Research and development (R&D) tax credits for new or improved processes or products are often a missed opportunity. This federal incentive allows a credit of up to 10% of the eligible expense, and most states also offer an R&D credit opportunity. The credit can be utilized to offset income tax and can be carried forward up to 20 years with no limit on how much credit can be generated.
The R&D tax credit incentivizes certain research activities by reducing a company’s liabilities for spending money on that research. The credit equals a certain percentage of a business’s qualified research expense (QRE) above a base amount. Expenses that qualify are more comprehensive than you may think. QREs can include the salaries of employees and supervisors who are conducting research, supplies, and even some of the contracted-out research.
Regardless of your business’s size, revenue or industry, the IRS’s Four-Part Test can help you determine whether the work you are conducting meets the R&D tax credit eligibility:
A. Develop a New or Improved Business Component (Product or Process)
You must create a new product, process technique, formula, invention, patent, or software, or improve an existing one. You must improve performance, functionality, quality, reliability, or cost.
B. Technological in Nature (The Discovering Technological Information Test)
The process of experimentation must rely on the hard sciences such as engineering, physics, chemistry, biology, or computer science.
C. Elimination of Uncertainty
You must demonstrate that you’ve attempted to eliminate uncertainty about the development or improvement of a product or process.
D. Process of Experimentation
Through modeling, simulation, systematic trial and error, or other methods, you must demonstrate that you’ve evaluated alternatives for achieving the desired result.
2. The Wisconsin Manufacturing Tax Credit
This credit applies to those businesses that own or rent personal manufacturing or agriculture property in Wisconsin. This credit is 7.5% of “eligible, qualified production activities income.” With a maximum Wisconsin tax rate of 7.65% for individuals, this credit will virtually eliminate the Wisconsin tax on manufacturing and agriculture income.
Who is eligible for the credit?
An individual, estate, trust, partnership, limited liability company (LLC), or corporation can compute the credit if the claimant owns or rents, and uses in Wisconsin, real property and improvements assessed as agricultural property under sec. 70.32(2)(a)4., Wis. Stats., or owns or rents, and uses in Wisconsin, real property, personal property, or both, assessed under sec. 70.995, Wis. Stats.
Who MAY NOT claim the credit?
Insurance companies cannot claim the credit. Partnerships, LLCs treated as partnerships, and tax-option (S) corporations also cannot claim the credit. However, the eligibility for claiming the credit and the computation of the credit is based on the amount of qualified production activities income generated by the pass-through entity. The credit computed by those entities can pass through to the partners, members, or shareholders. Additionally, trusts and estates may pass the credit through to their beneficiaries based on the income allocable to each. For more information, visit revenue.wi.gov.
3. Work Opportunity Tax Credit
If you hire individuals from a specific disadvantaged targeted group, you could be eligible for the Work Opportunity Tax Credit. The amount of credit will vary depending on the targeted group and the amount of wages paid per employee. This credit is available through 2025.
Generally, an employer is eligible for the credit for qualified wages paid to qualified members of these targeted groups:
Members of families receiving assistance under the Temporary Assistance for Needy Families program
Designated community residents
Vocational rehabilitation referrals
Summer youth employees
Members of families in the Supplemental Nutritional Assistance Program
Section 179 Expensing of Qualified Improvement Property offers a deduction of up to $1 million on improvements to the interior of your building. Section 179 expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It’s also available for:
Qualified improvement property (generally, any improvement to a building’s interior, but not for the internal structural framework, for enlarging a building, or for elevators or escalators)
HVAC, fire protection, alarm, and security systems
The generous dollar ceiling means that many small and medium-sized businesses that make purchases will be able to currently deduct most, if not all, of their outlays for machinery, equipment, and other assets. What’s more, the deduction isn’t prorated for the time the asset is in service during the year which makes it a valuable tool for year-end tax planning.
A temporary 100% bonus depreciation is available for qualified property acquired and placed in service before January 1, 2023. Businesses can claim a 100% bonus first-year depreciation deduction for machinery and equipment bought new or used (with some exceptions) if purchased and placed in service this year. The 100% deduction is also permitted without prorating based on the length of time an asset is in service during the tax year.
Known as QBI or Section 199A Deduction, this opportunity allows a 20% deduction of qualified business income.
The deduction has two components:
This deduction component equals 20% of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. The QBI component is subject to limitations, depending on the taxpayer’s taxable income, which may include the type of trade or business, the amount of W-2 wages paid by the qualified trade or business, and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. The patron reduction may also reduce if the taxpayer is a patron of an agricultural or horticultural cooperative.
This component of the deduction equals 20% of qualified REIT dividends and qualified PTP income. This component is not limited by W-2 wages or the UBIA of qualified property. Depending on the taxpayer’s taxable income, the amount of PTP income that qualifies may be limited depending on the PTP’s trade or business.
The deduction is limited to the lesser of the QBI component plus the REIT/PTP component or 20% of the taxable income minus net capital gain.
We suggest you work with a CPA who understands the complexity of this deduction opportunity.
That’s a lot of percentages and numbers to digest. The bottom line is these five, combined with multistate, nexus, sales, and use tax strategies, will help you offset your tax liabilities and should be part of your yearly tax plan.
Make an appointment with SVA and we can review your business and determine if you are taking full advantage of all the tax-saving opportunities available to you.
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Biz Tip Topic Expert: Rachel McAlexander - EA
Rachel is a Principal with SVA Certified Public Accountants and works closely with businesses advising them on tax and accounting issues that may arise throughout the year.
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