Small businesses have a big disadvantage to larger businesses in terms of taking full advantage of the tax savings opportunities they could be taking. The following is a list of some major tax savings and incentives that can make a big difference to small businesses if they only knew about them or had access to them.
One of the biggest opportunities that is lost is cost segregation. Cost segregation is the strategy of depreciating parts of a property at different and faster time schedules than others. For example, HVAC equipment, electrical, plumbing, parking and others can be depreciated at much faster time schedules that just the building. The actual building is usually depreciated over a 39-year schedule. These other parts of the building can be depreciated faster, thus creating a substantial cash flow and tax savings for your business in earlier years of the business for the property. If you have either renovated or just purchased a property for your business, one can use cost segregation as a cost savings tax strategy. (For related reading, see: Starting A Small Business: Taxes.)
You might ask, why hasn't my CPA talked to me about this? I would say this:
- Your CPA knows about this cost savings tax strategy. However, they don't have the infrastructure in their practice to initiate this strategy for you nor are they specialists in this strategy. Small CPA firms simply don't have the manpower or resources to take time doing this time intensive and in-depth work even if they know it can benefit their client. Larger CPA firms will implement cost segregation but it comes at large CPA firm cost.
- Some CPA firms set limits on the value of the property to work this strategy on. I know a CPA that will only implement this with his clients if the property is $10 million or more as he feels that anything smaller doesn't make sense for the CPA firm because of the time it takes - therefore, a smaller business doesn't get to take advantage. The small business owner doesn't know what he doesn't know.
- CPAs that I've talked to are one or two people shops and simply don't have the manpower to do this type of in depth work it takes to help a client with this strategy. Small CPA firms like this just won't specialize in this when they need to do hundreds of tax returns every year to keep their business going.
- Other CPA firms simply don't play in this space and so they don't even bring it up. Don't get me wrong, I think CPAs are fine and smart people, but they can't do it all.
A small business commercial real estate owner can use this cost segregation strategy if they have purchased, constructed or renovated a property in the past 20 years. The strategy can be implemented if the purchase price is $500,000+ or if they paid $50,000 of property tax on the property.
The average cost segregation savings is about $75,000. This is real money back into your pocket. Your cash flow will love you for it. I'm sure you, as a business owner, can thing of some good uses for an additional $75,000. (For more, see: 5 Little Known Ways to Reduce Small Business Taxes.)
Property Tax Mitigation
Property tax mitigation is another big cost savings to a small business owner. Besides income taxes, the single largest recurring charge for commercial property owners are property taxes. In most states, owners are required to pay taxes on both their real estate as well as their personal income. These charges are often an immense expense and a constant hit to the bottom line. Many times, small business owners are being overcharged on property taxes. An industry specialist with extensive market experience in valuation, tax, and law should be brought in to review and analyze. Small business owners simply don't have time to track down a specialist to do this kind of work.
Energy EPACT Credit
The Energy Policy Act of 2005 allows companies to claim a tax deduction of up to $1.80 per square foot for improving energy efficiency of existing commercial buildings or designing high efficiency into new buildings.
Work Opportunity Tax Credit
Another tax incentive is the Work Opportunity Tax Credit, or WOTC. It is not one but several tax credits given to employers at a federal level for hiring qualified employees. Annually, employers claim over $1 billion in tax credits under this program. There is no limit to the number of individuals an employer can hire to qualify to claim the tax credit.
IC-DISC/Export Tax Credit
Enacted in 1984, this is the last remaining export tax incentive available to U.S. exporters and can reduce an exporter's federal tax rate on a portion of next export income by up to 20 percentage points.
R&D Tax Credit
The Research and Development Tax Credit was enacted in 1981 to encourage American investment in innovation. Manufacturers and other technical-based operations often qualify for lucrative tax credits based on qualified activities. The manufacturing Incentives benefit is a federal program designed for companies that perform manufacturing in the U.S. This program is listed under Section 41 or the IRC (Internal Revenue Code) and continues to be amended on an annual basis as the U.S. manufacturing landscape continues to evolve. This is an engineered-based program that focuses on a company’s operations and processes to determine their qualification for incentives. The Manufacturing incentives benefit provides an avenue to receive "tax money" back from prior years while also reducing current taxable income on a dollar-for-dollar basis.
You owe it to yourself and your business to take full advantage of these great and substantial tax incentives. (For more, see: 5 Tax Breaks Overlooked By Small Business Owners.)
Kestra IS and Kestra AS do not provide legal or tax advice. Any decisions whether to implement these ideas should be made by the client in consultation with professional financial, tax and legal counsel.