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r&d payroll tax credit

R&D Payroll Tax Credit: A Startup’s Cash Flow King

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Startup companies across the world kick off operations under a limited budget. This is because it takes a considerable amount of time and effort for small companies to build up capital. 

Coupled with tough economic times and stiff competition from rival companies, startup companies strive to survive the pressure in order to stay afloat. In this case, success never comes along without setbacks and financial constraints. Therefore, it is necessary to roll out strategies that will help the company maintain effective cash flow.

 In other words, cash flow management is critical in the survival of a company. Mismanagement of cash flow can hurt a company’s financial health, leading to bankruptcy and even total collapse. 

How do you achieve your financial objectives? What measures have you put in place to sustain a healthy financial cash flow? The R&D payroll tax credit is a crucial cash management strategy that can significantly help your company save a considerable amount of money incurred in taxes.

Why the R&D Payroll Tax Credit?

The research & development payroll tax credit is an integral aspect of cash management that startup companies need to embrace. Typically, the credit helps your new company to offset payroll taxes. In this case, new companies and startups can apply for the R&D tax credit against taxes incurred on their payroll. 

The tax credit on payroll taxes is rolled out for five years. This helps startups to save a considerable amount of money.

A payroll tax credit reduces the monetary burden of your company through the reduction of income tax paid to the government. In some cases, eligible companies can claim up to $ 250,000 in payroll tax credit per year. This helps you offset a considerable amount of money that could have been inquired in paying taxes. 

Who Qualifies for the R&D Payroll Tax Credit?

To qualify for R&D payroll tax relief, companies are required to have less than $5 million in annual gross receipts to qualify for R&D tax relief. In cases where a business is new, gross receipts must be less than $5 million in limits within 12 months.

Under circumstances where an individual runs similar businesses sharing common ownership, R&D payroll taxes are calculated in a combined format to ascertain eligibility under this category.

The Internal Revenue Service  (IRS) has established the following guidelines about gross receipts in calculating payroll taxes:

  • All the cash received for services rendered
  • Revenue generated from investment and interest income
  • Total sales – referred to as allowances and net returns

Other activities that qualify for R & D payroll tax credit include:

1. Technical Uncertainty

Activities under this segment include efforts to improve a product or service. This may include inventions, software, and techniques. 

2. Experimentation

This includes processes meant to solve a particular technical uncertainty. Some aspects of the process are not limited to systematic trial and error, modeling, or any other method.

3. Technological Tasks

Experimentation relies on sciences. Some aspects of this category include engineering, computer science, and biology. The threshold also includes developing software for internal use.

These activities must be undertaken within the United States and not funded through alternative funding streams.

Unlock the Power of Tax Credits

The R&D payroll tax credit is integral for your new business. It will help you cut on costs inquired in paying taxes and help you grow. Contact us for help in filing for the tax credits you and your business are eligible for.

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How the WOTC Can Help When Hiring Long-Term Unemployed Workers

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Most employers are looking to hire candidates with the best skills, experiences, and ability to match a job description. But unfortunately for job seekers, the longer they’re unemployed, the lower the odds they’ll get considered, according to a report by the World Economic Forum. A long gap in a resume has long been considered an obvious red flag.

However, did you know that hiring the long-term unemployed can also be a great opportunity for your company? According to Deloitte, hiring this often overlooked cohort can bring real value to your business. Evidence suggests that organizations that hire the long-term unemployed have a more loyal and reliable workforce with higher retention rates.

That’s not all. The federal government and state authorities have devised different incentive programs to address the thorny issue of long-term unemployment in the country. One of these incentive programs is the Work Opportunity Tax Credit (WOTC).

What is the WOTC?

The Work Opportunity Tax Credit (WOTC) is a provision of the Internal Revenue Code that allows organizations that hire persons from certain target groups who’ve consistently faced huge obstacles to employment. The long-term unemployed are among the WOTC-eligible target groups.

How Does the WOTC Work?

The amount of the WOTC is computed as a percentage of qualified wages paid to eligible employees during their first year of employment, up to a statutory maximum. As an employer, you may claim a tax credit equal to 40% of an eligible worker’s qualified wages if the worker has worked for at least 400 hours during their first year of employment, up to a statutory maximum.

If an eligible worker has worked for less than 400 hours, but for over 120 hours, you may claim a credit equal to 25% of the worker’s qualified wages. If the employee has worked for less than 120 hours, you may not claim the WOTC.

