How to Maximize Tax Credits and Offset Your Income Tax Liabilities through Statutory Economic Incentives
by Kelley Rendziperis, on Mar 24, 2016 2:50:01 PM
It’s the time of year when companies and individuals throughout the United States deal with their federal and state tax compliance obligations. As part of that process, taxpayers continue to analyze statutory tax incentives available to offset potential income tax liability.
Many incentives offered by the U.S. government via the Internal Revenue Code, such as the Research & Development (R&D) Tax Credit, Work Opportunity Tax Credit and bonus depreciation, have been offered for decades through a plethora of temporary extensions, amounting to billions of dollars in savings on an annual basis. States that impose an income tax using federal taxable income as a starting point naturally benefit from these programs; moreover, many states either piggyback on these benefits or enhance them.
Over the past several years we have seen many prevalent tax credit programs expire and go into hiatus with a lack of direction on how to comply during gaps in coverage. However, the Protecting Americans from Tax Hikes Act of 2015 and the Consolidated Appropriations Act, 2016, was signed into law by President Obama on Dec. 18, providing extender provisions.
There is a multitude of federal tax credits, thus, the chart below shows various selected tax credits and how the above legislation affected them:
Major Expired Tax Credits
|Research & Experimentation Tax Credit||Permanently extended|
|Bonus Depreciation||Extended, with a phased out:
50% in 2015-2017;
40% in 2018;
30% in 2019; and
Sunset as of January 1, 2020
|Production Tax Credit (for wind facilities)||
Extended, but phased out:
|Production Tax Credit (for non-wind facilities)||Extended for projects that begin construction by Dec. 31, 2016.|
|Investment Tax Credit in lieu of Production Tax Credit (for wind facilities)||Extended, but phased out:
30% if construction begins before 2017;
24% if begun in calendar year 2017;
18% for calendar year 2018;
12% for calendar year 2019; and
|Investment Tax Credit in lieu of Production Tax Credit (for non-wind facilities)||Extended at 30% for projects that begin construction before Jan. 1, 2017|
|Work Opportunity Tax Credit||Extended through 2019|
|Indian Employment Credit||Extended through 12/31/16|
|New Markets Tax Credit||Extend through 2019|
Medical Device Excise Tax
Aside from the federal income tax credit and deduction provisions above, many states offer their own equivalent of statutory credits (e.g., Texas franchise tax credit/sales tax exemption related to R&D). Oftentimes, state level credits may differ in terms of eligibility, amount, or both. Some other key state-level statutory tax credits to look for are:
- Job tax credits - Including hiring special categories of employees (veterans, enterprise zone, WOTC, etc.)
- Investment tax credits - Including making investments in favored properties/locations (e.g., historic tax credit, brownfield tax credit)
- Credits for various taxes paid
- Training credit/deduction
Annually evaluating a company’s ability to capture credits is important not only in reducing potential tax liability, but also for accurately and timely being able to carry forward any credits which may not be utilized in the current year. In addition, some credits may be refundable, transferable and/or saleable.