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Tax Credits

startup tax credits

The Use Of Tax Credits to Grow Your Startup Strategically

By | Startup, Tax Credits | No Comments

One of the greatest obstacles that startups face is the acquisition of enough capital to fund their business idea.  Financial management becomes an even more essential concept. Business ventures have various financial demands which can be a strain before the business gets to break even or become profitable. Therefore businesses have to minimize their costs and that includes taxes. For startups, how can a company use tax credits to grow their business strategically?

Startup Deductions

Did you know that you get to qualify for deductions in your first year of business? Whatever your startup costs, be it marketing or research, you are allowed a $5,000 deduction of organization costs and $5,000 of business costs if your startup total costs are $50,000 – $55,000.  However, if they are greater than $55,000, you do not qualify for these deductions.

Research and Development (R&D) Tax Credits

R&D tax credits are offered to enterprises involved in developing or designing prototypes and processes and products like software, or the improvement of the same to reduce their tax liability. These taxes are meant to encourage startups to invest in research and development. They can really help offset the expenses that startups incur in research and development.

This allows entrepreneurs to be less apprehensive about the risks of building their startup. Businesses with annual business receipts of less than $5,000,000 can claim a $250,000 credit for up to 5 years to offset against their FICA taxes. A business can choose to either claim the credit or offset against their social security taxes.

What are the requirements for claiming R&D tax credits?

You need business records to claim R&D tax credits. Companies must ensure that they document their research activities for them to make a claim. This means they have to indicate the expenses that were incurred in each activity.  It is also important to substantiate which employees were involved in the R&D activities through proper record keeping.

There are other strategies a company can use to ensure that they reduce their tax liability, including:

Retirement Contributions

Contribution to a retirement plan can earn you tax benefits. This includes personal contributions, and if you have employees IRA plans are ideal. There are also plans like SEP which allow you to make contributions on behalf of your employees discreetly.

Having a Home Office

If you are one of those who have started their business in a garage, did you know that having a home office can reduce your taxes? If you use your space as an office on a regular basis and it is exclusively for business you get to deduct $5 dollars per square foot of expenses for up to 300 square feet.

Business Registration

How have you registered your company? This is important because it will influence how you get to pay taxes. You get to save on taxes by registering your business as an S Corporation. Sole proprietors are the least taxed and C Corporations sometimes get to be double taxed.

Note: It is not advisable to lower your taxable income so that you do not get to pay taxes as it is counterproductive as you are trying to make profits. Instead, maximize your retirement income by getting an IRA savings plan for you and your employees.

Starting a business is not easy and it involves a lot of risks but that should not be a reason to give up on a good idea. With the right information, you can grow your business despite capital constraints. Contact us for consultation or for more information on how you can be tax-efficient and how you can strategically grow your business.

healthcare tax credits

Tax Credits and Deductions for Healthcare Companies

By | Tax Credits, Tax Incentives | No Comments

Governments use tax deductions and credits to reward businesses for providing employment opportunities, developing and enhancing solutions, improving the economy, and making the world a better place through activities like combating climate change. 

Tax credits and tax deductions are excellent opportunities for businesses to lower their tax liability significantly. As a company in the healthcare sector, you have a higher chance of qualifying for these tax savings. 

Here are some tax credits and deductions that healthcare companies are eligible for:

1. Research and Development Tax Credit

This type of tax credit, also known as R&D, was introduced by the United States government to encourage companies within the private sector to undertake innovation. For example, pharmaceutical firms enjoy this tax credit as an incentive to improve research for vaccines. 

Through the R&D tax credit, healthcare companies retain higher profits on their products resulting from research. This is possible given that the firms pay fewer taxes and thus spend less on research. 

The R & D tax credit is not limited to a particular industry. For a company to qualify for this credit, it needs to be involved in creating new products or systems, developing or enhancing software, or improving already existing products or systems. Thus, firms in agriculture, manufacturing, engineering, energy, textile, and healthcare, among many others, can benefit from it.  

Examples of areas where healthcare companies can qualify for the R&D tax credit include the development or enhancement of performance-related surveys for professionals in the mental health sector. Creating unique seating arrangements like an armchair that also serves as a wheelchair for those in care homes also calls for research and development. Introducing processes that help to remove contaminants from chemical compounds promotes respiratory health. Also, building prototypes for orthopedic instruments fall under research and development due to the complex medical components involved. 

State and federal credit rates can vary. For example, the federal R&D rates are 20%, while the California rate is 15%

2. Small Business Healthcare Tax Credit

Both established and small businesses can benefit from tax credits. The Affordable Care Act in the United States brought forth the small business tax credit. Firms that offer their workers health insurance are eligible for this tax credit. 

