IAS | Take Advantage of these Business Tax Tips (Fall 2024)

Take Advantage of these Business Tax Tips

By: Tax Hotline
Fall 2024 (Vol. 42, No. 3)

Don’t miss these tax incentives and sales tax exemptions that can make a big difference in your tax liability:

STATUTORY INCENTIVES. Some credits are available “as of right.” That is, if your business meets the specified requirements, you just need to claim the benefit on a timely filed tax return to receive it. State and federal tax credits and exemptions are designed as incentives for businesses to engage in certain activities or invest in specific economically distressed areas. Here are a few:

Work Opportunity Tax Credit (WOTC). The WOTC is a federal credit ranging from $2,400 to $9,600 per eligible new hire from certain disadvantaged groups. Examples include convicted felons, welfare recipients, veterans and workers with disabilities.

State and federal research and development tax credits. These credits may be available to an eligible business that invests in developing new products or techniques, improving processes, or developing software for internal use, regardless of size. The federal “increasing research activities” credit is generally equal to 20% of the amount by which the business increases qualified research expenditures, compared to a base amount. The credit is available even to businesses with no income tax liability and may be carried forward to offset taxable income in future years. If eligible, a start-up company can claim the federal research credit against up to $500,000 in employer-paid payroll taxes.

Empowerment zone incentives. Certain tax breaks are available to companies that operate in federally designated, economically distressed “empowerment zones.” Tax credits may be worth up to $3,000 for each eligible employee.

Industry-based and investment credits. Many states and other jurisdictions offer tax credits and other incentives to attract certain types of businesses, such as manufacturing or film and television production. Jurisdictions may also offer investment tax credits for capital investments within their borders.

DISCRETIONARY INCENTIVES. Discretionary tax breaks must be negotiated with government representatives. Typically, these incentives are intended to persuade a business to stay in or relocate to a certain state or locality. To secure these incentives, a business must show it’ll bring benefits to the jurisdiction, such as job creation and revenue generation. Discretionary incentives may include income and payroll tax credits, property tax abatements and utility rate reductions.

SALES TAX EXEMPTIONS. States with sales taxes provide exemptions for some business purchases. Common exemptions include purchases by:

Retailers for the purpose of resale

Manufacturers of equipment, raw materials or components used in the manufacturing process

Specific tax-exempt entities, and

Agricultural businesses that buy such items as farming equipment and fuel, feed, seeds, fertilizer, and chemical sprays.

Pay Employees Tax Free and Take the Deduction

Do you want to give your employees more but don’t want to trigger tax consequences or go over salary limits? Here are a few ways to boost morale and reduce tax liability:

Pay for Insurance. If an employer pays the cost of an accident or health insurance plan for their employees (including an employee’s spouse and dependents), then the employer’s payments are not wages and are not subject to federal income tax withholding, social security, Medicare, and FUTA taxes.

Offer Educational Assistance. Employers seeking to attract new recruits and retain talent should consider offering educational assistance programs to their employees. The plans aren’t new, but they temporarily offer greater flexibility in how they work. Through Dec. 31, 2025, the funds can be used to help employees pay their federal student loan debts. Student loan payments can be made directly to employees or lenders. These tax-free benefits are limited to $5,250 per employee, per year. Benefits that exceed that amount are taxable as wages. The amount the company spends paying towards student loans under one of these programs is tax deductible to the business.

To learn more about adding this program to your benefit package: https://www.irs.gov/newsroom/employer-offered-educational-assistance-programs-can-help-pay-for-college

Establish an Achievement Awards Program. You can hand out awards at an appointed time, such as a year-end ceremony or holiday party. And, as long as you follow the rules, the awards will be tax-deductible for your company and tax-free for recipient employees. To qualify for favorable tax treatment, achievement awards must be granted to employees for either promoting safety in the workplace or length of service. The award can’t be disguised compensation or a payoff for closing a big deal. In addition, they must be tangible items, ranging from a gold watch or a smartphone to a plaque or a trophy. Examples of awards that would violate the rules are gift certificates, vacations, or tickets to sporting events or concerts. Additional requirements apply to each type of award. Safety awards can’t go to managers, administrators, clerical workers or other professional employees. Also, safety awards won’t qualify for favorable tax treatment if the company grants them to more than 10% of eligible employees in the same year. To receive a length-of-service award, an employee must have worked for the business for at least five years. In addition, the employee can’t have received a length-of-service award within the last five years.

Also, keep in mind that the award must be part of a “meaningful presentation.” That doesn’t mean you have to host a gala awards dinner at the Ritz, but the award should be marked by a ceremony befitting the occasion. There are limits on an award’s value depending on whether the achievement awards program is nonqualified or qualified. For a nonqualified program, the annual maximum award is $400. For a qualified program the maximum is $1,600 (including nonqualified awards).

Any excess above these amounts is nondeductible for the employer and taxable to the employee. If an employee receives multiple awards in one year, these figures apply to the total, not to each individual award. To establish a qualified program, and therefore benefit from the higher limit, you must meet two additional requirements. First, awards must be granted under a written plan and the plan must be open to all eligible employees without favoritism. Second, the program must not discriminate in favor of highly compensated employees as to eligibility or benefits. For 2024, the salary threshold for a highly compensated employee is $155,000. Small, infrequent gifts such as a coffee mug, a t-shirt or an occasional meal are generally not taxable.

Q: Can I give my employees a pre-set amount monthly car allowance tax-free?

A: No. The IRS will see that as income and that car allowance will be taxed the same as a wage is. However, you can reimburse employees monthly for mileage without tax consequences. As long as your business follows an accountable plan and can prove that your employees traveled the miles you reimbursed them for, you can deduct the payments and your employee will not be liable for taxes on those payments.

Q: Who qualifies for the QBI credit?

A: Thanks to the Tax Cuts and Jobs Act, sole proprietors and owners of pass-through entities, such as partnerships, S corporations and, generally, limited liability companies, may be able to claim tax deductions based on their qualified business income (QBI) and certain other income. This deduction can be up to 20% of your QBI, subject to limits that apply at higher income levels.

However, some tax planning strategies can increase or decrease your allowable QBI deduction for 2024. So if you’re eligible for this deduction, it’s important to consider the impact other year-end strategies will have on it before executing them. Also keep in mind that the QBI deduction is scheduled to expire at the end of 2025 unless Congress acts to extend it.