Extra credit

Entrepreneur, March, 1999 by Joan Szabo

Searching for more tax savings? An ounce of credit can be worth a pound of deductions.

Getting credit when credit is due is always satisfying - especially if you're calculating your federal tax liability. While tallying up tax deductions trims your tax bill, earning tax credits saves you even more.

"A dollar's worth of tax credit reduces your tax bill by one dollar, but a dollar's worth of deductions [only] lowers your tax bill by whatever percent your tax bracket is. If you're in the 28 percent tax bracket, for example, a tax deduction saves you 28 cents," explains Susan Jacksack, a small-business analyst with CCH Inc., a Riverwoods, Illinois, provider of legal, tax and business information.

In light of this, entrepreneurs are advised to be on the lookout for tax credits they can use. "We are quite convinced that many business owners don't claim their share of tax credits," says Thomas P. Ochsenschlager, a partner in accounting firm Grant Thornton. That's because they don't think they qualify or they're put off by the complexity of claiming a specific credit.

Ochsenschlager cites the research and development (R&D) credit and the welfare-to-work credit as two that are often overlooked by business owners. "We find this to be the case when we get new clients who were previously with small, local accounting firms. [Accountants] don't seem to be very aggressive in trying to qualify their clients for credits," he maintains. That's unfortunate, because it means a loss of some valuable tax savings.

IT'S WORTH RESEARCHING

With the R&D credit, recently extended through June 30, 1999, by the Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999 (better known as the omnibus budget act), companies are allowed to take a 20 percent credit for research and development costs above a base amount of up to, 50 percent of their current research expenditures.

"A lot of companies don't know what activities qualify as research. Those who do may only know they get a deduction for it and aren't aware they may be eligible for a credit," Ochsenschlager says. In fact, the R&D credit may be available to business owners for a portion of the money they've spent on efforts to improve a product or deliver a service more efficiently.

AVAILABLE CREDIT

The welfare-to-work credit is a relatively new credit employers can take for wages paid to qualified, long-term family assistance recipients who began working for the company after December 31, 1997, and before May 1, 1999. The credit is figured on the first $20,000 of qualified wages paid to an employee during the first two years of employment. In the first year, the credit is 35 percent of the first $10,000 in qualified wages paid to a qualifying employee. In the second, the credit is 50 percent of the first $10,000 of wages, resulting in an $8,500 maximum total credit for each qualified employee for the two years.

Ochsenschlager says a fair number of companies never bother to find out whether individuals they hire have been on welfare. As a result, these companies lose partial credit for the wages paid to employees transitioning off welfare.

Similar to the welfare-to-work credit is the work-opportunity credit. While it doesn't provide as much tax savings as the welfare-to-work credit, it can still put a good number of dollars back in your pocket. There are several important dates to keep in mind here. If you have hired individuals from special targeted groups with high unemployment rates or other special employment needs, you'll receive a credit equal to 35 percent of the first $6,000 of wages paid to these employees if they were on your payroll before October 1, 1997.

The maximum credit for each individual is $2,100. Targeted groups include qualified veterans and high-risk youths.

If the employee began work at your company after September 30, 1997, and has worked for you for at least 400 hours, the credit would equal 40 percent of the employee's qualified first-year wages, according to the IRS. Unless extended by Congress, employees in this category hired after June 30 of this year don't qualify.

Also keep in mind that an employee may not be considered a member of a targeted group unless certified as such by your state employment security agency. You can satisfy this requirement by requesting certification from your state employment agency, stating the individual is a member of a targeted group. It's also possible to get the employee certified by completing Form 8850 and sending it to your state employment security agency no later than the twenty-first day after the individual begins work.

You must have the certification before claiming the credit. While the welfare-to work and work-opportunity credits are similar, you can only claim one.

Even though claiming a credit may require more work than claiming a standard business deduction, especially on the part of your accountant, it's worth the effort, says Jacksack. This is especially true if you've hired several individuals from targeted groups.