, but generally, all earnings from self-employment above $400 should be taxed.

The Schedule SE on Form 1040 can be used to calculate this tax.

5.   Estimated taxes

This tax is imposed on income that is not subject to withholding, including interest, alimony, rent, dividends, etc. If you have additional income from other sources, it is advisable to conduct a paycheck checkup regularly, to avoid being hit with hefty bills at the end of the year. 

Let Incentax Help You Stay On Top of Your Taxes

Understanding the complex rules and requirements for tax incentives can be difficult and you may need a professional tax incentives advisor to help you navigate these murky waters. We are here to guide you on how you can get the most out of your tax credits and incentives.

Contact us today for a consultation on how you can effectively use your startup’s tax credits!