Are tax incentives part of your business’s tax strategy? Tax incentive opportunities have grown in the past couple of years due to new legislation being passed, so it’s important for businesses to stay on top of available credits to see which ones can help generate extra cash flow. In this article, we’re covering recent tax incentive updates to help guide your business’s tax planning strategies in the new year.
Confirming Employee Retention Credit (ERC) Eligibility
The ERC is a tax credit designed to reward employers who strived to retain their employees during COVID-19 despite significant revenue loss or government-mandated limitations on their business operations. Employers are allowed to retroactively claim the ERC until the statute of limitations closes on April 15, 2024, for the 2020 ERC and April 15, 2025, for the 2021 ERC.
With the extended application timeline, there’s been an uptick this past year in fraudulent schemes and aggressive ERC promotions, causing many businesses to apply for the credit without confirming proper eligibility. So much so that the IRS recently announced they’re temporarily suspending the processing of new ERC claims to protect businesses from these scams.
If an employer is interested in retroactively applying, the IRS asks that employers confirm they meet at least one of the two eligibility requirements:
- Gross receipts in a calendar quarter were less than 80% of the gross receipts for the corresponding quarter in 2019
- Business operations were fully or partially suspended during the calendar quarter because of orders from a governmental authority due to COVID-19
The IRS also asks employers to keep in mind that processing for ERC claims will be delayed as they refine their compliance procedures. Due to the increased compliance measures around ERC claims, employers should reevaluate whether the ERC is the right fit for their situation and seek guidance from their tax advisor.
Changes to Research Credits
The IRS recently shared proposed changes to the form businesses use to claim research tax credits. The IRS receives a large number of returns claiming the research credit, so these proposed changes are designed to add clarity around claim eligibility and cut back on the number of improperly submitted claims. The changes will likely become effective at the start of the 2024 tax year and include updates to two sections of the claim form. These updates include:
- The addition of five questions seeking various information about a business’s research activities
- Increased reporting of qualitative and quantitative results for each business component
The IRS advises that businesses partner with their trusted tax advisor to determine proper eligibility for the research credit before submitting a claim.
Expansion of Renewable Energy Credits
The passing of the Inflation Reduction Act in late 2022 was the biggest U.S. investment in preventing climate change to date, allocating $369 billion to clean energy programs over the next 10 years, including the modification and expansion of tax credits promoting clean energy and the development of renewable energy generation.
If your business has any of the following activities planned, you may qualify for one of the more than 20 new or expanded Inflation Reduction Act tax credits, including:
- Capital investments in renewable energy or energy storage
- Manufacturing of solar, wind and battery components
- Production and sale or use of renewable energy
The Inflation Reduction Act also introduced additional tax credit opportunities for projects meeting certain requirements for prevailing wages and domestically manufactured goods. If you haven’t yet explored the new tax credits available due to the Inflation Reduction Act, consult with your tax advisor to see which incentives, if any, align best with your business plans.
Other Tax Credits to Consider
If your business isn’t eligible for the ERC, research credits or any of the new Inflation Reduction Act credits, there are still other options available. The types of tax incentives your business is eligible for will differ depending on your state and industry, but here are several other common incentives to consider for your tax planning:
- Investment credits
- Employment credits
- Sales/use tax refunds
- Contractor tax refunds
- Property tax abatements
- Forgivable loans or low-interest loans
- Job training funds
Tax incentives can make a real impact on a business’s bottom line, but it requires time and effort to understand what options make the most sense for your business. As you review your business plans for the new year, it’s encouraged to reach out to your tax advisor if you think you may be eligible for certain tax credits so that they can guide you through the application process.
If you don’t have a tax advisor, our firm can help. Creative Planning Business Services offers tax incentive services that take the guesswork out of applying for tax benefits. We help clients determine which tax incentives they qualify for and perform the tax compliance work so that they can focus on other business needs. Schedule a meeting with our team to learn more.
