WOTC, the Work Opportunity Tax Credit, is a point-of-hire tax incentive provided by the federal government that rewards businesses for hiring employees from certain target groups. These groups of people constantly face employment barriers and have traditionally held high unemployment rates. If you hire an applicant who qualifies for WOTC, you may receive a reduction to the amount of taxes you owe.
The Work Opportunity Tax Credit is calculated based on your employees’ wages and on the number of hours they work. It’s important to understand that existing employees cannot be screened for WOTC, since it’s offered as a point-of-hire credit. Only new applicants may be screened, and they cannot have worked for you before.
Depending on where you are located, your state likely will offer tax credits to encourage businesses to hire employees from, and invest in, the target groups that are listed above. If you hire individuals from any one of these groups, you may be eligible to receive what is known as a “WOTC Piggy-Back Credit”. Employees or applicants who qualify for WOTC may also qualify for these Piggy-Backs; you may be able to get State credit using the same screening process that is used for WOTC—hence the name for these additional credits.
States that have WOTC Piggy-Back Credits include:
Arizona
California
Louisiana
New Mexico
New York
North Dakota
South Carolina
Washington
These State credits can range from several hundred dollars up to $35,000 per qualifying employee (up to 40% of first year wages for certified workers). Currently, WOTC is authorized for any new hires that have occurred after December 31st, 2014, and before January 1st, 2020. Any unused credits may be either carried back one year or carried forward for 20 years.
Businesses can claim billions of dollars each year in tax credits under the federal Work Opportunity Tax Credit and the accompanying Piggy-Back Credits. Unfortunately, however, it often happens that employers hire individuals who qualify for WOTC (and additionally, WOTC Piggy-Back Credits) and neither the employee nor employer know it.
If you need help identifying the WOTC Piggy-Back Credits that are available to you due to your location and would like to receive the maximum tax credit possible, give Tax Credit Group a call; we’re here to help.
More and more, Americans are spending their time on the internet and small businesses are finding that if they want to connect with the customers, they have to be on the internet as well.
A 2019 study by the website Big Commerce found that not only are Americans turning to the internet for information, they’re also turning there to shop. The study found that only 9.6 percent of Gen Z (born between 1997 and the present) have purchased something in a physical store. The numbers are only slightly higher for Millennials at 31.4 percent, Gen X at 27.5 percent and Baby Boomers at 31.9 percent.
In other words, the internet is where the shoppers are.
But selling on the internet causes problems and a lot of paperwork for small businesses, in part because of a 2018 ruling by the U.S. Supreme Court.
South Dakota v. Wayfair
In 2018, the Supreme Court ruled that states can collect sales tax from a company even if the company doesn’t have a physical presence in the state. That’s different than the previous law which said that a state could only collect sales tax from a company with a physical presence (i.e. an office, manufacturing site, etc.) within the state.
This new ruling has determined that if there is an economic nexus within a specific state, then the state is within its rights to collect sales tax from the company. The word nexus is very important. States are now looking at exactly how much business a company is doing within their borders. If a company’s sales reach a certain threshold, then the company is considered to have a “presence” other than a physical one within the state.
For example, if a company makes $100,000 in sales in Arkansas in 2019, it has an economic nexus within the state. Arkansas also has a provision that considers any company that makes 200 sales or more within the state, to have an economic nexus within the state. In both instances, even though the company has no physical location in Arkansas, it must still pay the state’s sales tax.
Many major corporations were prepared for the fallout from the Supreme Court’s decision. While it may lead to a little extra paperwork for Wayfair, the truth is a company of that size can handle it.
The real problem is the smaller, mom and pop shops that now must navigate their way through each and every state to figure out if they owe sales tax and if so, how much.
How Congress is Dealing with the Fall Out of South Dakota v. Wayfair
Right now, several bills are working their way through Congress to try and help out small businesses.
H.R. 379 would negate the Supreme Court ruling and make it so states could not collect sales tax from a company that does not have a physical presence in the state unless the state has a law that requires sales tax to be collected on e-commerce sales.
H.R. 6724 introduced in 2018, would do something similar.