How to Qualify for the WOTC

While anyone who hasn’t been working for more than 27 weeks without success fits the description of a long-term unemployed individual, not everyone under that description is eligible for the Work Opportunity Tax Credit. For instance, you (as an employer) won’t get the tax credit if you hire the following groups of people:

  • Majority owners of your business
  • Former employees
  • Your relatives or dependents

Assuming that the long-term unemployed individuals that you’re hiring are eligible for the WOTC, there are several steps to take to ensure that your company qualifies for this tax credit. Firstly, you and the applicants must complete two forms during the hiring process and before the new hires start working. These two forms are the IRS Form 8850 and the Dept. of Labor Form 9061.

As soon as you hire a long-term unemployed worker, you’re required to submit the two forms of your state workforce agency for a determination on their eligibility for WOTC credit. You must submit the two forms no later than 28 calendar days after your new hire starts working. Failure to submit these forms as required will disqualify you from getting the tax credit.

Filing for the Work Opportunity Tax Credit

After receiving a letter from your state’s workforce agency confirming that your new employee is WOTC-eligible, your company becomes eligible for the tax credit. You can claim the tax credit by completing and submitting IRS Form 5884 with your business tax return.

But truth be told, figuring out your Work Opportunity Tax Credit is a complex and potentially painful process. Although there’s a lot of advice to be found online, each situation is unique. Even if you’re familiar with taxes, you might want to enlist some assistance from a tax credit expert.  

Get in Touch with Incentax Tax Credit Experts

Since 2011, Incentax has been helping companies in a wide range of fields and industries to qualify for State and Federal Tax Credits. Our dedicated Tax Credit Experts implement a proven, client-centric process to identify and maximize all available tax credits for our clients’ advantage.

If you have WOTC-eligible populations in your company and are interested in maximizing your tax savings, contact us today to learn more about how we can help.

small business tax credits

4 Key Tax Credits for Small Business Owners

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As a small business owner, it is important that you take advantage of all the tax credits available to your company in order to reduce your tax burden. Yet, you may find yourself asking a lot of questions about small business tax credits if you are not familiar with them and the plethora of tax credits that may be available to your business. To help you save money on your taxes this year, here is a look at what you need to know about tax credits including how you can find tax credits your business may qualify for.

What Is a Tax Credit?

While you likely already know that tax credits and deductions can be helpful in reducing the taxes you owe, you are not alone if you are unsure what the difference between the two is. A tax credit is a dollar amount that can be subtracted from the amount of taxes you owe. For instance, a $400 tax credit would reduce your owed taxes by $400. Alternatively, tax deductions reduce your business’s taxable income, which indirectly lowers your taxes owed. In other words, a $400 deduction would reduce your taxable income by $400, slightly reducing your taxes. Tax credits are then often seen as the superior tax break, as they can significantly reduce your tax burden. The great thing about tax credits is that you can use as many of these credits as you qualify for. Yet, how can you find relevant tax credits for you and your business? Keep reading for a look at 4 of the most common tax credits available to business owners. 

Earned Income Tax Credit

Has this been a bad year for your business? If so, you may qualify for the Earned Income Tax Credit (EITC). This tax credit provides a tax break to people who are employed but earn a low to moderate-income. Just because you are a business owner, this does not mean that you can’t qualify for the EITC, as you are also self-employed. Many business owners who may be eligible for the EITC do not claim it because they believe that it only applies to their employees. However, depending on your financial situation, you may qualify for this tax credit, which can help to ease your overall tax burden. 

Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to businesses that hire employees from certain target groups who have historically faced barriers to employment. Former veterans and long-term unemployment recipients are primary targets of the WOTC. Depending on the employee’s salary and the target group they come from, employers can claim up to $9,600 per employee they hire under the Work Opportunity Tax Credit. 

Credit for Small Employer Health Insurance Premiums

One of the many provisions in The Affordable Care Act (Obamacare) includes a small employer health insurance tax credit aimed at helping small businesses who provide their employees with health insurance. The credit is available to small businesses that pay at least half of the cost of their employees’ health insurance premiums. If you qualify, this tax credit is worth 50% of the amount you paid towards insurance premiums (however, it is reduced to 35% for tax-exempt businesses). In order to qualify for this premium, your business has to have fewer than 25 full-time employees, you must pay an average wage of less than $51,600 per year, and you must have purchased your company’s insurance plans through the Small Business Health Options (SHOP) program. 

