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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.

covid-19 small business tax credits

4 COVID-19 Tax Credits and Tax Relief Programs for Small Business Owners

By | Tax Credits | No Comments

If you are like many business owners, then it is likely that the COVID-19 pandemic has impacted you financially in addition to fundamentally changing the way you do business. Fortunately, in an effort to make things easier on businesses that are being affected by this global pandemic, the federal government has passed several coronavirus relief packages that provide financial assistance to businesses and families across the country.

However, what some business owners may not know is that these stimulus packages have created new tax credits and tax relief programs meant to help small business owners during this difficult time. To help ensure that you are taking full advantage of these programs, here is a look at what businesses need to know about COVID-19 small business tax credits and relief programs. 

Employee Retention Tax Credit

In order to help businesses that were hurt financially by the coronavirus pandemic, The Employee Retention Tax Credit provides businesses with a refundable tax credit equal to 50% of wages paid to an eligible employee up to $10,00 per employee. This tax credit is available to all employers regardless of size or tax-exempt status. Qualifying employers can include those that are fully or partially suspended by government order due to COVID-19. Once an employer’s gross receipts go above 80% of a similar quarter in 2019, they no longer qualify for this tax credit.  

Payroll Tax Deferral Relief  

As part of the payroll tax deferral relief offered by the CARES Act, your business has the ability to defer the 6.2% employer portion of the Social Security tax owed on the first $137,700 of an employee’s 2020 wages paid during the deferral period (March 27, 2020 to December 31, 2020). You will then have to repay these deferred payroll taxes in two installments on December 31, 2021 and December 31, 2022. This deferral is available to all employers regardless of the extent to which their business has been affected by COVID-19. It is important to note that this deferral program is unavailable to small businesses, sole proprietors, or self-employed individuals who receive forgiveness of SBA loans issued under the Payment Protection Program that was offered by the CARES Act. 

Retroactive Tax Relief

The CARES Act also provided certain tax relief measures that were retroactive, which can potentially make it beneficial for you to file an amended tax return for past years in order to recover taxes paid. For instance, one provision of the CARES Act significantly liberalizes rules for deducting net operating losses by allowing net operating losses that arise from 2018 to 2020 to be carried back five years. A net operating loss that arises this year can then be carried back to 2015, allowing you to claim refunds for taxes paid in carry-back years. Since tax rates were higher before 2018, net operating losses carried back to those years can result in significant tax refunds, helping provide you with crucial capital during this difficult time.  

Sick/Medical Leave Tax Credit

As part of the Families First Coronavirus Response Act (FFCRA) signed into law in March, small businesses with fewer than 500 employees must provide limited paid leave benefits to employees affected by the coronavirus emergency. However, these small businesses have access to new tax credits to help pay for these benefits. The act requires that affected employers pay emergency sick leave of $511 per day for up to 10 days to employees in coronavirus quarantine or seeking a coronavirus diagnosis. An employee can also receive up to $200 per day for up to 10 days to care for a quarantined family member or a child whose school or child-care has been closed due to the pandemic. These required benefits are offset by a new tax credit that allows a small employer to collect 100% of qualified sick-leave and family-leave payments made by the employer as required by the law between April 1, 2020, and December 31, 2020. 

Taking advantage of all available tax credits and tax relief programs can be crucial in helping your business to survive the COVID-19 pandemic. You should consider talking to an advisor who can help you to ensure that you are not missing any key tax credits that could help your business during this difficult time. Contact us to learn about how Incentax’s process can help you find tax credits that could help your business through this ongoing crisis.  

federal empowerment zones

What Are Federal Empowerment Zones?

By | Tax Credits, Tax Incentives | No Comments

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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The 5 Most Overlooked Tax Credits

By | Tax, Tax Credits | No Comments

According to the Internal Revenue Service (IRS), taxpayers who claimed deductions on their returns received a total of 747 billion dollars in write-offs. However, many Americans miss out on the opportunity to take home more money in the form of tax credits because they are not familiar with how they work. For instance, one in five people who qualified for Earned Income Tax Credit failed to claim it on their tax returns. 

For you to maximize your earnings, you must know which tax breaks and deductions you qualify for. Here we highlight the top five tax credits that are often overlooked. 

Earned Income Tax Credit

Earned Income Tax Credit (EITC) is a tax credit that is available to people who fall within a specified income threshold. Specifically, it is meant to supplement wages for low and moderate-income workers. It is also provided for people who have lost their jobs, worked fewer hours, or took a pay cut. Even if you previously did not qualify, you are eligible for a break if you meet all the qualifications. 

Basically, the EITC you receive depends on three main factors: your family size, income, and marital status. Worth noting here is that to receive this deduction, you have to file a tax return whether or not you owe taxes. Moreover, you can claim a refund going back three tax years if you were eligible all along but did not apply for it. 

Child and dependent care tax credit

Many Americans miss out on the child and dependent care tax credit due to a lack of knowledge on how it works. Typically, you can legally run up to 5000 dollars in a reimbursement account, which is exempted from normal taxes. However, if you spend more than this amount in a year, you are eligible for a tax credit of an extra 1000 dollars. This means that using the minimum 20 percent of the expenses, you can save at least 200 dollars in taxes.  