H.R. 1933 aims to ease the burden on small businesses by preventing states from collecting any sales tax from sales that took place before the Supreme Court ruling. It would also hold small businesses that do less than $10 million in online sales annually exempt from paying state sales taxes.
A bill introduced in 2018, H.R. 6824, would do something similar to H.R. 1933.
Sales Tax by State for 2019 (Updated July 2019)
Until things change, small businesses will be required to pay sales tax in each state that it has an economic nexus, in other words, a presence in. Below is a chart that looks at what each state’s sales tax is and what the state’s economic nexus is.
$100,000 or 200 or more separate transactions (effective 10/1/19)
Montana
0%
n/a
Nebraska
5.5%
$100,000 or 200 or more separate transactions
Nevada
6.85%
$100,000 or 200 or more separate transactions
New Hampshire
0%
n/a
New Jersey
6.63%
$100,000 or 200 or more separate transactions
New Mexico
5.13%
$100,000
New York
4%
$500,000 in sales of tangible personal property and more than 100 sales
North Carolina
4.75%
$100,000 or 200 or more separate transactions
North Dakota
5%
$100,000
Ohio
5.75%
$500,000
Oklahoma
4.5%
$100,000 in aggregate sales of TPP
Oregon
0%
n/a
Pennsylvania
6%
$100,000
Rhode Island
7%
$100,000 or 200 or more separate transactions
South Carolina
6%
$100,000
South Dakota
4.5%
$100,000 or 200 or more separate transactions
Tennessee
7%
$500,000
Texas
6.25%
$500,000 (effective 10/1/19)
Utah
5.95%
$100,000 or 200 or more separate transactions
Vermont
6%
$100,000 or 200 or more separate transactions
Virginia
5.3%
$100,000 or 200 or more separate transactions
Washington
6.5%
$100,000
Washington, D.C.
6%
$100,000 or 200 separate retail sales
West Virginia
6%
$100,000 or 200 or more separate transactions
Wisconsin
5%
$100,000 or 200 or more separate transactions
Wyoming
4%
$100,000 or 200 or more separate transactions
This chart is a look at where things stand currently, however, states and businesses are still getting used to these new rules and you can bet that they will change over the next few years.
It will be essential for any small business owner that makes sales online to keep tabs on what each state they do business in is doing.
The Upside of the Wayfair Supreme Court Decision
If there is one silver lining in all of this, it’s that it is possible this will force states to come to a collective agreement on how they tax e-commerce.
South Dakota is part of the Streamlined Sales and Use Tax Agreement put forth by the Streamlined Sales Tax Governing Board. The board was formed in 2000 to help “…simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance.”
According to the Streamlined Sales Tax Governing Board’s website it deals with the following:
State level administration of sales and use tax collections.
Uniformity in the state and local tax bases.
Uniformity of major tax base definitions.
Central, electronic registration system for all member states.
Simplification of state and local tax rates.
Uniform sourcing rules for all taxable transactions.
Simplified administration of exemptions.
Simplified tax returns.
Simplification of tax remittances.
Protection of consumer privacy.
As of July 2019, 24 states have adopted the policies of the Streamlined Sales Tax Governing Board and it’s possible that more will soon.
There are a lot of factors to consider when you begin to establish your business and one factor that is often overlooked is the effect state taxes will have on your business’s bottom line. Sometimes businesses forget that in addition to those federal taxes, they also have to pay state taxes and often local city business taxes as well. All of that can make a big dent on a business’s bottom line.
The Tax Foundation, a non-profit that specializes in tax policy took a look at all 50 states and ranked them in five different categories: corporate tax, individual income tax, sales tax, property tax, and unemployment insurance tax. Based on those rankings, it came up for an overall ranking for each state. You can see the full list here, but to make it a little easier, take a look at the top and bottom three on the list.
The Top 3
Wyoming
The state of Wyoming has the lowest corporate and individual income taxes in the United States. Its sales tax (just 4% in 2019) is also in the top 10, which makes it a very agreeable place for businesses to set up shop.
Alaska
Alaska is top in America when it comes to individual income tax and 25th for corporate tax. The state has no sales tax, but it allows cities to tax purchases up to 7%, which dropped the state down a few pegs in the rankings.