To qualify for the tax credit, your company needs to have a maximum of 25 full-time employees, pay each employee $55,000 a year or below, cater for half or more of their health insurance premiums and have insurance from the Small Business Health Options Program (SHOP) market. 

The Small Business Healthcare Tax credit can cover up to 50% of the health insurance premium payments for your employees. 

You should know that you cannot claim the credit two years in a row. 

3. Pass-Through Deductions

If you are a sole proprietor, are in a partnership, S corporation, limited liability partnership, or any form of business that subjects you to a pass-through, you can get a deduction. A pass-through deduction can lower the taxes on your net income by 20%. 

Companies that fall under the category of prohibited specified trade do not qualify for pass-through deductions unless they fulfill certain conditions. Examples of this include clinical entities that are operated by the owner.

4. Business Expense Deductions

Some expenses you incur in running a business can make you eligible for tax deductions. If you are starting your business, you can apply for a deduction on your capital expenses. After that, you are eligible for deductions on your business expenses. If you travel a lot for business, you can have deductions for travel costs. 

Knowing which tax credits and deductions you are eligible for, when they’re due and how to apply for them can be confusing. That is why it’s vital to enlist the services of tax credit experts like Incentax who will simplify the process for you and help you take optimum advantage of the available federal and state tax credits. 

r& d tax credit

The Inside Scoop on R&D Tax Credits

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

American companies are spending more on Research and Development each year. The National Science Foundation shows sustained increases in research and development expenses in the US in the years after the 2008 financial crisis, meaning, American companies are trying to innovate and put their money where their mouth is. 

Yet small and medium business owners hear the words “research and development” and they probably envision something outside of what they and their teams are doing on a daily basis.  

When business owners hear “R&D tax credits” it’s easy to think that you need to have a huge department doing rocket science each day and invent the next huge thing to even be considered as a business that does Research and Development. 

Well, R&D tax credits are one of the areas in tax incentives where the little guy can benefit too.  Advocates for the R&D tax credit believe the government could do a better job at educating business owners, regardless of the size, on the tax credits they could be taking advantage of and aren’t. 

What is an R&D Tax Credit and What is it Trying to Get Companies to Do?

What these tax credits are trying to do is incentivize companies through a tax break for doing Research and Development work in the US. Notice, we’re not even saying Research and Development that works.  We’ll get to that in more depth in a bit. The goal is to keep more jobs in the US and reward companies that are trying to innovate. 

What kind of activity qualifies as Research and Development? 

Any activity in your business that involves design, development, and improvement of a product and/or a service may qualify as R&D.  In fact, in 2003, the “Discovery Rule” that was part of this tax credit was removed; instead of having the R&D tax credit only accessible to companies executing research activities “new to the world”  the tax credit became accessible to companies executing research activities that were new to them, or an improvement upon what they were doing before. 

In 2015, the Research and Development tax credit became permanent, and the profit thresholds necessary to qualify where lowered, meaning that startups that weren’t generating a lot of money, but were possibly generating a lot of innovation could benefit too. You just have to pass what’s known as the four-part test to qualify.

Does my company have to invent something new? 

No! You should be able to demonstrate, through documentation your teams are keeping, that the work you’re doing attempts or successfully improves upon a product or service, or develops a new product or service. 

What do I need to document to claim it? 

You need to document the activities you do as part of your research and development, as well as the expenses those activities require. Some examples of documentation that can help support your claim are project briefings or notes, product descriptions or white papers, payroll records and expense reports. 

How small can my business be to qualify for an R&D Tax Credit?

Your business’s revenue has to be less than $5 million in a given year to qualify. You can submit up to five years of evidence as part of your claim and apply it retroactively as far back as 2015. 

What about state taxes?

Make sure to check with your state’s Tax Department for applicable credits in your state. Many states have their own tax incentives for Research and Development, but they vary from state to state. 

How can I find out more about this and start my claim if I qualify? 

Our team of experts at Incentax, LLC knows the tax code in and out and can help you evaluate your individual business situation to find every tax break you can get. Contact us to set up a consultation and learn more about this and other tax credits you may benefit from. 

