Why Business Tax Credits Play a Pivotal Role in 2021 Tax Planning

Unprecedented. Uncertain. Disruptive. After a year of pandemic shutdowns and subsequent economic turmoil, these words have been used repeatedly to describe a tumultuous 2020. They can also be used to describe the 2020 election—the results of which are still being contested, with two Senate races headed for a January runoff. The result has been the delay of a new stimulus package to aid distressed business owners and taxpayers, leading many companies to stockpile cash the best they can.

For all these reasons, businesses must take a proactive approach to 2021 tax planning. A Biden administration will support a corporate tax rate hike, from 21% to 28%, and an end to some tax breaks for the real estate industry, though a split Congress would limit regulatory changes and tax hikes.

One of the most proactive steps business owners can take is to ensure they are taking advantage of every tax credit available to them. By working closely with their specialty tax advisors, they can use these valuable tax credits to reduce their business tax liabilities dollar for dollar.

R&D Tax Credits

Federal research and development (R&D) tax credits have been available to businesses in a wide range of industries for more than three decades. While the Tax Cuts and Jobs Act made many changes to our tax code, it retained the permanency of R&D credits, understanding the importance of U.S. investments towards innovation. Two-thirds of U.S. states also offer tax credits for R&D activities. The credit, which is designed to reimburse companies that develop new products, processes or inventions, offers a significant percentage back to the company for qualified research activities and qualified research expenses. These savings can offset wages and salaries paid for qualified activities. A simple R&D tax credit study, conducted by qualified R&D tax credit experts, is needed to qualify. Please note: if you received Paycheck Protection Program (PPP) loans to pay wage expenses, it is currently unclear whether those expenses can be deductible with R&D tax credits. Engineered Tax Systems will keep you informed as the IRS issues guidance. Learn more.

45L Energy-Efficient Tax Credits

Builders, owners and developers of residential homes and apartment buildings have the opportunity to earn tax credits for energy efficiency, if their properties meet certain qualifications. The 45L Energy-Efficient Home Tax Credit is equal to $2,000 per residential unit or dwelling to the developers of energy-efficient buildings. Qualifying properties include apartments, condominiums, townhouses and single-family homes. Note: The 45L energy-efficient residential tax credit was extended in 2019 and is in effect through the end of 2020. The tax credit was retroactively extended to include 2018 and 2019. Any unused credits can be carried over for up to 20 years. Learn more.

While not a tax credit, the 179D tax deduction is closely related to the 45L tax credit as it too provides a tax incentive for the installation of energy-efficient assets in newly constructed or energy renovated commercial buildings and apartment buildings four stories or more. Buildings meeting eligibility requirements may qualify for up to $1.80 per square feet. Like the 45L tax credit, the 179D tax deduction is set to expire after Dec. 31, 2020. Learn more.

Historic Tax Credits

Federal tax law offers an effective incentive to taxpayers who contribute to the preservation of our nation’s old and historic buildings. To qualify for the tax credits, the building must be listed in, or eligible for, the National Register of Historic Places and is an income-producing property. Developers may use the tax credits themselves or sell them, which they often do to fund the rehabilitation project. The tax credit is worth 20% of all qualified rehabilitation expenditures incurred during the historic preservation and rehabilitation project. These projects have not only served to preserve historic buildings, but have led to the revitalization of countless communities across America by driving economic development, creating jobs and improving property values. Learn more.

New Markets Tax Credits

Established in 2000, New Markets Tax Credits provide investors who make “qualified equity investments” in certain low-income communities a 39% federal tax credit over a seven-year period. Community development entities (CDEs), which act as intermediaries to make loans or investments, sell these tax credits to investors. The IRS postponed until Dec. 31, 2020, the due dates for making investments and reinvestments, and expending amounts for construction of real property. ETS assists developers and property owners in determining if properties might qualify for both of these programs and facilitates the twinning of these programs. Learn more.

Paid Leave Credit.

The Families First Coronavirus Response Act generally requires employers with fewer than 500 employees to provide paid leave in certain COVID-19-related situations. Covered employers generally can take a federal payroll tax credit for 100% of the qualified sick and family leave wages they pay each quarter. This credit can be up to $511 per day for leave taken for the employee’s own illness or quarantine, and $200 for leave taken to care for others.

Work Opportunity Tax Credit

This credit is designed to encourage hiring from certain disadvantaged groups, such as certain categories of veterans, ex-felons, the long-term unemployed and food stamp recipients. The maximum credit allowable is generally $2,400 per hire but can be higher for members of certain target groups—such as up to $9,600 for certain veterans. The credit is scheduled to expire on Dec. 31, 2020.

Work With a Qualified Tax Credit Expert

Claiming tax credits requires a fair amount of documentation required by the IRS. That’s why it’s important to seek professional help from a consultant with a strong expertise in helping taxpayers successfully claim these valuable tax credits. Our tax credit experts dig much deeper into the fundamentals of your business activities—incorporating operations, engineering, financial and tax expertise that results in more credits and meticulous documentation that is necessary to support your activities, costs and credit. There is a direct correlation between the amount of your defensible credit and the expertise of the advisor performing the tax credit study.

Learn More About Using Tax Credits to Offset 2021 Tax Liabilities The tax and engineering experts at Engineered Tax Services have helped companies of all sizes across the U.S. identify and qualify for tax credits. To learn more about R&D tax credits for architects, please complete the form on this page. For immediate questions about tax deductions for architects, call Engineered Tax Services at (800) 236-6519 or check out our R&D tax credit page for more information.

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Heidi Henderson

Heidi Henderson

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