There are downsides to opening a business in Alaska. The cost of living in Alaska is high and the quality of life can be poor considering for part of the year it’s pretty dark outside.
South Dakota
South Dakota has the best corporate tax rate in the country and is tied with Wyoming for the best individual tax rate. But the state’s sales tax rate is 4.5% which is what knocked South Dakota down to third on the list.
Bottom 3
New York
New York’s low ranking has a lot to do with property taxes and the individual state income tax, which are 47th and 48th respectively. The one place the state does excel is how it treats its corporations. According to Nolo, the default corporate tax rate is 6.5%, but emerging technology companies get a 1% break and qualified manufacturers pay no corporate tax at all.
New York includes New York City and that’s another roadblock for businesses. Companies that want to open up in The Big Apple will have to contend with another set of taxes as well. According to Smart Asset, New York City also collects its own individual income tax on top of what the state and federal government collect.
California
Second to last on the list is California, in large part because of how much it charges in corporate and individual taxes. California is 49th on the list in individual tax, behind only New Jersey, which just so happens to be the lowest ranking state on the Tax Foundation’s list.
There is an upside to California, U.S. News ranks the Golden State as the top spot to start a business because “The state boasts the most venture capital investment and the highest patent creation rate of any state.”
New Jersey
The Garden State falls to the bottom of the list because it has high taxes in almost every category. The state has the highest individual tax in the United States and ranks 47th in corporate tax. There’s also a state sales tax that ranks 45th on the list at 6.625%.
A few years ago, the IRS made some changes to the tax credit employers receive for giving employees paid family or medical leave. The IRS code section 45S will be in effect until the end of this year, though it’s possible that Congress could decide to extend it beyond December 31, 2019.
For employers, it means that offering that added benefit to your employees comes with a tax perk.
What must I do to claim the credit?
The first thing you need is a written policy for your employees. This policy must include at least two weeks of paid family or medical leave annually for all full-time employees. The leave will be prorated for part-time employees.
This policy must have an effective date. You can only deduct the paid leave wages that were paid out following the effective date of your policy. It is possible to make a retroactive effective date as long as it falls inside the taxable year that the policy was adopted. For example, if the policy was adopted on July 1, 2018, the effective date can be January 1, 2018 and still work.
The paid leave must equal at least 50% of the wages that the employee normally makes.
Who can qualify for the credit?
Anyone who has worked for you for at least one year and received less than $72,000 in paid leave can qualify for the credit.
What kind of leave can qualify?
There are restrictions on what kind of leave qualifies for paid family or medical leave. The leave must fall into one of the following categories:
Birth of the employee’s child and to care for that child;
The adoption or fostering of a child;
Caring for a spouse, child or parent with a serious health condition;
An employee dealing with a spouse, child or parent being called to active duty in the Armed Forces;
Care for a service member that is related to the employee.
If the leave that you cover does not fall into one of these categories, then that leave does not qualify for the paid family or medical leave tax credit.
How can I determine how much of a credit I receive?
The IRS calculates the credit by taking a percentage of the wage that’s paid to the employee while the employee is on leave. There’s a cap of 12 weeks per year on the pay.
If an employee receives 50% of their pay, the employer will receive 12.5% of that in tax credit. For every percentage point the pay goes up, the credit is increased by 0.25%.
Does this credit affect my other business tax credits?
Yes. You can’t double dip and take wage tax deductions or credits and then also take paid leave credit.
These are just some of the basic rules that help you establish a paid family and medical leave policy within your company. There are other, more intricate rules and it’s important that you talk to your tax adviser before you start enacting a paid family and medical leave policy in your company.
If you have any further questions, you can also reach out to us here at The Tax Credit Group. We have a team of professionals that can help you with all of your needs.
The start of summer also marks the beginning of hurricane season for the south and eastern parts of the United States and the start of wildfire season in western parts of the United States. While no one ever wishes that disaster strikes, there’s always the possibility.
For those who have had the misfortune of dealing with a major disaster or are worried that you might one day, the IRS does have solutions. Despite popular belief, the IRS does not have it out for anyone. In fact the IRS is in the habit of helping people and businesses dealing with a major disaster.
How Do I Know if I Qualify?