 

technology company tax burden

5 Ways Technology Companies Can Reduce Their Tax Burden

By | Innovation, Startup, Tax, Tax Credits | No Comments

Tax obligations are part and parcel of running a business. If your tech company is based in California, for instance, some of the taxes that you’ll have to pay include:

  • Income taxes
  • Employment taxes
  • Excise taxes

For years, tech companies have been slammed for failing to pay a fair share of taxes. However, it’s fallacious to make a blanket accusation to the effect that tech companies engage in tax evasion. Just like other businesses, these companies only devise ways of reducing their tax burden. 

From the local government to the IRS, tech executives should beware of all their tax obligations. This entails knowing how much tax you owe to different entities, when you should file, and the type of taxes that you ought to pay. Here are five strategies that a tech company can leverage to ease its tax burden.

1. Automating Tax Records

This sounds like a no-brainer, but some tech companies still take a casual and laidback approach to bookkeeping. Being proactive as far as bookkeeping is concerned could entail automating your records and books. Certain records are mandatory for you to take deductions. Without these records, expenditures might not be deductible. In this regard, here’s what you should consider doing:

  • Automate your books to track your company’s income and expenses. There are dozens of record-keeping programs that can help you do this.
  • Establish a file system to categorize your expenditure. Since some business expenditures are deductible, a system that categorizes your expenditure will help you determine and claim your tax relief.

2. Making Smart Tax Decisions

Under federal tax law, most business expenses are deductible. On the other hand, most income is taxable. Furthermore, the law also gives you options about when and to what extent you can report income or claim certain deductions. Being aware of these provisions can go a long way in helping you lessen your tax burden.

3. Staying Apprised of Law Changes

The American tax law constantly changes with significant legislation, IRS rulings, and court cases frequently emerging, thus altering the taxation landscape. Contrary to what you might think, these new developments are not meant to stifle your tech company. Instead, they present tax opportunities that you can leverage. Staying apprised with law changes can help you act on such opportunities.

For instance, in the aftermath of Hurricanes Wilma, Rita, and Katrina in 2005, several short-term tax breaks were enacted to benefit both individuals and corporations. By leveraging such opportunities when they arise, you’ll be able to lessen your tax burden significantly.

4. Contributing to Retirement Plans

Once your tech company breaks even, you should consider sheltering its income in a retirement plan that provides you with tax deductions for your contributions. The added benefit to this is that providing employees with such a savings opportunity helps you gain their loyalty. In the long-run, you’ll be able to tax on contributions until you start taking money from the retirement plan.

5. Structuring Your Business Appropriately

This is perhaps the most overlooked aspect of tax planning. Often, tech companies that start small fail to change their business structure as they scale. For instance, you can gain significant tax benefits by structuring your tech company as a C corporation rather than an S company or an LLC. When you structure your company as a C corporation, the initial $50,000 of its income will attract a 15% tax rather than a 35% tax.

The Incentax Advantage

Every business owner deserves a tax break. However, few of them know about opportunities that they can leverage to pay less tax. Moreover, you can avoid clashing with state and federal tax agencies by outsourcing the expertise of tax professionals. For top-notch tax consultation and advisory, contact us today.

covid19 tax credits

What You Need to Know About Covid-19 and Business Tax Credits

By | Tax Credits | No Comments

The COVID-19 crisis has led to government-imposed lockdowns throughout the world. It has significantly slowed down economic growth and led to massive job cuts. Despite the revenue losses experienced across all industries, companies are still required to fulfill their tax obligations.

The federal government has enacted The Families First Coronavirus Response Act (“FFCRA”) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act to protect individual taxpayers and businesses from the devastating financial effects of the crisis.

State governments haven’t been left behind. In California, for instance, the state government has pledged to provide assistance to small businesses during the epidemic.

The advantages of these federal and state coronavirus-related tax relief policies include:

  • Additional time for handling tax-related matters
  • Quicker tax refunds
  • Temporary changes in tax audit policies to ensure quicker tax determination

Here’s an overview of the business tax credits that have been implemented to support companies amid the COVID-19 threat.

Employee Retention Credit

The CARES Act introduced the employee retention credit (ERC) that allows eligible employers to claim a tax credit against employment taxes for every calendar quarter for amounts equal to 50% of qualified wages per worker. This applies to a maximum of $10,000 in wages per employee per year. Generally, the ERC is limited to the employment taxes that are imposed on the wages. Any excess is regarded as a refundable overpayment.

Paid Sick Leave Refundable Credit

The Emergency Paid Sick Leave Act (EPSLA) requires eligible businesses to provide their workers with paid sick leave in case they are unable to work. Employees who are afflicted by the coronavirus are entitled to a two-week (80-hour) paid sick leave at their regular salary.

