Business Tax

Taxes are an integral part of running a business, and they often represent a substantial portion of your expenses. However, there’s good news for businesses looking to reduce their tax burden and stimulate growth – business tax credits. These credits provide financial incentives for companies to invest in various activities, from research and development to promoting renewable energy. In this article, we’ll explore what business tax credits are, how they work, and how they can benefit your company.

What Are Business Tax Credits?

Business tax credits are financial incentives offered by governments at the federal, state, or local level to encourage businesses to engage in certain activities that benefit society, the environment, or the economy. These credits work by reducing a company’s tax liability, effectively lowering the amount of taxes they owe. They serve as a reward for businesses that invest in activities that align with the government’s policy objectives.

Types of Business Tax Credits

There are various types of business tax credits available, each with its own set of eligibility criteria and benefits. Here are some common types:

1. Research and Development (R&D) Tax Credit: This credit is designed to encourage businesses to invest in innovation and research activities. It can help offset the costs associated with developing new products, processes, or technologies.

2. Renewable Energy Tax Credits: These credits are intended to promote the use of renewable energy sources, such as solar, wind, and geothermal energy. They can significantly reduce the cost of investing in clean energy initiatives.

3. Investment Tax Credits: These credits reward businesses for investing in specific projects or assets that promote economic growth or job creation. They are often used to stimulate investment in economically distressed areas.

4. Low-Income Housing Tax Credit: Aimed at promoting the development of affordable housing, this credit provides incentives for businesses to invest in housing projects for low-income individuals and families.

5. Work Opportunity Tax Credit: This credit encourages the hiring of individuals from specific target groups, such as veterans and individuals with disabilities. It can offset a portion of the costs associated with employing these individuals.

Benefits of Business Tax Credits

Business tax credits offer numerous advantages for companies:

1. Reduced Tax Liability: The most apparent benefit is the reduction of your company’s tax liability. This translates into cost savings that can be reinvested in your business, used for expansion, or allocated to other vital activities.

2. Encouragement for Investment: Tax credits provide a financial incentive to invest in areas such as research and development, clean energy, or affordable housing. This encourages businesses to participate in activities that contribute positively to society and the economy.

3. Competitive Advantage: By taking advantage of available tax credits, your business can gain a competitive edge. This is especially relevant in industries where innovation, sustainability, and social responsibility play a significant role.

4. Stimulated Growth: Many tax credits are designed to spur economic growth, create jobs, and improve local communities. By participating in these initiatives, your business can be a catalyst for positive change.

How to Access Business Tax Credits

To access business tax credits, follow these steps:

1. Identify Eligibility: Determine which tax credits your business may be eligible for. Consult with a tax professional to assess your eligibility accurately.

2. Document Activities: Keep meticulous records of the activities that make you eligible for the tax credits. Proper documentation is essential to substantiate your claims.

3. File Accurate Tax Returns: Ensure your tax returns accurately reflect the credits you are claiming. Mistakes can lead to delays and audits.

4. Consult with Professionals: Tax professionals, accountants, and legal experts can help you navigate the complex world of tax credits, ensuring you maximize your benefits while staying compliant with tax laws.

Business tax credits offer a valuable opportunity for businesses to reduce their tax liabilities and invest in activities that promote growth, innovation, and social responsibility. By understanding the available credits and working with professionals to access them, your business can not only thrive financially but also contribute to positive change in your community and beyond.

What is Beneficial Ownership Information Reporting?

Beneficial Ownership Information (BOI) reporting is a federal requirement by the Corporate Transparency Act (CTA). BOI reports include information about all the company’s beneficial owners.

Who is considered a Beneficial Owner?

A beneficial owner is any individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25 percent of the company’s ownership interests.

What is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) is a United States federal law that aims to increase transparency in corporate ownership. The law requires that individuals considered beneficial company owners in the U.S. provide the Financial Crimes Enforcement Network (FinCEN) with specific information.