The first thing you need to establish is whether or not the disaster you experienced was large and impactful enough for it to be declared a natural disaster by the Federal Emergency Management Agency (FEMA). This is important because the IRS only recognizes incidents that were declared emergencies by FEMA.
For a list of the qualifying events, you can visit the IRS here.
Have I Met All Tax Deadlines Following the Disaster?
If FEMA has declared your event an emergency, then the IRS extends several deadlines for business owners including payroll taxes, quarterly estimates and even filing your return. Note that this is an extension, which means while they may not be due now, those taxes will eventually be due.
Make sure you plan and prepare for that bill so you’re not surprised when the deadline finally arrives.
How Can I Get Tax Relief Quickly Following a Disaster?
One of the key things the IRS does to try and help disaster victims immediately is to allow them to amend their tax returns from the previous year. This is important because it means the taxpayer can receive a disaster-related tax refund without waiting.
In addition to allowing these amended returns, the IRS also expedites the processing of the returns to make sure refunds are handed out as quickly as possible. For details on amended returns visit the IRS website here.
When you amend your return, it’s important that you look at the casualty loss deduction and itemize your return if necessary.
According to the IRS, “A casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. A casualty doesn’t include normal wear and tear or progressive deterioration.” (For full details, visit the IRS website here.)
Make sure that any deductions you take are calculated after you receive an insurance reimbursement or take the potential reimbursement out of the amount you’re deducting. The IRS doesn’t let you double dip by getting a tax deduction for a loss and getting a payout from insurance.
What if I Don’t Live in the Disaster Area, but I’m Still Affected?
The IRS tries to cover all of its bases when it’s dealing with taxes so there are no loopholes for people. That’s why the agency actually has a policy to deal with people that are affected by the disaster even if they do not live in the disaster area. Affected parties include people whose tax preparers operate in the disaster area and people involved in business partnerships or corporations that operate in disaster areas.
For full details, you can visit the IRS website here.
Extra Relief for Major Disasters
The IRS also understands that some disasters are more devastating than others and therefore have a bigger financial impact on businesses, that’s why extra tax relief can be added on in some situations.
For example, in 2017 businesses in parts of Florida and Texas affected by the hurricanes received up to $2,400 in deduction per employee.
It’s important that you talk to your tax professional about any deductions that may be available to you or your business following a major disaster. The advice offered in this article is not based on your specific situation and therefore may or may not be the best advice for you. If you need help making sure you get the best tax benefit for your situation, you can always contact us here at The Tax Credit Group.
Making your business environmentally friendly isn’t just good for the Earth it may also be good around tax time. That’s because the IRS has a lot of tax credits and deductions in place for businesses that make an effort to go green and encourage their employees to do the same.
Encourage Bicycling to Work
Under the Tax Cuts and Jobs Act of 2018, employers are allowed to deduct some bicycle commuting reimbursements that they give to their employees as business expenses. From now through 2025, you can reward your employees for bicycling to work, and then take a tax deduction as a result. In order to qualify, you must reimburse the employee through their wages.
Consider Green Energy Sources
The Business Energy Investment Tax Credit will reward you for investing in energy-saving modifications on your business. When you work things like solar panels, fuel cells, small wind turbines or geothermal systems into your business or office building, you may qualify for a tax credit.
The credits are starting to phase out and will almost completely expire in 2022. In 2019, you have the opportunity to get anywhere from 10% to 30% in tax credits. Check the Energy.gov website for an idea of what kind of credit your business is eligible to receive.
The credit only applies to “investment credit property”, in other words, something that can be depreciated or amortized. You must also own the equipment or property or, in the case of the equipment, you have built it yourself.
While the tax benefits are limited for LEED certification (the aforementioned Business Energy Investment Tax Credit is one of them), according to the U.S. Green Building Council, LEED certified buildings lease faster, have higher resale prices and use less energy, water and other resources.
Make Energy Saving Changes Within the Office
This one isn’t really a tax savings tip, but it is a money saving one. The next time you’re shopping for new light bulbs for the office, choose Energy Star qualified ones. Or choose Energy Star approved appliances for the break room. Energy Star is a government-backed agency that backs the most energy-efficient products on the market.
