Small-business owners are always looking for ways to minimize taxes and save money. There are various year-end tax planning strategies to help increase your deductions and identify credits that will minimize your taxes.
While tax deductions reduce your profit, tax credits are an actual credit against the total tax owed. On a personal tax level, a tax deduction would be an itemized deduction, such as mortgage interest; a tax credit would reduce your tax bill dollar for dollar, such as an education tax credit when you or your child attends college.
There are both federal and state tax credits available to businesses. Some are specific to certain industries, but many are available to all businesses.
In Pennsylvania you get an additional benefit: certain tax credits can be bought and sold to other businesses, usually at a discount of 10 percent. The research and development tax credit is available if your company spends money on qualified research. The credit for a small business is 20 percent of the increase in spending over the base period. The research must qualify under the rules for federal research and development expenses.
The Pennsylvania Keystone Innovative Zone (KIZ) tax credit is available to for-profit tech companies that are less than eight years old and are located within a KIZ. There are multiple KIZs in Pennsylvania, including South Bethlehem, East Stroudsburg University, Reading, and Bucks County. The maximum tax credit available is $100,000, and is based on a year-over-year increase in revenue from within the KIZ.
Other tax credits in Pennsylvania include the Educational Improvement Tax Credit for contributing to scholarship organizations to promote expanded educational opportunities for student (maximum $750,000 tax credit per year), and the Tax Credit for New Jobs, which is $1,000 for each new job created (increases to $2,500 if the job is filled by an unemployed individual). The company must agree to create 25 new jobs or increase the number of employees by 20 percent with an hourly wage that is 150 percent of the federal minimum wage within three years of the start date. These credits cannot be sold.
Beginning in 2017, there is a Pennsylvania tax credit available for video game production. This credit is up to 25 percent of qualified expenses in the first four years of production, and 10 percent each year thereafter. This credit can also be sold.
On the federal side, a business can obtain tax credits for providing access to your business for people with disabilities ($5,000), paying for child care for your employees (25 percent of expenses up to $150,000), starting a pension plan for your employees ($500), research and development activities, and hiring employees who are veterans, food stamp recipients, or ex-felons ($2,400 to $9,600 per hire).
There is also a credit for paying for health insurance for your employees. You must pay at least 50 percent of the premium and employ fewer than 25 full-time employees earning under $50,000 a year, on average. The health insurance must be purchased on the SHOP marketplace.
There are many opportunities for a company to reduce its tax bill. This list is certainly not all inclusive. Many tax credits involve complicated calculations, so always consult your Certified Public Accountant for more details and to get a comprehensive list of credits that may be available to you.