Research and Development Tax Credit

In order to encourage domestic research and development, the Research and Development Tax Credit can help to significantly offset your company’s R&D costs. If you spent money developing a patent, building new software, working on a prototype for a new product, or on any other kind of research, you may qualify for this tax credit which can cover up to 20% of your R%D expenses. However, only certain kinds of research qualify, and determining your eligibility can be complicated, which makes it important that you work with a qualified tax professional who can help you make the most of this tax credit. 

Taking advantage of tax credits can be a great way to significantly reduce your company’s tax burden. However, with a multitude of tax credits available, it can be difficult to determine which ones your business qualifies for. Contact us to learn how Incentax’s streamlined process can help you to identify and maximize all the tax credits available to your business.

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How the Empowerment Zones Program Could Help Your Business

By | Tax Credits, Tax Incentives | No Comments

In 1993, Congress passed the Empowerment Zones and Enterprise Communities Act to alleviate poverty in certain regions across the country. The program targeted six strategic cities: New York, Chicago, Atlanta, Baltimore, Detroit, and Philadelphia-Camden. The goal was to uplift the lives of poor communities living in these regions.

The Empowerment Zones program, albeit ambitious, seems to have been forgotten. Here is a brief overview of the fundamental details of the EZ program and how it might apply to your business.

Qualification Requirements for Communities

The Empowerment Zones program was intended to rejuvenate strategic economic regions that were experiencing a decline in growth – Detroit is an excellent example. The program planned to incentivize the private sector to set up businesses in these locations and, by doing so, spur long-term economic growth.

The main requirement for a community to qualify for designation as an Empowerment Zone was a clear economic distress demonstration. Qualifying factors supporting economic distress included:

  • High unemployment levels
  • A poverty rate of at least 20%
  • A declining population rate
  • A clear pattern of divestment by existing businesses

Additionally, these communities had to clearly demonstrate the potential for economic development, which essentially is the program’s main goal. The government considered several factors when gauging these communities’ potential for economic improvement. The main consideration was a community’s capacity to build public-private partnerships. These communities were also required to help provide the necessary private and public resources to help support the economic rejuvenation efforts.

The Application Process

Communities that met the set qualifications were required to apply with the federal government. One of the application requirements was backing by the communities’ local and state governments. This was required to ensure that qualifying requirements received as much support as they needed.

Another important requirement was the submission of a strategic development plan based on the EZ program. The plan had to include the input and insight of all involved parties, including community members, businesses, NGOs, and government institutions. Finally, the communities had to provide a baseline of benchmark goals and measurements to gauge the program’s progress and achievements.

Requirements & Incentives for Businesses

The federal government planned to spur economic growth in these communities by offering tax incentives to businesses who were willing to set up shop there. For starters, businesses were offered a 20% wage credit for the first $15,000 paid in wages to an employee – the employee had to be a resident of the empowerment zone.

In addition to residents of the empowerment zones, businesses also had the option of hiring target employees in exchange for a 40% tax credit on each of these employees’ first-year wages totalling $6,000. Target employees were considered some of the more vulnerable members of the community, including at-risk youth, vocational rehabilitation referrals, SSI recipients, and food stamps recipients.

Businesses that contributed to physical developments in these communities also stood to benefit greatly from subsidized capital expenditures. Under the program’s Round III stipulations, capital expenditure on equipment erected on land parcels within these communities would depreciate by up to $35,000.  

Outcomes of the Federal Empowerment Zones Program

Results of the EZ program were mixed and largely inconclusive. However, there were more positive outcomes than negative ones. For example, five of the six empowerment zones realized an increase in jobs and a boom in minority-owned businesses. However, the incentives were more attractive to large organizations than small businesses. It should also be noted that the program coincided with an economic boom across the country.

Several other programs have been modeled after the Federal Empowerment Zones program of 1993 with the same intention. It is up to the communities and businesses to keep track of these programs and take advantage of whatever they have to offer.

Contact us today to help you learn more about federal empowerment zones, and how your business could benefit from this program.

federal empowerment zones

What Are Federal Empowerment Zones?