In other words, use the money you already set aside for office supplies and appliances and buy Energy Star approved items. Not only are you lowering your utility bill, but in the case of appliances, you may also qualify for money back rebates offered for purchasing Energy Star appliances.
Check to See What Your State Offers
Depending on your state, you may also qualify for state tax deductions or credits that overlap with the ones you receive at the federal level. The website Dsire USA breaks down every state’s energy policies and incentives. Check the site to make sure you’re receiving the full benefit of any environmentally friendly changes you make to your business.
As with all the advice we offer, you should talk with a tax professional before you make a decision about what’s best for your business. The Tax Credit Group is happy to offer any support it can for your specific situation. Just send us a message and we’ll cater our advice to your particular situation.
According to the Small Business Administration’s latest survey, there were approximately 30.2 million small businesses in the U.S. in 2018 with a total of 58.9 million employees. That means a majority of those small businesses were run by just one person, maybe two at the most.
Small business owners are stranded in a weird limbo when it comes to retirement. Unlike regular employees who have a steady paycheck that they can draw from to stash away cash for retirement, small business owners operate differently. The good/lucky ones can take a steady paycheck from the company. The others may be struggling from month to month and see their pay struggle as well.
So what are the retirement plan options for small business owners and how can they stretch that money as far as possible through tax credits and tax deductions.
Tax Benefits: These are pre-tax funds that go into a Traditional IRA so you’re making your money go further in the beginning. Just remember, you will be taxed when you withdraw those funds. In some cases, you can deduct a portion or all of the money you contribute to your Traditional IRA from your taxes.
Limitations: The IRS is constantly updating this, but for 2019 anyone under the age of 50 can contribute up to $6,000 to their IRA. Anyone over the age of 50 can contribute up to $7,000.
Tax Benefits: None when you start out because you’re depositing funds that have already been taxed, however, when you retire the funds are withdrawn from the plan, tax-free.
Limitations: The amount you can donate to your Roth IRA will depend on how much money you make and whether you file your taxes single, married or something else. The upward limitation is $6,000 for anyone under the age of 50 and $7,000 for anyone over the age of 50, though that limit can be decreased or even be zero if you make too much money.
The Roth IRA is really for small business owners or employees who don’t make a lot of money and remember in the case of small businesses, a lot of time the income from the small business is also counted as your personal income.
A SEP IRA or Simplified Employee Pension IRA is a method of saving for your employees and yourself. In many cases, it may be just you as a small business owner.
How is it different from a Traditional/Roth IRA?
While the term IRA is used, the SEP IRA is very different from a Traditional/Roth IRA. The SEP IRA is a pension plan, which means the company is making a contribution on behalf of the employee. With small businesses, this is often the same person, but it is an important distinction.
Additionally, the upward limit of what can be contributed to a SEP IRA can be much higher than what can be contributed to a Traditional/Roth IRA.
Tax Benefits: The biggest benefit of the SEP IRA is that the company can take a tax deduction for contributions. Because this is along the lines of a pension plan, this also includes deposits made into any employee accounts.
Requirements: As with anything having to do with taxes, the more deductions you’re allowed, the more hoops you have to jump through. The SEP IRA must be registered with the IRS, so you’ll have to fill out a form. You’ll also need a written agreement with all of the employees involved and you’ll need to set up IRA accounts for them.
You can find a full list of the requirements here.
Limitations: Every employee must receive the same percentage of compensation in a SEP IRA and that compensation is capped at $56,000 (for 2019) or 25% of annual pay, whichever is smaller. SEP IRAs are only available to people 21 and older and they must have worked for your company for three of the last five years.
In other words, this is an option for more established businesses, not new ones.
Other Benefit: According to Investopedia, the real benefit of the SEP IRA is the ability to contribute based on the health of the business. If the business is having a down year, you can skip the contribution to the SEP IRA entirely.
One-Participant 401(k)
When you think of a 401(k) plan, you usually think of something that’s offered by large corporations and businesses, but the IRS actually has what it calls a one-participant 401(k) plan or Solo 401(k).
It’s a plan specifically set up for small business owners with no employees, though they can add their spouse to the plan.
