While you're probably still smarting from the increased individual tax rates you'll soon be paying as a result of the American Taxpayer Relief Act, there was a small win for entrepreneurs when the most popular tax credits for start-ups were extended as part of the bill.
In a rush to get the 'fiscal cliff' legislation passed, Congress was able to slip in the extension of two of the most favorable tax credits available to entrepreneurial companies. The research tax credit and the work opportunity tax credit, or WOTC. Both credits expired as of December 31, 2011, but were extended retroactively and through December 31, 2013 when Congress passed the fiscal cliff legislation and the president signed the act in January.
The Research Tax Credit
The research credit provides a federal tax credit to companies undertaking research to develop new or improved products, processes, or technologies. Eligible activities can include: development of next-generation products, technologies, or manufacturing processes (environmental or 'green' technologies included) as well as functional improvements in existing products, technologies, or manufacturing processes. They also include conceptual research for new technology, outside contract research, and reengineering projects.
The amount of a company's research credit will depend on its research spending history and profile as well as the calculation method used to determine the benefit. Under the formulas provided, the potential research credit can be as high as 6.5 percent to 7.8 percent of a company's qualified research expenses, with state tax credits often accruing a significant benefit too.
The Work Opportunity Tax Credit
The work opportunity credit gives a federal tax credit to employers who hire from certain targeted groups including food stamp recipients, qualified veterans, and designated community residents. On average, companies are finding that 15 percent to 25 percent of new hires are eligible for one of the WOTC target groups. For most of these groups, the WOTC credit is up to $2,400 per qualified employee in the first year of employment. The qualified veterans' programs offers employers a tax credit up to $9,600 in the first year. Recipients of long term family assistance generate a credit during the first two years of employment, with a total credit up to $9,000 per qualified employee.
You should take advantage of these two popular credits now available to minimize your overall tax burden.