Most Businesses Are Leaving Tax Credits Unclaimed. Is Yours?

Most Businesses Are Leaving Tax Credits Unclaimed. Is Yours?

by Sharvil Sheth
March 15, 2024

Are you leaving easy money on the table? Probably — in the form of unclaimed tax credits that would reduce the amount you owe in taxes. That’s money that could increase your profitability and provide a competitive edge by funding additional technology, staff and strategic initiatives. Yet fewer than 30% of eligible small businesses claim the research and development (R&D) tax credit, for example, and it’s just one of many credits that business leaders often leave behind.

Having a whip-smart internal finance team doesn’t mean your business is immune to this problem. Your tax compliance people may be great, but they’re limited in number and likely stretched for time. Even companies that consult professional tax advisors don’t always reap all the tax savings they could.

Watch for These Commonly Overlooked Tax Credits

Whether your business endured a natural disaster or enjoyed smooth sailing all year, chances are good that you qualify for a tax credit (or several) you’re not claiming.

  • Your current activities might qualify for R&D tax credits. Business leaders often forfeit R&D savings, thinking the tax credit is only available for technology companies. These credits are for everyone, and a high percentage of businesses routinely spend money on activities that qualify under R&D rules. The resources staff devote to figuring out new or better products and processes count as R&D, whether it’s for a new recipe, a sturdier packaging technique or a more efficient approach to managing inventory.

  • Inflation Reduction Act tax credits make business investment more affordable. The Inflation Reduction Act of 2022 established new and expanded business tax credits for electric vehicles, clean commercial vehicles and electricity produced from renewable resources. You can update your equipment or fleet at a substantially lower cost while helping the environment, thanks to this legislation.

  • You can monetize more energy credits now. Another great feature of the Inflation Reduction Act is the ability to transfer certain tax credits. Lots of small businesses generate credits for things like clean electricity investment, renewable electricity production, advanced manufacturing production and electric vehicle recharging facilities. Many existing credits have traditionally been nonrefundable and nontransferable, but now you can transfer them and new ones, too. Being able to monetize nonrefundable tax credits opens new revenue streams for companies with losses or limited tax liability.

  • A bigger payroll offset cap helps small businesses use R&D tax credits. The Inflation Reduction Act also doubled the amount of R&D tax credits a qualified small business can apply to payroll tax, raising the limit from $250,000 to $500,000. The higher cap means that even if your company has minimal income tax liability (or none at all), you can still reap the benefits of R&D credits you qualify to claim.

  • CHIPS Act tax credits apply broadly. This 2022 legislation doesn’t just offer benefits for large manufacturers of semiconductors and other high-tech products. Many aspects of the bill apply broadly, extending to small businesses that serve as suppliers or contractors for larger companies. Eligible businesses can register and then transfer these tax credits, too.

  • Meeting your staffing needs may qualify you for employer tax credits. Businesses can earn federal employer tax credits for hiring workers from specified demographic pools or creating businesses or jobs in defined geographic areas. Even meeting responsibilities like providing childcare, retirement plans, health insurance and family and medical leave for employees can earn you employer tax credits.

  • Don’t forget state and local tax credits. It’s not just the feds that extend tax breaks to eligible businesses. California offers a long list of business tax credits, and so do other large states. Smaller states may not provide as many tax credits, but all offer some for qualifying businesses. These state and local tax credits can significantly affect your bottom line. When you don’t claim a federal tax credit such as R&D, you’re also missing out on a similar credit at the state or local level.

Beware These Tax Credit Missteps

There are many reasons businesses miss tax credits. For one, claiming them always requires proper documentation, and for some credits, you’ll need to complete preliminary requirements. For example, before you can transfer tax credits under the Inflation Reduction Act, you must register the credits through the official IRS portal. Assuming that this kind of effort outweighs the potential reward is a common mistake.

Sometimes a tax credit’s name incorrectly suggests that it doesn’t apply to your company, industry or business activities. The CHIPS Act and the R&D tax credit are prime examples; they sound super-specific but really apply to many businesses. New Armanino tax clients are often surprised to learn they qualify to claim these valuable credits.