Tax Benefits: Whatever your company matches in contributions to the 401(k) plan can be deducted from your taxes. That means you may put $5,000 into the 401(k), use company funds to match it up to 25% of the contribution and then deduct that match against your taxes.
Limitations: The real downside of this option is that you cannot have any employees. If you do, it immediately disqualifies you from this option.
Other Benefit: The true benefit of a 401(k) plan compared to other plans is the upward amount you are allowed to contribute. You can put up to $56,000 or 100% of your salary (whichever is less) into your retirement, plus your company can match up to 25% of that contribution, which means more savings when times are good.
Other Plans
There are other options to employers such as the Simple IRA or Defined Benefit Plan, but both can be significantly more costly to small businesses and usually aren’t options unless your business is well established and has great cash flow.
Additional Tax Benefits
No matter what plan you choose, remember that you may be able to qualify for tax credits on the cost of starting up the retirement plan. The IRS offers tax credits for the first three years of startup costs, up to $500.
When you’re running a small business, every penny counts, so be sure to look into that as well.
If you’re a small business owner looking to start up a retirement plan for yourself or your employees, make sure you talk to your financial advisor first. You can also reach out to us here at The Tax Credit Group. We’re always happy to help.
When it comes to running a business, especially one that relies on transportation, it’s important that you take every advantage you can. It can be financially painful to purchase a new work vehicle every five to ten years and even more painful if you need to purchase more than one vehicle.
Luckily, the IRS gives you a chance to ease that pain just a little bit.
The Plug-In Electric Drive Vehicle Credit
The IRS created this credit almost 10 years ago as a way to incentivize people to purchase alternative motor vehicles. When it was initially launched, people who purchased plug-in hybrids or electric vehicles could receive a tax credit of anywhere from $2,500 to $7,500. That same credit applied to businesses.
But the IRS was smart, and it did not make the credits unlimited. Instead, it built into the system a phase-out for each manufacturer. Once the manufacturer sells 200,000 of the qualified vehicles, the credit has expired.
So, while the Prius and Volt are off the table, there are still a few vehicles that qualify for the credit in 2019. If they fit into the overall business plans, you should definitely take advantage. To find the latest updated list on the IRS website, click here.
An added bonus to this credit is that some states offer a separate tax credit as well. The Energy Sage website has the vehicle credit broken down by state. Click here to see if your state offers a separate tax credit.
As with all tax credits, there are a few other caveats. For one thing, you need to make sure that the vehicle is new and that you are purchasing the vehicle, not leasing it. If you’re leasing it, then the leasing agency (in most cases the dealership) is the one that has the right to claim the tax credit. You, of course, can work out a deal with the dealership to work that credit into the price of the purchase.
There are also mileage, fuel efficiency, and battery standards that the vehicle must meet in order to qualify as well.
One Purchase with Dual Benefit
Aside from the tax credit, there’s also the benefit of tax deductions. As a business owner, you know that assets like vehicles depreciate, which means you can write off a portion of the cost of the vehicle every year. Since tax credits and tax deductions are considered different items on a tax form, it’s possible to get a dual benefit from one purchase.
As with all advice provided on this blog, it’s very important that you talk to a tax professional about your specific situation. We realize that every company has different challenges and successes and what will benefit one company may not benefit another.
We here at The Tax Credit Group understand the intricacies of the tax laws and how to make them work to your advantage. Feel free to contact us at any time for a consultation.
It’s springtime and for many people, that means spring cleaning. However, spring cleaning should not just be for your home, you should also think about extending it to your business. It’s tough to admit that the inventory that’s been gathering dust on your shelf is never going to sell, or the old business equipment that you upgraded last year really has no use anymore.
Saving it is taking up something even more valuable in your business, space. It’s time to be honest with yourself and admit, you’re never going to use it again, or in the case of old inventory, you won’t be able to sell it. But instead of trashing it, why not donate it and get a little bit of benefit after you say good-bye?
Tax Deductions for Property Donations
When it comes to the IRS, property isn’t just land, it’s items too. The IRS allows you to deduct what it calls the “Fair Market Value” (FMV) of property. FMV means what you could conceivably get for a piece of property if you sold it.