Student loan interest  

Student loans can be adjusted according to your income. Thus, if your income falls within a certain range, you do not have to pay a fixed amount every period. What is more, student loan deductions do not require an itemized deduction for you to claim them. 

There are basically three types of deduction you can claim in regard to student loan interests. First is The American Tax Opportunity Tax Credit, which is a tax deduction for college expenses for the first four years of education. The maximum annual credit here is 2,500 dollars a year. 

The second is The Lifetime Learning Credit, which is worth 2,000 per return, applies to individuals who are/were enrolled in an eligible institution. Lastly, The Tuition and Fees Deduction allows taxpayers to deduct up to 4,000 dollars from their income. Being aware of these tax break opportunities can save you a good amount in taxes. 

State sales tax  

Several states in the US have no income tax. They include Alaska, Tennessee, North Dakota, Washington, New Hampshire, Nevada, Wyoming, Texas, and Florida. If you live in one of these taxes, you are eligible for state sales tax. This law allows you to deduct expenditures such as house renovation costs, purchase of cars, boats, and planes, among others. To know what is deductible, you can use the IRS tables or keep a record of all your sales tax in a year and use it to claim these benefits. 

Reinvested dividends   

This is a subtraction that taxpayers miss and one that can end up saving them a lot of money in taxes: Essentially, if you have mutual funds dividend invested in shares, your tax basis increases, thus reducing the amount of capital gain when you decide to sell your shares. Failure to include the reinvested dividends means paying more taxes than you should.  

Being aware of how tax deductions and credits work can go a long way in saving you a substantial amount of money. This is even more true for business owners and startup founders. Incentax LLC can work with you to help you take advantage of the available federal and state tax credits for your business. Contact us to begin enjoying maximum returns with minimum inconveniences!  

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5 Common Tax Mistakes Businesses Make

By | Tax | No Comments

Filing your taxes is an obligation that, as a business owner, you have to keep to be on the safe side of the law. Having said this, many business owners tend to make mistakes that lead to tax overpayments, penalties, or even audits from the Internal Revenue Service (IRS). Even worse, deliberate or intentional mistakes can compromise your business and your life as well.  

Getting your taxes under control can save you the trouble that results from the avoidable errors people make during the tax season. For a more in-depth insight, here are some common mistakes businesses need to be aware of vis-à-vis taxes. 

Incorrectly reporting income

Over-reporting or under-reporting your income can have negative consequences on your business. Sadly, this is a common mistake that mostly happens when balancing invoices and business payments. For instance, you may receive payments from clients and fail to record them in that pay period, which may cause a tax overlap. 

Although small errors are largely inevitable, it is advisable to keep records of your tax documents and every transaction you conduct. More importantly, keep your financial records updated at all times so that you have evidence in case there are discrepancies in the IRS records.  

Not separating your expenses   

More often, business owners fail to draw a line between business and pleasure expenditures. This usually leads to a failure to make correct deductions when filing taxes. For example, you can make deductions on fuel money spent while delivering a package to a customer. However, you cannot deduct the money used for activities that are not attached to your business. 

To avoid this common mistake, always ensure that you demarcate between business and personal spending. You can do this by keeping a record of both types of expenditures. Failure to do so can attract unnecessary attention from the IRS. 

Bending or breaking deduction rules

The concept of tax deductions is oftentimes confusing due to the technicalities involved. To minimize mistakes, the IRS has outlined how business owners should make deductions; specifically, it provides actual figures and limits to guide people when filing and submitting their taxes. 

Further, deductions vary based on multiple factors, such as whether your business is a startup, the size, and the nature of the activity (say insurance costs and medical fees). Being up to date with deduction rules is crucial in ensuring you make your tax deductions accordingly. 

Misclassifying employees and independent contractors

As a business owner with employees, you can be liable to penalties for failing to classify your employees. The IRS has issued clear tips to differentiate between permanent employees and contractors; for example, an individual becomes an employee if you dictate when, where, and how the person does a task while one becomes a contractor if they work under a different schedule, use their own tools, and are not eligible for defined benefits. 

Your business should also give every employee a W-2 form while contractors who get paid more than 600 dollars should receive a Form 1099-Misc. If you run a business as a self-employed individual, you should also learn how your taxes apply to avoid penalties. 

Filing your taxes late 

Although this common mistake is quite avoidable, many business owners find themselves locked out of the tax season because they failed to do their taxes on time. Failing to file your taxes within the window period provided can earn you penalty fees, which could put your business on the spot. Having a payment arrangement can save you from being penalized. You can even make quarterly payments to make your work less stressful.

As part of business financial management, minimizing room for tax errors can see you save a lot of money in the end. As long as you emphasize accuracy and accountability, you can be sure to avoid these and other mistakes many businesses make. 

At Incentax, we strive to help businesses maximize their tax credits for maximum returns. Please contact us for more on how we can help you maneuver.