Editors Note: In an effort to help small business leaders conserve cash, experts were asked for their suggestions about little known tax breaks or incentives. Below are some of their thoughts suggestions.
Mike D'Avolio, Senior Tax Analyst, Intuit offers these suggestions as the Most Overlooked or Least Known Deductions for Small Businesses:
- Enhanced depreciation deductions: 50% bonus depreciation and section 179 expense
- Deduction for start-up expenses for new businesses
- Credit for small employers providing health insurance coverage for their employees
- Credit for research and development expenses
- Work opportunity credit for employing targeted employees
- Deduction for the business portion of property that is also used for personal purposes
Most overlooked or least known deductions for small businesses: In general, you’re allowed to deduct the costs of running your business as long as the expenses are ordinary and necessary. Be sure to document the expenses and retain any receipts. If the tax issues impacting your business are too complex to handle on your own, please seek out expert tax advice.
Enhanced depreciation deductions
- Businesses are allowed to claim a 50% bonus depreciation deduction for the purchase of new assets. This represents the percentage of the purchase price of new capital assets, like furniture and equipment, that a business owner can write-off in the first year.
- Even though the purchase of used property does not qualify for bonus depreciation, it does qualify for a section 179 expense deduction, which carries a $500,000 limit. This is an alternative measure allowing for a write-off of the cost in year one. Certain types of real estate qualify for the section 179 deduction with a $250,000 limit.
Start-up expenses: The government encourages people to open a new business by allowing a $5,000 write-off for start-up expenses. Any start-up costs that are not allowed to be expensed can be amortized over a 15-year period. Examples include advertising, employee training and a market survey.
Credit for small employer health insurance premiums: According to the government, businesses have been slow to adopt this credit offered by the Affordable Care Act. Small businesses can claim a credit for providing health insurance coverage for their employees.
Credit for research and development expenses: This credit covers costs associated with certain research activities, such as developing a new or improved business component, developing prototypes or models and applying for patents.
Work opportunity credit: This credit is available to businesses that pay first and second year wages to certain targeted employees, such as veterans, long-term family assistance recipients and summer youth.
Property used for both business and personal purposes: In general, you cannot deduct personal, living or family expenses. However, if you have an item that is used for both business and personal purposes, such as a vehicle, you are allowed to allocate the expense and deduct the business portion.
Boston-area accountants Steve Rodma and Thomas Astore, at Rodman & Rodman, P.C. have a more detailed look at the Work Opportunity Tax Credit.
Taxpayers that hire employees from cenrtain designated target groups may be eligible to claim the work opportunity tax credit (WOTC). This is a federal tax credit that can be as much as $2,400 for each eligible employee (the credit is increased for certain eligible employees).
In general, the credit is limited to eligible employees who began work for the employer by December 31, 2013. The credit is an elective credit and the employer needs to reduce its wage expense for all or a portion of the credit. In addition, the employer needs to meet various other technical requirements to claim the credit
The eligible target groups include: (1) qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program, (2) qualified veterans, (3) qualified ex-felons, (4) designated community residents, (5) vocational rehabilitation referrals, (6) qualified summer youth employees, (7) qualified members of families in the Supplemental Nutritional Assistance Program (SNAP), (8) qualified Supplemental Security Income recipients, or (9) long-term family assistance recipients.
Generally, individuals who are members of the above targeted groups must be certified before they begin work by designated local agencies, or a prescreening notice (IRS Form 8850) can be completed when the individual begins employment.
Here are some other suggestions from Rodman and Astore:
- Business Energy Credit for Solar Property: Taxpayers engaged in an active trade or business that place qualified solar energy property in service between January 1, 2006 and December 1, 2016 are eligible for a 30% federal tax credit on such property. Such property includes equipment using solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, except for property used to generate energy for the purpose of heating a swimming pool.
Taxpayers must reduce the qualified property’s basis by 50% of the credit.
For example, if a business were to install qualified solar energy property during 2013 for an initial investment of $100,000, on their 2013 tax return, they would receive a credit for $30,000 against tax due, and, additionally due to bonus depreciation (50% of basis), could deduct $42,500 on their federal tax return (basis of $100,000 less half the $30,000 credit equals remaining basis of $85,000, of which 50% can be deducted immediately). Assuming a federal tax rate of 34%, the immediate tax savings to the company in 2013 would be $44,450.
- Qualified leasehold improvements (to the interior portion of a building) are eligible for 50% bonus depreciation through December 31, 2013.
- Employers may be eligible for the federal small employer health insurance credit if they employ less than 25 full time employees, their average wages are less than $50,000 (excluding owners’), and if they contribute at least 50% of the health insurance premiums for their employees.
- Employers with less than 100 employees may be eligible for a multi-year federal retirement plan credit of up to $ 500 per year based on the plan start-up costs.
Bradford C. Dickson, CPA, Principal at Windham Brannon, PC suggests using a Paper Export Incentive from the Interest Charge-Domestic International Sales Corporation (IC-DISC).
According to Dickson, a small business that exports products manufactured, produced or grown in the United States can generate permanent or deferred tax savings by setting up an IC-DISC.
The IC-DISC is essentially a “paper” entity that becomes a commission sales agent for the small business.
The IC-DISC pays no income tax and requires very little support. The small business pays and deducts a calculated commission to the IC-DISC based on its export sales, generating a tax benefit of up to 35% or 39.6% of the commission.
The commission paid to the IC-DISC is then distributed by the IC-DISC to its shareholders as a dividend, subject to lower qualified dividend rates (15% or 20%).
The result is a permanent tax saving of up to 20% on the commission payment. The IC-DISC may also loan the commission back to the small business for an interest charge.
Dickson offers this example of how this strategy works:
- ABC, a profitable S corporation with one shareholder, has $3 million in export sales.
The shareholder establishes an IC-DISC, and ABC pays a commission of $120,000 (4% of export sales) to the IC-DISC.
ABC deducts the commission with a resulting $47,520 tax benefit to its shareholder ($120,000 X 39.6% tax rate).
The IC-DISC is exempt from income tax on the commission.
The IC-DISC pays a dividend of $120,000 to its shareholder, who incurs a dividend tax of $24,000 ($120,000 X 20% tax rate).
The net overall tax saving is $23,520 ($47,520 - $24,000).
Even higher tax savings can be achieved where profit margins on export sales are higher than those for domestic.
New Tax Rules on Property and Repairs
Recent Treasury regulations address the age-old controversy of whether certain expenditures should be properly expensed or capitalized. Included in these rules is the ability for businesses that have restored or replaced less-than fully depreciated property to take an immediate write-off. To benefit now, a small business should adopt these rules before Treasury finalizes their implementation and effective date.
Here is Dickson’s example:
- ABC spent $10,000 to replace the entire roof on a building purchased five years earlier for $200,000.
Before these rules, ABC would capitalize the cost of the new roof and depreciate it over 40 years beginning in the year in which the new roof was installed.
Under the new rules, ABC still capitalizes the cost of the new roof and depreciates it over the same 40 years.
However, ABC may separate the structural components of the building and write off the undepreciated balance of the old roof that has been replaced.
This could yield a write-off of $17,500, assuming the roof represented 20% of the original cost and only five of 40 years depreciation had been previously taken ($200,000 X 20% = $20,000 cost of old roof; $17,500 = $20,000 X 35/40 years remaining).
Dickson suggests companies should engage a tax professional to ensure that they qualify to take advantage of these opportunities―along with a number of other small-business tax deductions.