For example, you can’t donate a 1994 Ford pick-up truck in marginal condition and say it’s worth $10,000. You have to either provide proof that you made sufficient upgrades to the truck to make it worth $10,000 or prove that someone was willing to pay $10,000 to purchase the truck. It’s a lot of work and that’s a simple example.
To keep everyone from having to prove the FMV of the items they donate, the IRS gives you up to $500 in donations without requiring a form. Anything more than $500, you’ll need to fill out a Form 8283 and you’ll probably need to prove that your property is worth what you say it’s worth.
There are a lot of other factors that go into determining the FMV and some of them require appraisals before you donate. If you would like to see a more extensive write up on how to determine the FMV, the IRS has drafted this article.
Once you determine the FMV of your item, deducting it may have benefits to your company come tax time. It’s an easy way to make that unwanted property do some work for you.
What Else Can You Donate and Deduct?
Money – The value of this one is pretty easy to determine. It’s a dollar for dollar deduction, though there is a cap. That cap will depend on your company’s tax situation.
Time – The value of your time is not deductible. That means you can’t deduct $400 because you volunteered for four hours and you normally bill $100/hour. However, you can deduct “…certain expenses incurred and related to your volunteer work. For example, if you host a party or fundraiser for the organization, you can deduct the costs. Other deductibles include supplies (e.g. stationery), the costs of a uniform and telephone expenses.” (Per the Small Business Administration)
Ask the Pros
The IRS has a lot of forms and a lot of systems in place to make sure that if you’re taking a tax deduction because of a donation, you’re doing it the right way. Filling out a form is only one part of the process, you need to make sure you’re also providing the correct documentation for any deduction claims you’re making. Not only does this keep you within the boundaries of the law, but it also ensures that if you get audited you’re prepared with proper documentation.
As with any tax deduction, you should always, always talk to a tax professional before you make any moves. That person is going to know the ins and outs of the tax laws better than anyone, plus he or she will be up to date on any changes that may have happened recently.
We here at Tax Credit Group can help you through all of that. All you need to do is give us a call.
For non-tax people, it can be easy to consider a tax credit and a tax write-off to be one and the same. After all, both of them offer benefits on your taxes, ideally in the form of you paying less. In other words, they’re both good.
But to a tax professional, they are actually different and one is better than the other, though both are ideal.
What is a Tax Credit?
To put it as simply as possible, tax credits “…reduce taxes directly and do not depend on tax rates.” (Tax Policy Center)
In other words, if you have a $500 tax credit, then that’s $500 off of your taxes, no matter what your tax rate is.
What is a Tax Write-Off/Deduction?
As for a tax write-off or deduction, “The value of all deductions, itemized or otherwise, depends on the taxpayer’s tax liability and marginal tax rate.” (Tax Policy Center)
What that means is that the deduction is going to vary by what tax bracket you fall into. For example, if you have a $10,000 deduction, your taxes will be reduced by $1,200 if you’re in a 12% tax bracket, but $3,200 if you’re in the 32% tax bracket.
What’s Better, a Tax Credit or a Tax Deduction?
According to Investopedia, “Tax credits are more favorable than tax deductions or exemptions because tax credits reduce tax liability dollar for dollar. While a deduction or exemption still reduces the final tax liability, they only do so within an individual’s marginal tax rate.”
The other benefit comes if you have enough tax credits that your net liability drops below zero. “Some credits…are refundable, which means that you still receive the full amount of the credit even if the credit exceeds your entire tax bill.” (Turbo Tax)
When it comes to deductions, there are some deductions that can be rolled over to the next year, but deductions are often capped, which means it is difficult to drop your net liability below zero with deductions alone.
As a Business Owner, Why Do I Care?
Tax credits and tax deductions are independent of each other, which means that you are perfectly within your rights to take both on your taxes. It’s important that you remember to look into and take advantage of both as you do your taxes so that the system works for you instead of against you.
As always, the tax advice we provide in these blog posts is generic in an effort to apply to the most people possible. To get an idea about how your specific company can benefit, you should seek out the advice of a tax professional.
We here at The Tax Credit Group understand the ins and outs of the tax laws and how to make them best work to your advantage. Feel free to contact us at any time for a consultation.