For individuals, that includes:

• their full name
• date of birth
• current residential address
• a federally issued identification number from a driver’s license or passport

For companies, that includes:

• legal entity name or DBA name
• business address
• state jurisdiction of formation of registration
• IRS TIN

Any changes to the above reporting information must be updated with the FinCEN within 30 days of the change.

What is considered a Reporting Company?

Companies required to report a BOI are referred to as reporting companies. There are two types of reporting companies: domestic and foreign. They are defined as follows:

1. Domestic reporting companies are corporations, limited liability companies (LLC), and other entities created by filing a document with a secretary of state or similar office in the U.S.
2. Foreign reporting companies are entities (including corporations and LLCs) formed under a foreign country’s law and registered to do business in the U.S. by filing a document with a secretary of state or similar office.

There are 23 types of entities that are exempt from the reporting requirements. Those entities can be found on the FinCEN website.

What is the Reporting Process?

The reporting process takes place via an online portal on the FinCEN’s website. Filing begins January 1, 2024, with an initial filing window of one year (i.e., initial BOI reporting can be done from January 1, 2024, through January 1, 2025). The FinCEN will not accept BOI reporting before January 1, 2024. There is no fee for submitting this information.

New entities established after December 31, 2023, must report within 90 days of establishment.

Hefty civil ($500/day) and criminal penalties (up to $10,000) can be imposed on companies that fail to file a complete report.

To be sure that you and your firm comply with BOI reporting requirements, check with your trusted tax accountant or CPA.

As a business owner, you should familiarize yourself with your federal, state, and local tax requirements. Understanding what your obligations are will assist you in filing returns and paying taxes accurately and on time. Whatever taxes you are required to pay, you have to be very aware that there are deadlines for remitting them and any delays on your part could result in penalties. Here are some tips that can help you avoid tax trouble with the IRS.

Employment Taxes

The IRS requires employers to withhold federal income tax and FICA (Social Security and Medicare) taxes from their employees’ wages. The IRS also wants you to remit these employment taxes, along with your company’s FICA contributions, to them in a timely manner. Failing to remit these taxes can lead to serious penalties for noncompliance. This is one issue you absolutely must stay on top of.

Remember, sole proprietors, general partners, and, usually, members of limited liability companies do not have Social Security and Medicare taxes withheld like employees do. Instead, they must pay self-employment taxes, which typically cover Social Security and Medicare.

Estimated Taxes

You must generally make quarterly estimated tax payments to cover self-employment taxes and income tax on income that is not subject to withholding. If you do not make required estimated payments on time, you may owe the IRS an underpayment penalty.

Misclassifying Workers

Employees and independent contractors are treated differently for income tax withholding and employment tax purposes. Generally, the more control you have over a worker’s tasks and hours of work, the more likely that individual is an employee. In the case of employees, you must withhold federal income tax and FICA taxes, pay your share of FICA taxes, and pay unemployment taxes. You are not required to withhold income or FICA taxes from an independent contractor. Independent contractors pay income taxes and self-employment taxes on their own. If the IRS determines that your business has misclassified employees as independent contractors, it could prove to be costly.

Keep Business and Personal Transactions Separate

Personal bank and credit card accounts should always be kept separate from business accounts. Doing so makes it easier to identify all appropriate business expenses at tax time. That, in turn, simplifies things when it comes to claiming business tax deductions.

Substantiating Business Expenses

Like every business, your company will incur various expenses that are simply the cost of doing business. Many of these business expenses will be deductible. You should have proof of purchase for those expenses that you intend to deduct. Proof can be a cancelled check (or a legible image of the check), or a credit card, debit card, or electronic funds transfer (EFT) statement that shows the payee, amount of purchase or transfer, and the date of the transaction.

