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by Dean Zerbe, Former Senior Counsel to the U.S. Senate Finance Committee; alliantgroup National Managing Director
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Tax incentives are an essential part of business operations in the United States. They provide a powerful source of financial support for businesses, both large and small. As a business owner, it is essential to understand the tax incentives available to you to maximize profits and reduce your tax liability.
In this blog, we will discuss the different types of tax incentives available to S-Corporations, C-Corporations, and LLC businesses and how they can claim them.
Types of Tax Incentives
There are a variety of tax incentives available to businesses, including:
- Tax credits: Tax credits are a dollar-for-dollar reduction in the taxes you owe. For example, if you are eligible for a tax credit of $1,000, your taxes will be reduced by $1,000.
- Tax deductions: Tax deductions reduce your taxable income. For example, if you have a tax deduction of $1,000, your taxable income will be reduced by $1,000. Your taxable income after deductions would then be run through your tax rates to determine your reduced tax liability. Though not as powerful as a credit, a $1,000 deduction could still lower your tax liability by several hundred dollars.
- Tax exemptions: Tax exemptions are tax deductions that eliminate your tax liability for certain income. For example, if you are a non-profit exempt from federal income tax, you will not owe any federal income taxes.
Business Classifications
Before diving into the tax incentives, we must understand the differences between S-Corp, C-Corp, and LLCs.
S-Corp: This is a “pass-through” entity, meaning it does not pay taxes on its income. Instead, profits and losses are passed through to the individual shareholders, who report them on their income tax returns. S-Corporations must have fewer than 100 shareholders and can only issue one class of stock.
C-Corp: This entity type is legally separate from its shareholders. The corporation is taxed on its profits, and shareholders pay taxes on dividends. C-Corporations do not have restrictions on the number or type of shareholders they can have but are subject to the aforementioned double taxation.
LLCs: This is a hybrid business entity that combines the flexibility of a partnership with the liability protection of a corporation. Like an S Corporation, an LLC is a pass-through entity, and the profits and losses are passed through to the individual members. However, shareholders are protected from legal liability to a greater extent.
How to Claim Tax Incentives
The process of claiming tax incentives can vary depending on the type of incentive you are claiming. However, there are some general steps that you will need to follow:
- Identify the tax incentives that you are eligible for. Various resources are available to help you identify the tax incentives you qualify for, such as alliantgroup. Partnering with a reputed third-party provider familiar with your industry and peers is critical while determining what you are eligible for and how much you can claim.
- Gather the necessary documentation. The IRS may require you to provide documentation to claim a tax incentive. This documentation can vary depending on the type of incentive you are claiming.
- File the appropriate paperwork. Once you have gathered the necessary documentation, you must file the proper paperwork with the IRS. The type of paperwork you need to file will vary depending on the incentive you claim.
Best Incentives Available for Businesses
These are the most powerful credits and incentives available to businesses regardless of their type:
Employee Retention Credit (ERC):
The ERC is a refundable tax credit available to eligible employers who retained employees during the pandemic. The refund can be up to $26,000 per employee, and businesses can qualify if they had some disruption to their business caused by government orders. This includes supply chain issues or businesses that were forced to abide by social distancing constraints and other restrictions.
ERC is the single largest tax incentive available, and every business should look into this credit. A general contractor, for example, received $1.16 million in refunds for facing operational and resource challenges during the pandemic.
Unfortunately, many fly-by-night providers have sprung up, and are trying to convince business owners that they qualify for the maximum amount without doing any due diligence. Finding a reputable provider is critical.
This incentive is designed to help businesses increase technical jobs in the U.S. by encouraging them to invest in innovation through research and development activities. It applies to almost all industries, from manufacturing to software development, making it an attractive option for businesses looking to reduce their taxes. One contract manufacturer claimed over a million dollars in refunds for improving its products and using computer-aided design tools.
The R&D credit is calculated primarily based on wages earned by employees performing qualifying work, so the more staff members involved, the higher the potential savings.
This deduction is available to architects, engineers, and design-build contractors working on government-owned buildings or structures. It allows them to claim up to $5 per square foot for energy-efficient building installed systems such as interior lighting, HVAC, and building envelope. For instance, an architecture firm that alliantgroup partnered with saved $2 million through this deduction.
It’s also worth noting that alliantgroup recently became the only provider to have its 179D process fully validated by the U.S. Tax Court. Our experts take care of the 179D process end-to-end, from obtaining allocation letters, certification of projects, and identification of designers, to energy modeling.
Work Opportunity Tax Credit (WOTC):
This credit is available to employers that hire individuals considered part of a targeted group—these groups include ex-felons, veterans, individuals receiving government assistance, and long-term unemployed individuals. WOTC incentivizes businesses to hire individuals from these groups by reducing their federal income tax liability by up to $9,600 per eligible employee hired.
Maximize Your Tax Savings
There are a few things you can do to maximize your tax savings:
- Keep accurate records. It is important to keep accurate records of all of your business expenses. This will help you to substantiate your claims for tax deductions and credits.
- Plan ahead. The sooner you start planning for tax season, the more time you will have to identify and claim all the tax incentives you are eligible for.
- Get professional help. If you are unsure how to claim a tax incentive, consult a tax professional. A tax professional can help you identify the tax incentives you are eligible for and file the necessary paperwork.
Final Remarks
Overall, tax incentives provide valuable financial support for businesses of all sizes—the amount of refunds they can claim through these is often more than the profit they can make for years to come! Therefore, it is crucial to engage the services of an expert provider who has an in-depth understanding of the incentives, is up-to-date with fluid tax laws and guidance, and is adept at properly documenting claims to help businesses maximize profits and reduce their tax liabilities.
If you are unsure about what you qualify for, reach out to alliantgroup, and we can help determine what you are eligible for.
We have been working with scores of businesses and nonprofits that have taken ERC with “pop up” shop providers and now are waking up recognizing that all this may be too good to be true.
About the Author
Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington D.C. office. Prior to joining alliantgroup, Mr. Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman and current Ranking Member of the Finance Committee, Senator Charles Grassley (R-IA), on tax legislation. During his tenure on the Finance Committee, Mr. Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law – including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform), and the Pension Protection Act. Mr. Zerbe is a frequent speaker and author on the outlook for short-term and long-term changes in tax policy, as well as ways accounting firms can help their clients lower their tax bill.