Familiar tax credits also can have little-known provisions that are easy to overlook. You may know there are employer credits, but you may not realize that you’re eligible to claim them based on the new hires you made last year. More obscure tax credits — such as production credits for manufacturers of eligible components used in solar or wind equipment — can fly under the radar because they never make it into the business news. So, you aren’t aware that they exist, much less that your company qualifies for them.

Other lucrative tax credits are so nuanced and intricate that just knowing about them isn’t enough. Claiming them may require complex analysis by specialists to capture relevant details, assess your eligibility and measure your potential tax savings. But jumping through hoops like an energy study to qualify you for a Section 179D credit or a state sales tax exemption can pay off in lasting benefits.

Drive Growth With a Proactive Tax Credit Strategy

As a business leader, you don’t have time to delve into the minutiae of the tax code. Relying on your company’s finance team isn’t a great option, either. Their first priority is regulatory compliance, and in most cases, that’s more than enough to keep them busy. Your staff can’t just drop everything to research tax credits.

The only folks who can dig deep enough to identify all your applicable credits are highly trained tax professionals — experts who live, eat and breathe tax so they can spot everything. But while many leaders view expert tax advice as a perk that’s only available (or affordable) for larger businesses, the savings you get from a strategic tax approach can be a game changer for smaller companies, too.

However, engaging a tax professional won’t automatically maximize your tax savings. You want a team that goes far beyond compliance to look at everything impacting your tax picture: your industry niche, location, staffing needs, operations, growth plans, stage in the business lifecycle and more.

Ask all the right questions

Proactive tax experts take it all in and bring you recommendations rather than relying on you to inquire about specific credits. They’ll ask lots of questions to uncover additional savings opportunities for your business — and they’ll help you understand what to ask, such as:

  • How can you document certain business activities to make them eligible for a tax credit?
  • Will a potential investment or business strategy affect your eligibility for tax credits?
  • Which additional tax credits align with your business growth plans?
  • How do your business tax credits impact your personal tax liability?
  • How do federal tax credits interact with the state and local credits in your location?
  • What special tax incentives might a state or local government provide?

Your tax pro helps you navigate the registration and transfer process so you can monetize unneeded tax credits. They’ll take the lead in getting tax authorities to offer you tax incentives for a potential expansion into a new area, too. Once an offer is on the table, they can evaluate the big picture based on your business goals and the tax climate in alternative locations. Sometimes very enticing tax incentives don’t outweigh the relative drawbacks of a particular region.

Help Your Tax Advisor Help You

Open lines of communication help your tax pro deliver the value you’re paying them to provide. That means collaborating year-round, not just at tax time. Staying in touch throughout the year also gives you time to complete required processes and establish documentation for all your tax credits. If you leave it until the last minute, you’re more likely to miss out on some credits and make errors. Correcting eligibility or documentation missteps can be a lengthy headache. It’s much easier to work with your tax expert and get it right the first time.

Spotty communication between business leaders and their advisors — and even within the business itself — means missed opportunities and money lost. A free flow of information between your finance, human resources, real estate, operations and other departments helps your tax advisor find more ways to save you money through tax credits.

You should run all kinds of business plans by your tax team to get their input before implementation. They’ll help you tailor your activities to qualify for tax credits you couldn’t otherwise claim and reap the maximum benefit.

Why not use your tax advisor’s expertise to your full advantage? After all, you’ve likely missed out on credits in the past. Once you’ve got access to excellent tax advice, use it to set yourself up for growth and long-term success.

Uncover Your Hidden Tax Credits

If you’re like most businesses, you’re probably missing meaningful savings from untapped tax credits. Want to stop leaving money on the table? Our proactive tax professionals are passionate about helping you get the maximum benefit from every tax opportunity. Contact our tax credit specialists today to explore how to boost your bottom line with tax credit savings.

Are You Missing Tax Credit Savings?

Armanino has the industry expertise, tax credit experience and track record of customer satisfaction to best advise your tax credit incentive strategy and compliance needs.

Contact us today for a free assessment.

Sharvil Sheth - Tax | Armanino