Business Tax Credit - Explained
What is a Business Tax Credit?
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Table of ContentsWhat is a Business Tax Credit? How Does a Business Tax Credit Work?Example of How Business Tax Credits WorkWhat Purpose do Tax Credits Serve?Types of Business Tax CreditsFamily Leave Act Tax Credit Tax Tax Credit for Purchases Business Tax Credit Deduction for Going Green Research and Development Tax Credits Small Business Health Care Credit Tax Work Opportunity Tax Credit Alternative Vehicle Tax Credit Academic Research on Business Tax Credits
What is a Business Tax Credit?
Business tax credits refer to credits available to individuals and business owners when they file their annual tax returns. Businesses use credits to reduce or offset their tax liability. Generally, tax credits reduce the taxes an individual or business owes to the federal government.
How Does a Business Tax Credit Work?
Business entities use business tax credit to reduce their tax obligation. They make use of all the tax credit at their disposal to reduce what they owe to the federal government as tax. Reductions, as well as credits, are directly applied against what a business owes. If in the current year business has surpassed its tax credits and not in the previous year, it may exercise what we call "carry-forward" or "backward." A backward is where a business carries back its credits to apply to the already filed returns. A carryforward is where a business has credits above what is permitted in the current tax year. In this case, the business is allowed to carry the credits balance in the coming next tax year.
Example of How Business Tax Credits Work
Lets assume that the XYz Company is currently in the process of filing its yearly tax return. So, it decides to check the list of credit at its disposal. It then realizes that it can claim for Employer-Provided Childcare Facilities and Services because it has childcare on the site. So, it uses Form 88882 to list the credit. However, the money it is claiming may happen to exceed the amount allowed this year because it is the first year for them to provide the on-site daycare services. In this case, it can only apply part of the credit to the previous tax year. Note that XYZ Company has not completed its claim as it can still claim more tax credits by applying for the remaining portion of the credit to the coming tax year. Of all the business tax credit it was able to take in the present year, XYZ Company owed only a small amount of tax to the federal government. So, the year that follows, it will have a number of credits to apply to in its remaining obligation, even with no new tax credits at its disposal.
What Purpose do Tax Credits Serve?
Tax credits are used as incentives to businesses and individuals when they do some given activities. For instance, a business can be given a tax credit when either builds with green products or purchases energy-efficient equipment. Note that the tax credit offer lasts only for a given period of time, as specified by the Internal Revenue Service. It ends when this time elapses.
Types of Business Tax Credits
Note that there are various forms of business tax credits, and they include the following:
Family Leave Act Tax Credit Tax
To enable small businesses to offer its employees paid leave, there was the introduction of new tax credit acts in 2017, known as Tax Cuts and Jobs Act. However, for a business to receive this tax credit, it has to create a procedure and a policy. It should also offer its qualifying employees a paid leave of not less than fourteen days yearly. In addition to the paid leave, the employees should also have a sick off, vacation, or paid time off. The tax credit offer was only for 2018 and 2019.
Tax Credit for Purchases
For a tax credit related to business purchases, you must have bought and begun using the equipment during the year in which you claim the tax credit.
Business Tax Credit Deduction for Going Green
You are eligible for this kind of tax credit when you change your equipment and start using energy-efficient equipment (environment-friendly equipment). Apart from tax credits, you can also qualify for tax deductions when you make changes to your business facilities. For instance, lets assume that a business buys energy-saving equipment such as solar and wind energy. Such a business will receive a tax credit by the Business Energy Tax Investment Credit.
Research and Development Tax Credits
The existence of a research and development tax credits has been there for a long time. The 2015 PATH Act has increased incentives that come in the form of tax credits for small businesses that make use of research and development tax credit. Even where there is no traditional scientific research, you can still qualify for the R&D tax credit, including:
- Product development
- Improving business performance
- Payments to employees who carry out research or to researchers from outside
- Improving the quality of the product, function, or reliability
Small Business Health Care Credit Tax
It is a tax credit that encourages small businesses (employers) to give their employees health insurance for first-time employees or continue covering those who already have. It is provided under the Patient Protection and Affordable Care Act, also known as Obamacare. There are qualifications that apply to this credit, and if your business meets them, then you qualify for the credit of up to 50 percent of the premiums you paid for your employees.
Work Opportunity Tax Credit
You are eligible for the work opportunity credit if you hire individuals who have experienced barriers related to employment and are from legit groups. Note that the claimable amount depends on the kind of employee you bring on board and their employment period. Employees who qualify for this credit include people with disabilities, veterans, ex-felons, and long-term unemployment
Alternative Vehicle Tax Credit
For you to qualify for this kind of tax credit, the vehicle you own must be new and not second class. It also must some certain guidelines related to efficiency and mileage. To know whether the car you have purchased qualifies for this kind of credit, you can seek help from a tax expert.