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Federal Empowerment Zones (EZs) are areas within the United States that are economically depressed. Communities that had poverty rates of at least 20% coupled with high rates of unemployment were designated EZs. In addition to high poverty and unemployment rates, the qualified communities also exhibited a high rate of emigration.

History of Federal Empowerment Zones

The Empowerment Zones and Enterprise Communities Act of 1993 made EZs possible. It made incentives available to businesses through the tax code. The act provided bonding authority for infrastructure development. Infrastructure improvements were seen as crucial to business growth and revitalization. A generous grant program was also provided, ensuring that distressed communities had the funding they needed to stimulate their economies.

Since the early 1990s, developments have been through legislation amending the original act. National competitions were held which allowed qualifying communities to compete with each other to gain designation as Empowerment Zones, Enterprise Zones (ECs), and Renewal Communities (RCs). All of these designations were designed to aid the economies of highly distressed communities.

Qualifying communities showed extremely high unemployment, poverty, and emigration rates. These same communities had to have regrowth potential. The aid meted out to EZs, ECs, and RCs indirectly benefited businesses through funds spent on infrastructure improvements. Businesses were eligible for employment tax credits of up to $3,000 per employee. These incentives encouraged business owners to hire within the Empowerment Zone because only wages paid to employees living and working within the zone qualified for the credit. 

Baltimore, a well known Enterprise Zone, also qualified for Empowerment Zone status. Unfortunately, several studies have shown that the results of the program were ineffective. Baltimore has a history of being a highly distressed city. It was not alone in its inability to experience growth. The EZ and EC Act of 1993 had little effect on the overall economies of the cities it was trying to help. The program instituted by Bill Clinton to help economically depressed areas did little more than bolster funding reserves for existing social programs.

Should EZs and ECs Continue?

With the current stormy economic climate, many more cities will experience highly distressing conditions. Unemployment for roughly half of the U.S. is at or above 11% as of the summer of 2020. Large national stimulus packages have been rolled out. The global economy is projected to experience an unprecedented blanket recession. Does targeted funding work? 

The previous studies conducted by government and independent agencies weren’t promising. This model for economic reform won’t meet the demands of a post-pandemic nation. The evidence for the efficacy of the EZ and EC Act of 1993 was inconclusive.

Does Your Business Qualify for EZ or EC Credit?

The original legislation of 1993 was extended by additional legislation into subsequent years. It is important for businesses to do their due diligence when it comes to tax filings. Many eligible business owners did not claim the tax credits associated with Empowerment and Enterprise community designations simply because they didn’t know about them. 

The original EZ and EC Act of 1993 was extended multiple times. The most recent extension allows employers to claim WOTC for employees that were hired within the zone prior to tax year 2020 and also live in the qualifying area. Wage credits can be claimed retroactively dating back two years.

Capital gains tax exclusion on business sales within the zones as well as other tax incentives and bond privileges were part of the Empowerment Zones and Enterprise Communities Act of 1993 and its subsequent extensions.  Many local businesses were unaware of these tax privileges and did not take advantage of them.  Contact us for help in filing for the tax credits you and your business are eligible for.

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4 Ways Your Real Estate Company Can Save on Taxes

By | Real Estate, Tax Credits | No Comments

For independent real estate agents, it can be difficult to find the time to manage your finances. For many real estate agents who run their own agency, taking care of your clients, and developing new leads, can eat into your time. You may find tax preparation moving down your priority list. However, you do not want to make the mistake of being surprised when tax season rolls around.

Taking the time to look at your finances now can help you to make sure that everything is in order and that you are taking advantage of all possible tax deductions available to you when April arrives. Finding the right tax deductions can help save your business thousands of dollars each year. To help get you started, here is a look at just a few ways that your real estate company can save money on taxes this year:

Commissions Paid

There are several tax deductions that you can take as a real estate agent. An important one to keep in mind is that you can deduct commissions that you have paid to employees or business partners. As a business owner, paying commissions is a cost of doing business, and the IRS generally considers commissions paid to be a fully deductible business expense.

This is an important deduction to remember to take as it can represent significant money saved or a lot of money left on the table if you do not take advantage of this deduction. When you go to fill out your tax paperwork, deductions for commissions paid would be placed on your Schedule C tax form on the 10th expense line.  