Eligible employers are entitled to a refundable tax credit that equals the paid sick leave. The tax credit also includes the employers’ share of Medicare tax that is imposed on those wages.

Paid Family Leave Tax Credit

Employees who are unable to work because they need to take care of a child whose place of care or school is closed are entitled to paid medical and family leave equivalent to two-thirds of their regular pay.

Eligible employers are entitled to a refundable tax credit that is equal to the paid medical or family leave. Besides, the tax credit includes the employers’ share of Medicare tax that is imposed on those wages as well as the cost of maintaining health insurance covers for the employees during the leave period. An eligible employer is defined as one who:

  • Was undertaking business during the 2020 calendar year
  • Concerning any other calendar quarter, the business activity got partially suspended due to government orders such as mandatory COVID-19 lockdowns that caused significant loss of income

Delay in The Payment of Payroll Taxes

The CARES Act allows self-employed individuals and employers to delay depositing their portion of social security tax and the 50% tax levied on self-employment income. However, 50% of the delayed payment ought to get deposited to the IRS next year, and the other 50% by the end of 2021. Businesses that are taking loans provided by the Small Business Act don’t qualify for this benefit.

Acceleration of AMT Tax Credits

The Tax Cuts and Jobs Act (TCJA) revoked the corporate alternative minimum tax (AMT). Nonetheless, it still allows for refundable AMT credits. This applies for taxable years 2018 to 2021. Under the CARES Act, businesses can accelerate the recovery of the AMT credits. This includes requesting a tentative reimbursement of such amounts before or on 31st December 2020.

As you can see, there are many business tax credits that can help keep your company afloat during the current COVID-19 pandemic. For more details about the refundable tax credits that you qualify for and how to make successful claims, contact the team at Incetax.

What Is the Research & Development Tax Credit?

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

There are many valuable economic incentives offered by the government to help businesses reduce current and/or future tax liabilities.  One incentive program in particular, known as the Research and Development Tax Credit, rewards businesses for their investment in domestic research.  Those that qualify can then use the additional source of revenue to stay competitive, hire additional employees, and enhance day-to-day operations.

WHAT IS THE R&D TAX CREDIT PROGRAM?

The R&D Tax Credit was first introduced in 1981 as a way to encourage innovation throughout the economy, create and retain technical jobs and increase global competitiveness.  It is available to any business that develops new or improved products, processes or software systems. This means that businesses of all sizes and in a variety of industries can be eligible to claim this tax credit, not just major corporations with research labs.  Taking advantage of the R&D Tax Credit can help taxpayers alleviate some of the financial burden in trying to remain competitive in their respective industries.  

WHAT ACTIVITIES QUALIFY?

Companies that invest money, resources and time towards improving a product, technique, formula, process or software, or inventing of a new product or process, likely qualify. Below are common qualifying research and development activities:

  • Designing or developing new or improved products, processes, or formulas
  • Developing new or improved software technologies
  • Evaluating and testing new concepts or materials
  • Developing models or protypes
  • 3D or CAD modeling
  • Beta testing

HOW DOES THE R&D TAX CREDIT WORK?

The R&D Tax Credit can apply to any business that incurs expenses for performing qualified research activities. The following are the types of qualified research expenses that the credit is comprised of:

  • Wages paid to employees directly working on, supporting, or supervising the R&D process
  • Supplies consumed during the R&D process (ie, for prototyping and testing purposes)
  • Payments made to outside contractors hired by the taxpayer to assist in the development process

RECENT CHANGES TO THE R&D TAX CREDIT

Although billions of dollars worth of R&D tax credits have been claimed, many taxpayers still faced hurdles in being able to take advantage of the tax credit despite having qualifying activities and expenses.  This was mainly due to the fact that companies losing money could not monetize the credit, and that the credit could only offset regular tax liability.  When the PATH Act was signed in December 2015, the R&D tax credit was not only made permanent, but it also removed some of the barriers that many start-up companies faced to claim the tax credit. 

The PATH Act now allows eligible small businesses to use up to $250,000 of R&D credits annually against payroll tax liability. 

WORKING WITH INCENTAX

Staying competitive by developing new or improved products or software systems can be extremely expensive and time consuming for businesses.  Such innovations often fail, leaving companies with no return on their investment.  By claiming the R&D tax credit, businesses are able to alleviate some of the financial burden associated with such risky initiatives.

It is important to mention that maintaining documentation related to a taxpayer’s R&D activities can form the basis of a successful R&D credit claim.  Therefore, it is important to work with tax credit professionals like Incentax who can assist with the process.  

Contact us today to conduct R&D study for your business.