Business Tax Credits: How to Maximize Their Economic Benefits
Ensuring that a business achieves long-term growth takes a lot of careful strategizing. This is especially true when it comes to business tax credits and tax planning, where organizations have the opportunity to carve out substantial savings every year – and potentially even generate additional cash flow.
Especially in recent years, there has been a legislative surge in new tax benefits through economic incentive programs, called opportunity zones, geared to stimulate investment and job creation for small, midsize, and even large global companies.
This extends from the federal, state and local level here in the US, with identical dynamics on a global level throughout international jurisdictions, and now businesses are faced with a complicated and vast collection of opportunities to save – and even make – money with respect to taxable liabilities. The byproduct of this fiscal policy is known as tax credits.
The problem is that, far too often, organizations’ focus on regular management of traditional tax compliance causes them to miss opportunities – meaning tax credits that don’t get claimed, or worse, companies do not go after credits and incentives that they may be eligible for.
What is a Business Tax Credit?
Tax credits are generated through government-sponsored incentive programs that are designed to influence businesses (and individuals) to behave in a way that is beneficial to their community, local workforce, or environment.
Credits and incentives should not be confused with tax deductions; the latter enables a reduction to total taxable income base (decreasing what can be taxed by the government), whereas the former provides a dollar-for-dollar reduction in tax liability after calculating the total tax bill. If an organization properly demonstrates that they have fulfilled program requirements and the rules and regulations that govern defined benefits, then a tax credit is issued along with guidelines for redemption.
Properly taking advantage of incentive programs and the tax credits they produce isn’t easy. While it may seem simple on its face, real-world understanding and management of tax credits is quite an undertaking – no matter the size of the company. Legislative and statutory frameworks dictate how business tax credits can be earned, claimed and monetized, and a considerable amount of expertise is required to navigate these waters.
There are seemingly countless types of tax credits available to businesses, and each of them has their own unique list of preconditions, requirements, and qualifications. Not only do companies need to determine which US federal tax incentives are available and how to take advantage of them, but there are also incentive programs offered by all 50 states.
Further, city governments also provide their own tax incentives that are designed to support investment and job creation on a municipal level, endeavor to lure new businesses to relocate and/or encourage the expansion of local operations. This same dynamic exists on a global level as there are tax incentive programs offered by just about every government around the world.
Tax Credit Monetization: What Types of Business Tax Credits are There?
There are a myriad of available tax incentive programs that support and encourage innovation and investment across just about every industry. From pure “jobs” programs – including Enterprise Zone, Work Opportunity Tax Credits (WOTC), Research & Development, among so many others, which as policy programs target and stimulate the most innovative industries and quality jobs – tax credits and incentives are the most effective economic development tool that government has at its fingertips to promote generational prosperity, growth, and permanent infrastructure.
Generally, with respect to tax credit monetization, business tax credits fall into these categories in how they can be redeemed:
Non-refundable tax credits
This represents the majority of tax credits. These types of tax credits can be applied against tax liabilities on a dollar-for-dollar basis up to the total amount of tax (federal, state, international) that business owes.
Refundable Tax Credits
Upon filing a tax return (in the jurisdiction), and to the extent that the credit exceeds liabilities, the government issues a cash “refund” to the company.
Transferable Tax Credits
Statutorily, these credits can be freely transferred/assigned/sold to another taxpayer (who has liabilities in the issuing jurisdiction) at any time, subject to the rules and regulations around the transfer, who then applies for the credit against their liabilities.
Rebates and Grants
These incentives are monetized in the form of cash receivable from the issuing agency, without the need to first file a tax return. The former is redeemed following satisfaction of qualifying guidelines, whereas the latter is received prior to investment.
Reduction of or exemption from taxes granted by a government for a specified period, usually to encourage certain activities such as investment in capital equipment, and most commonly offered to offset property tax liabilities.
Corporate debt securities offering a secondary guarantee that interest and principal payments will be made by a governing agency should the issuer default due to reasons such as insolvency or bankruptcy.
Statutory, Discretionary and Negotiated Incentive Distinctions
Statutory incentives include economic benefits that are earned by right if a company meets certain thresholds or performs certain activities as defined by legislative policy and which meet qualifying guidelines. Discretionary incentives are similarly legislated but require pre-application and/or pre-approval to qualify and are completely at the governing agency’s discretion, and usually include “but for” requirements – meaning, if not “but for” the incentive the economic investment and job creation would not be undertaken.
While some tax credits can only be claimed in the year in which they were earned, others can be “carried forward” to apply against liabilities in future (tax) years. “Carryforward” provisions typically range from 1 year to as much as 20 years, and in regard to certain incentives, credits can be carried “back” and applied again liabilities in prior years. Attention should also be paid to amended and re-stated returns as it pertains to credits, their use, and limitations.
In order to earn certain credits and incentives, companies engaging in economic activity eligible for benefits and liability offsets must adhere to the rules and regulations and follow certain guidelines with respect to (1) how an investment is targeted and maintained, and more important (2) the jobs and permanent infrastructure created as a result. Each incentive program (whether statutory, discretionary or negotiated) will have their own unique compliance requirements.
Maximizing the Value and Benefits of Tax Credits and Incentives
Owing to the diversity of tax credits and incentives and all forms of government assistance through economic development policy, how can your business maximize their value? How do you leverage, from a balance sheet and cash flow perspective, the economic benefits that may make the difference in how you compete on the margins and win?
Knowing the ins and outs of each potential tax credit program is crucial, as it can dictate how investments are prioritized, play a significant role in forecasting cash flow and provide the (soft equity) gap that may lead to a “go” or “no go” decision.
Understanding how to get the most out of the system, however, is nearly impossible without the best technology and access to the necessary expertise. The sad truth is that a ton of companies are either overlooking eligible incentives they should be going after, but also are not properly benefiting from the credits they have earned due to the absence of modern-day tax technologies designed to maximize their value.
Collaborating with an experienced technology partner to plan and manage a sound tax management strategy is how top organizations are able to minimize their tax liabilities each year. Investing in an enterprise solution to manage tax credits is one of the only ways to ensure that companies are navigating the system in the most lucrative way possible each year. It’s all about dumping your tax credit concerns onto someone else’s plate – putting all the hard work into the hands of an established and reliable tax credit company, such as The OIX.
With years of experience slashing clients’ tax liabilities with innovative tax credit and incentive software, The OIX offers a unique and effective solution that takes all the chaos and inefficiency out of the picture. This next-generation platform streamlines the management, reporting, forecasting, analysis, workflow, monetization and compliance processes for tax credits and incentives on a worldwide scale.
By adopting tax credit software solutions through an industry-leading tax credit company like The OIX, you can ensure that your business isn’t missing out on any lucrative tax credits – while also positioning your company for long-term growth.