Tax liability is an ugly phrase, whether applied to your business or personal life. It means money you thought you had but apparently won't any more. The taxpaying corporation must send a check to Uncle Sam, state revenue officials, or a city or town instead of spending the money on something that could offer a return on investment.
But that doesn't have to be the case. Instead of planning on paying even more money out, why not turn that tax liability into a business strength? By investing the right way, you can get tax credits that can reduce your total liability. To put it differently, tax credits help turn a tax liability into an investment in the business.
The concept is particularly apt for a middle market business. Giant corporations can afford to pay fleets of accountants and lawyers to find every way to bend tax law to their advantages. A middle market company doesn't have the resources to pour into the problem.
Tax credits offer a different solution. Governments create tax credits to promote activities that they deem important to society and the overall economy. You may be able to selectively take advantage of credits that let you spend money that you otherwise would have, or wish you could have. Here are just a few of the current federal tax credits that help offset any tax liability.
- Alternative Motor Vehicle Credit.The Energy Policy Act of 2005 allowed people and companies to get a tax credit for buying specific types of alternative fuel vehicles. Hybrids or so-called lean-burn technology vehicles are no longer eligible. A qualified fuel cell vehicle, however, still is. The base credit available if you purchase before the end of 2014 is $4,000. Depending on the weight of the vehicle and comparisons to equivalent earlier gas-powered models, more may be available. A company might need a vehicle for operational use or might make it available to an executive for business use as part of compensation.
- Plug-In Electric Drive Vehicle Credit. This is a separate credit for electric passenger vehicles and light trucks that you plug in to a socket to charge. The base credit is $2,500 plus additional money, depending on the size of the battery. The top allowable credit is $7,500.
- R&D Tax Credit. Although it expired at the end of 2013, signs coming from Congress suggest a good chance that that it will be reinstated for 2014. So as you work to develop or improve products, manufacturing processes, software, and certain other categories, keep careful records because chances are you're looking at some good-sized deductions, although there are some who say that taking the credit can raise your chances of an audit.
- Work Opportunity Credit. Hire certain categories of workers, including some disabled persons, people who get SNAP (the new name for food stamps) benefits, certain veterans, and certain ex-felons, and you might be able to deduct upwards of 40 percent of first year full-time wages, and 50 percent the second year.
- Employer-Provided Childcare Facilities Credit. Provide childcare facilities at your company and you may be able to deduct up to $150,000 a year.
This isn't an exhaustive list for the federal government and it hasn't even touched on the many credits that might be available in states in which you operate. But with proper professional advice and some diligence, you might find your tax bill quickly shrinking, while investment in your company and its operations improves.
Erik Sherman is an NCMM contributor and author whose work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, Newsweek, the Financial Times, Chief Executive, Inc., and Fortune. He also blogs for CBS MoneyWatch. Sherman has extensive experience in corporate communications consulting and is the author or co-author of 10 books. Follow him on Twitter.