Recently on The Commercial Real Estate Show, I spoke with several experts about tax credits and other tax incentives to power your business. Whether you operate a business or you're in the real estate business, there are plenty of tax incentives to save you money.
I first spoke with David McMillan, President of McMillan & Associates. He is always full of great information for business owners and real estate professionals.
To start, there is a big difference between tax credits and tax deductions. A deduction just lowers the amount of money you're taxed on. A tax credit is an actual reduction dollar for dollar of what you owe to the government. Essentially, every dollar of a tax credit is another dollar back in your pocket.
There are three basic types of tax credits that business owners across the country should think about:
1. Negotiated tax credits can be federal or state tax credits tied to a geographical area being targeted for economic development. Whether your company is expanding or existing, certain incentives can be negotiated with the government because of your company’s expected revenue associated with an expansion or big project.
2. Business activity credits or earned tax credits: when your business hires somebody, adds jobs, does research and development (R&D), or training. These are a few examples of activities that can trigger a tax credit.
One of the strategies the government uses to encourage economic development is targeting specific areas to help improve those zones. They're called different things such as “enterprise zones” or “empowerment zones”. In Georgia, they are called “opportunity zones,” but no matter the nomenclature, essentially these zones are little pockets targeted for economic development.
A great Atlanta example is the fact that NCR is building their world headquarters in the middle of Georgia Tech’s campus that just happens to be in one of these zones. “And they'll probably get millions of dollars from moving to that little specific part”, said McMillan.
Where do you find these zones? McMillan said it may be a little hard, but the two places to start are first, your state's Department of Revenue websiteand secondly, the best place to look is your state's Economic Development Agency for a listing and summary of the types of incentives that are available for that state.
It’s also important to note that negotiated tax credits aren’t just for big businesses. Tax credits are in the law, so it applies to everybody if you meet the requirements of hiring, moving a business, or expanding a business in a certain location. In some cases, you only have to create as few as 2 new jobs. “So while NCR may be adding thousands of jobs, if you're a small business you can add 3 or 4 jobs and still qualify for some of these tax credits,” said McMillan.
There are additional federal tax credits that are possibly available in those zones and in other areas. Specifically, the work opportunity tax credit is a federal program that applies to every state and essentially provides businesses an incentive to hire certain types of people and get them back into the workforce. Also known as “for hiring credits,” one of the biggest categories of work opportunity tax credits is the hiring of veterans who have been unemployed, or people who are disabled or unemployed. That alone can trigger a big tax credit worth potentially several thousand dollars per person. Another credit is hiring someone who’s been on food stamps or other government assistance programs such as long term welfare. The government uses these programs to get people back in the workforce. McMillan says there's over 70 million people in the country today that could trigger this one tax credit.
Many states have piggyback tax credits. So, if you hire somebody who is on food stamps in South Carolina and they’re on South Carolina's welfare program, then you can get a state tax credit on top of a federal tax credit.
Also on the state level, many states provide incentives for people learning different types of new skills and training. For example, Georgia has a great incentive that's available for every type of business for learning software technology. But states like California and South Carolina and even New York have some incentives for certain types of businesses. Most states have a set of favorite industries such as manufacturers, warehouse and distribution, R&D, telecom, or even the tourism business. Those are usually the industries that these tax credits most often apply to. “Training and learning and having a better skilled workforce is usually at the top of the list for what states try to encourage,” said McMillan.
R&D is a huge opportunity for companies. Most often people applying for this tax credit are manufacturers or companies that create and develop software. It could be software that you develop on your own for your own internal use or a product that you sell externally. “I actually would say we see more companies getting tax credits for software development now because existing systems don’t fit their business so they're forced to develop it on their own,” he said.
McMillan took advantage of this tax code when he developed Taxploration to help companies identify tax credits and track it. “Most companies have gone digital. It makes sense to have some type of digital platform to track all these tax credits, keep up with the documentation and keep up with the forms that need to go with your tax return. And that's what our software does: allows people to do it all in one place.”
Negotiated tax credits encourage businesses to move and expand in their markets, so I asked which states are doing a good job of that. “States that are most ‘business friendly’ tend to have the most incentives and that's where you also see the most business growth”, said McMillan. “So I put Georgia at the top of the list.”
The Southeast does an incredible job of encouraging businesses to locate. In fact, Area Development Magazinejust ranked Georgia the Number One place to do business in the country for the third year in a row. Another state worth mentioning is Nevada. Elon Musk and Tesla have started working on a one-billion-dollar battery cell plant in Nevada citing tax incentives that Nevada was offering as the reason. McMillan also mentions the Midwest, Colorado and Oklahoma as places doing a great job of giving businesses a chance to grow.
Depending on the state, there are also tax credits for starting a pension plan or providing childcare to your employees. In some cases you can offset 75 percent of the cost of providing childcare.
There is also a healthcare tax credit for small businesses but it's not designed well, said McMillan. The more employees you have and the more money you pay your employees, the less tax credit you get. Unfortunately for larger companies with more than 25 employees there's not any incentive on that side to help you out but McMillan thinks we will see something change with that tax credit in 2017 or 2018.
How Do I Get In on This?
McMillan says that the first step is to identify what you're missing. This may mean doing some research on your own, talking to your CPA or engaging a third-party firm. Once you decide what's out there and what you're eligible for, then you can start a plan to capture these incentives.
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