There are a few federal tax incentives that provide benefits to companies that make investments in their workforce and operations, but you need to be aware of these programs to take advantage of them. Following is an overview of some of the programs that may help provide relief for certain taxpayers.
Investments in People
- Work Opportunity Tax Credit (WOTC). There continues to be a tight labor market where companies focus much of their recruiting efforts on both attracting and retaining employees. As businesses attempt to increase their workforces, they may hire from more diverse pools of individuals who would qualify for a payroll tax credit. The WOTC is meant to incentivize workplace diversity and facilitate access to good jobs for workers from certain targeted groups that have consistently faced significant barriers to employment. The tax credit can range from $2,400 to $9,600 depending on a worker’s qualifications.
- Employee Retention Credit (ERC). Initially created by the CARES Act of March 2020, the federal government established the ERC to help businesses with the cost of keeping staff employed during the COVID-19 pandemic. While the ERC is no longer active and eligible wages for the credit cover the period between March 13, 2020 through September 30, 2021, taxpayers can still claim this by filing amended payroll tax returns and requesting refund claims. The savings can be significant, ranging from a $5,000 maximum credit per employee for wages earned between March 13, 2020 through December 31, 2020 to a $7,000 maximum credit per employee, per quarter for wages earned in Quarters 1 through 3 in 2021.
To qualify for the ERC, an employer must have experienced either:
- Full or partial suspension of operations due to a governmental order, OR
- reduction of gross receipts for a calendar quarter compared to the same calendar quarter in 2019. For 2020, the threshold is a 50 percent reduction in gross receipts and in 2021 the threshold is a greater than 20 percent reduction in gross receipts.
Investments in Capital and Operations
- 179D Deduction. This benefit allows a Federal tax deduction for energy efficient commercial building property placed into service. This was recently expanded as part of the Inflation Reduction Act (IRA). Eligible property is defined as depreciable property that reduces energy consumption by certain engineering standards and is installed as part of the interior lighting systems; heating, cooling, ventilation, and hot water systems; or the building envelope of a commercial building. Such building costs are typically depreciated over a 39 year period but will be entitled to a depreciation deduction of up to five dollars per square foot under 179D.Additionally, 179D can now be allocated by owners of government and tax-exempt buildings – who receive no benefit for the deduction – to the architects, engineers, and designers responsible for designing a building’s energy efficient systems.
- Qualified Commercial Clean Vehicles. This is a new business credit established by the IRA for qualified commercial clean vehicles acquired before January 1, 2033. The vehicle must be acquired for business purposes (not for resale) for use on public streets, roads, and highways, or be “mobile machinery.” The amount of the credit is the lesser of (1) 30 percent of the basis of a vehicle not powered by a gasoline or diesel internal combustion engine, or (2) the “incremental cost” of such vehicle over the cost of a comparable vehicle powered by a gasoline or diesel engine.
- Bonus Depreciation. As companies consider potential capital expansion during the next few years, it is important to include a reminder of the current federal bonus depreciation rules. This favorable depreciation method allows for a 100 percent immediate expensing of eligible capital fixed assets. However, the current 100 percent bonus deduction is allowable on qualified fixed assets through December 31, 2022 and will decrease to 80 percent in 2023. This benefit will continue to drop each subsequent year by another 20 percent until it sunsets in 2027.
These are a few examples of incentive opportunities that allow companies to receive tax benefits based on how they invest their capital. It is important for businesses to be mindful of them when reviewing their historical and future operations so they don’t leave any financial advantages on the table.
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