When 2021 crossed over into 2022, many of us felt cautiously optimistic. The uncertainty, the fear, and the financial strain of these past two years took its toll, and we are more than ready to shift our focus from simply surviving to moving purposefully toward our goals.
Although the future is not fully within your control, there are many facets of your business that you can control that can help you navigate your path to success. Below are three tax credits that you may want to incorporate into your tax plans. These tax credits, and the many others like it, can help you better manage the inevitable surprises that are tossed your way.
As a business in the wake of a once-in-a-lifetime pandemic, each step you take toward your goals is worth celebrating. So take a peek at the three credits below to see if you can incorporate them into your tax plans, then head over to our more comprehensive list of small business tax credits to see what’s available.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) rewards employers for hiring individuals from certain marginalized groups who have historically faced barriers to employment, including veterans, ex-felons, and Supplemental Nutrition Assistance Program (SNAP) recipients. The WOTC is nonrefundable and will reward businesses with between 25% and 50% of employees’ first-year wages. Most employers can take this credit on Form 5884 to offset income taxes, but some tax-exempt organizations can take their credit against payroll taxes.
Research Tax Credit
The Credit for Increasing Research Activities, commonly called the Research and Development (R&D) Tax Credit, has been around for decades and was created to reward companies for investing in R&D. The credit is based on a company’s incremental increase in R&D spending, including wages paid to employees for conducting R&D activities and amounts paid to contractors for performing research or testing.
Businesses do not need to create new products or discover something groundbreaking to be eligible for the R&D Credit. Simply working to improve business processes or altering existing products can be enough. Qualified research activities (1) are technological in nature, (2) are performed to improve the functionality, performance, reliability, or quality of a business component, (3) eliminate technical uncertainty in the development or improvement of a product or technology, and (4) include a process of experimentation like testing, modeling, or simulating.
The credit is 20% of research expenses that exceed an amount from a benchmark year, or 14% if you use the simplified alternative credit. The credit calculation will consider 100% of in-house research expenses but only 65% of contracted expenses.
Although the R&D tax credit is still going strong, there is something new in 2022 that could change how you think about R&D spending. Beginning in 2022, you can no longer immediately deduct R&D expenses; instead, you must capitalize them and amortize (or deduct) them over the next five years. This amortization requirement should not affect the credit calculation, but it may impact your tax plans.
You can report your R&D Tax Credit on Form 6765.
Credit for Small Employer Health Insurance Premiums
Small businesses that subsidize their employees’ health insurance premiums may be able to receive some of those payments back as a credit. The nonrefundable income tax credit, reported on Form 8941, is 35% of insurance premiums paid by tax-exempt employers and 50% for all others. There are quite a few hoops to jump through, though.
• The insurance coverage must be obtained through the Small Business Health Options Program (SHOP), which is part of the Affordable Care Act marketplace
• Employers must pay at least 50% of all employees’ premiums
• The organization must have 24 or fewer full-time employees
• Full-time employees must make an average salary of less than $57,400 (adjusted for inflation)
The credit is awarded on a sliding scale. The largest credits will be awarded to businesses with 10 or fewer full-time employees and average annual wages of $28,700 or less.
It may be difficult to find your footing in 2022, and that’s ok; the last two years have been hard for all of us. But there’s so much you can do that can push your business further. No matter where you are on your journey and no matter your goals, we are here to help you navigate your unique circumstances. Let’s make 2022 the best one yet.