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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.
A Little More on What are Business Tax Credits
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.
How it works (Example)
Let’s 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, let’s 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.
Reference for “Business Tax Credits”
Academic research on “Business Tax Credits”
Do R&D tax credits work? Evidence from a panel of countries 1979–1997, Bloom, N., Griffith, R., & Van Reenen, J. (2002). Do R&D tax credits work? Evidence from a panel of countries 1979–1997. Journal of Public Economics, 85(1), 1-31. This paper examines the impact of fiscal incentives on the level of R&D investment. An econometric model of R&D investment is estimated using a new panel of data on tax changes and R&D spending in nine OECD countries over a 19-year period (1979–1997). We find evidence that tax incentives are effective in increasing R&D intensity. This is true even after allowing for permanent country-specific characteristics, world macro shocks and other policy influences. We estimate that a 10% fall in the cost of R&D stimulates just over a 1% rise in the level of R&D in the short-run, and just under a 10% rise in R&D in the long-run.
The Monetization of Business Tax Credits, Giegerich, T. W. (2012). The Monetization of Business Tax Credits. Fla. Tax Rev., 12, 709.
How effective are level-based R&D tax credits? Evidence from the Netherlands, Lokshin, B., & Mohnen, P. (2012). How effective are level-based R&D tax credits? Evidence from the Netherlands. Applied Economics, 44(12), 1527-1538. This article examines the impact of the R&D fiscal incentive programme on R&D by Dutch firms. Taking a factor demand approach, we measure the elasticity of firm R&D capital accumulation to its user cost. Econometric models are estimated using a rich unbalanced panel of firm data covering the period 1996 to 2004 with firm specific R&D user costs varying with tax incentives. Using the estimated user cost elasticity, we perform a cost–benefit analysis of the R&D incentive programme. We find some evidence of additionality suggesting that the level based programme of R&D incentives in the Netherlands is effective in stimulating firms’ investment in R&D. However, the hypothesis of crowding out can be rejected only for small firms. The analysis also indicates that the level based nature of the fiscal incentive scheme leads to a substantial social deadweight loss.
New York State business tax credits: Analysis and evaluation, Rubin, M. M., & Boyd, D. J. (2013). New York State business tax credits: Analysis and evaluation.
The costs and benefits of early-stage business tax credits: a case study of two US states, Tuomi, K., & Boxer, B. (2015). The costs and benefits of early-stage business tax credits: a case study of two US states. Venture Capital, 17(3), 263-270. Tax credits for investment in early stage business are a common policy measure aimed at fostering innovation and entrepreneurship. Although credits can theoretically play an important role in offsetting risk and boosting early-stage investment, there are few empirical findings to back the theory. This paper adds to the debate by looking at two US tax credit programs: those of Maryland and Wisconsin. The net economic impact of these states’ programs is estimated using the regional input–output modeling system (RIMS II).
Reducing the Rate of Prison Recidivism in Florida by Providing State Corporate Income Tax Credits to Business as an Incentive for Employment or Ex-Felons, Hillyer, H. A. (2015). Reducing the Rate of Prison Recidivism in Florida by Providing State Corporate Income Tax Credits to Business as an Incentive for Employment or Ex-Felons. Barry L. Rev., 21, 105.
Tax Credits Available Under the Michigan Business Tax, Houlf, D. M., & Babcock, J. J. (2007). Tax Credits Available Under the Michigan Business Tax. Wayne L. Rev., 53, 1329.
Outlook for business tax credits, Barlas, S. (2001). Outlook for business tax credits. Strategic Finance, 83(3), 21-21.
Evaluating business tax credits: reading between the lines, Weiner, J. (2010). Evaluating business tax credits: reading between the lines. FRB of Boston Public Policy Discussion Paper, (10-1). This policy brief provides guidelines for critically evaluating and interpreting empirical studies of state business tax credits. This brief summarizes analysis in NEPPC discussion paper 09-3: State Business Tax Incentives: Examining Evidence of their Effectiveness.
Refundable State Business Tax Credits Are Income: Refundable State Income Tax Credits Designed to Promote Economic Development Are Taxable Income to the …, Reichert, C. J. (2015). Refundable State Business Tax Credits Are Income: Refundable State Income Tax Credits Designed to Promote Economic Development Are Taxable Income to the Recipients. Journal of Accountancy, 219(5), 74.