Marketing Expenses

As a small business owner and sole proprietor, it is likely that you invest a significant amount of money in marketing and advertising your business. Even with the advent of cost-effective marketing methods such as creating social media accounts for your business, it is likely that you still spend a large amount of money marketing your business and listings by purchasing signs, flyers, and advertisements in local papers. Many real estate agents also outsource their social media and content marketing to experts, which is an added expense.

Fortunately, marketing and advertising costs can also be deducted as a business expense. Even money spent developing your website and running digital ads on social media and Google can be deducted as marketing expenses. These deductions can be made on Line 8 of your Schedule C tax form.  

Fees, Licenses, and Memberships

A common expense for independent real estate agents is annual fees for things such as license renewals, professional association memberships, and multiple listing service (MLS) dues. Fortunately, many of these fees can be deducted as a cost of doing business. Money paid towards premiums for general business insurance and errors and omissions insurance are also both fully deductible business expenses as well.

It is important to keep track of everything that you spend maintaining your business and professional memberships. This will help ensure that you take advantage of all tax deductions available to you.  

Deduct Travel Expenses

Of course, unless you are lucky enough to have only local clients within a few miles of your home or office, it is likely that you do a lot of driving, and the miles can add up fast. This can mean spending more money fueling and maintaining your car than the average driver. Fortunately, you can deduct $0.575 per mile you drive for your business in 2020. You may also be able to deduct maintenance and repair costs for your vehicle as well. 

Keeping track of all the tax deductions and credits available to you as an independent real estate agent can quickly become overwhelming, and it is easy to forget a credit or deduction. Contact us to learn how Incentax’s streamlined process can help you to identify and maximize all the tax credits available to your real estate company. This can help to significantly reduce your tax liability.  

tax liability new business owner

4 Ways to Reduce Your New Company’s Tax Liability

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As the owner of a new small business, you will need to take several key steps to ensure your business’s success. One of the most important things that you should do from day one is properly manage your taxes, as not doing so could sink your business.

You will also need to find ways to reduce your tax liability, as doing so can help you to keep your hard-earned money, allowing you to continue to invest in your business. Fortunately, there are many tax-saving strategies that you can employ to reduce your company’s tax burden. Here are just a few steps that you can take to reduce your tax liability this year: 

Contribute to a Retirement Plan

Once your business is profitable, you can reduce your taxes by setting aside money in a retirement account. By placing money in a 401(k) or IRA, you can reap valuable tax benefits as you will get a deduction for your contributions.

For the 2020 tax year, the IRS allows you to put away up to $57,00 in total contributions for retirement into a one-participant 401(k) plan. Doing so gives you a way to prepare for your future while reducing your current tax liability.  

Structure Your Business The Right Way

In order to reduce your tax liability, it is critical to structure your company the right way, as structuring your business improperly could cost you greatly come tax season. For instance, if you have a closely held company where income passes through you as the business owner, then it is likely that you have established your company as an LLC or an S corporation.

While this may be the right choice in some circumstances, depending on your income bracket you may actually benefit by changing your company’s structure to a C corporation.  It can be beneficial to seek professional help when structuring your business in order to ensure that you choose the best option for your company.     

Consider Expanding Benefits Instead of Giving Raises

As your business grows, you may be inclined to give your employees raises to show your appreciation for their hard work as well as to incentivize them to keep working at your company. However, this may not always be the best option for tax purposes. A better option may be to compensate employees by increasing your contribution to their health insurance costs instead of giving them the same amount of money in the form of a raise.

If you gave your employees a salary increase, each employee would have to pay taxes on those wages, and you, as the employer, would have to pay the employer share of the FICA and Medicare taxes on this additional income as well. Instead of giving employees a $400 raise, it may be better for you to offer to contribute $400 more to their medical insurance. This not only prevents you and your employees from having to pay additional taxes, but also, in many instances employer contributions to employee benefits are tax-deductible as a business expense, helping you to save money. 

Find The Right Advisor to Help You Maximize Tax Credits

Of course, a great way to ensure that you are doing everything that you can to reduce your tax liability would be to talk to an advisor that can help you to take advantage of available tax credits. The government offers various tax credits at the state and federal levels for businesses of all types. However, it can be difficult to sort through all of the tax credits available to your business on your own.

Working with a tax credit expert helps ensure that you are doing everything that you can to reduce your tax liability. 

Contact us to learn how Incentax’s streamlined process can help you to identify and maximize all of the tax credits available to your business, as this could significantly reduce your tax liability.  

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.