It’s also important that you can provide an invoice or receipt that identifies the purchase. If it’s not clear what the business purpose for the purchase is, then you should attach a note of explanation or write directly on the invoice or receipt. This can be helpful if the deductibility of the purchase is ever questioned by the IRS. Deductions for business travel expenses have very specific substantiation requirements, so be sure you are familiar with them before claiming these expenses.

Determining what taxes your business is subject to and when those taxes must be remitted is complex. Unfortunately, errors can be costly to your business. A professional who specializes in small business tax and accounting matters can help your business put systems and procedures in place so that it can claim all the deductions it is entitled to and meet its tax obligations in a timely and accurate manner.

As a small business owner, tax liability is the money you owe the government when your business generates income. With changing laws and gray areas regarding deductions, exemptions, and credits, it’s no wonder small business owners rank taxes at the top of the list of the most stress-inducing aspect of business ownership. To reduce that stress, taxes shouldn’t be something to focus on only at year’s end. Use these tips on reducing your business tax year-round and see your taxes and stress level decrease!

1. Business structure

Your company’s business structure is how it is organized – it answers questions like who is in charge, how are profits distributed, and who is responsible for business debt. The most common business structures are:

• Sole proprietorships have one owner who takes all profits as personal income. The owner is personally liable for any business debts.
• Partnerships are structured like sole proprietorships but can have an unlimited number of owners.
• C corporations have unlimited shareholders who each own part of the company. Profits are distributed as dividends between them. Owners are not personally liable for business debts.
• S corporations are structured like C corporations, but the number of shareholders is capped at 100.

In addition to affecting how a business operates, business structure impacts how much a company pays in taxes. The U.S. tax code is complex and includes four main tax categories:

• Income tax – paid on profits
• Employment tax – employee Social Security and Medicare contributions
• Self-employment tax – Social Security and Medicare contributions for self-employed individuals
• Excise tax – special taxes for specific goods and services like tobacco, alcohol, etc.

IA sole proprietorship or partnership is a good idea for businesses wanting tax simplicity. For those with less than 100 owners, an S corporation might be the right fit and best tax option. Again, business structure and tax laws are complex and are best determined by a qualified, experienced accountant.

2. Net Earnings

Net earnings (i.e., net income or profit) is the gross business income minus business expenses. Regardless of the business, it begins with gross income (the income received directly by an individual, before any withholding, deductions, or taxes), and allowable expenses are deducted to arrive at net income. How this figure is calculated is dependent upon business structure.

Net earnings are used to calculate business income taxes. Again, the calculation process differs slightly for different business structures. It is best to seek a professional to help with net earnings calculations for the proper calculation and maximum legal deductions.

3. Employ a Family Member

One of the best ways for small business owners to reduce taxes is hiring a family member. The (IRS allows a variety of options for tax sheltering. For example, suppose you hire your child, as a small business owner. In that case, you will pay a lower marginal rate or eliminate the tax on the income paid to your child. Sole proprietorships are not required to pay Social Security and Medicare taxes on a child’s wages. They can also avoid Federal Unemployment Tax Act (FUTA) tax. Consult a trusted accounting professional for details about the benefits of hiring your children or even your spouse.

4. Retirement contributions

Employee retirement plans benefit employees, but they can also be good for your small business. Employer contributions to an employee retirement plan are tax-deductible. They can also carry an employer tax credit for setting up an employee retirement plan. Again, this is a task an accountant can handle for you. They can guide you on retirement plan choices based on your business’s situation, employees, and other factors.

As a small business owner, you can deduct contributions to a tax-qualified retirement account from your income taxes (except for Roth IRAs and Roth 401(k)s). Sole proprietors, members of a partnership, or LLC members can deduct from their personal income contributions to their retirement account.

As with any tax situation, consulting your trusted accounting professional is always best. They are up to date on the latest tax laws, information, and allowable deductions. By being aware of ways your small business can reduce taxes, you can bring these topics up with your accountant, discuss the best options for you, and be prepared long before tax time rolls around.

Contact our tax professionals to learn more about how you can control tax exposure for your small business.