Inflation is currently impacting many businesses, forcing them to quickly adapt to a changing economic climate. Whether grappling with the continuously rising costs of supplies or navigating the impact of rising interest rates, businesses have a slew of concerns about their bottom line. For most businesses, tax credits offer a way to combat the effects of inflation. Tax credits for small businesses are a great way to hedge against inflation because they lower tax liability, which frees up cash to help meet rising costs.
Though there are many types of tax credits, there are three in particular that businesses should consider this year: the Employee Retention Credit (ERC), the Fuel Tax Credit and the Research and Development (R&D) Credit.
Employee Retention Credit
The Employee Retention Credit began in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act as a way to make it easier to keep employees on the payroll during the pandemic. The ERC is a refundable tax credit offered to businesses for the period of wages paid between March 13, 2020, and September 30, 2021. To be eligible for this credit for 2021, a business needs to have 500 or fewer full-time employees. It also needs to have either been partly closed due to a government order or have suffered a revenue decline of 20% or more for any quarter. If eligible, a business can receive employee retention tax credits of up to $7,000 per employee per quarter.
The ERC was an immediate credit taken against quarterly payroll taxes. Businesses that did not take the ERC during 2020 and 2021 may find they were eligible under expanded rules and should speak with an accountant to determine whether the credit they may qualify for would be worth filing amended payroll tax returns for the affected quarters.
Fuel Tax Credit
The Federal Fuel Tax Credit is a program that lets some businesses reduce their taxable income dollar for dollar based on specific types of fuel costs. The Fuel Tax Credit encourages the production and use of fuel from renewable sources.
This credit is generally not available for personal use, as it is limited to business uses including off-highway business usage, agriculture and farming, and boats and buses.
Before pursuing this credit, it should be noted that this is one of the most often misused credits, and there is a $5,000 penalty as well as possible jail time for fraud related to the credit. If your business is interested in pursuing this credit, it is important to consult with an experienced accountant to help you navigate your potential eligibility.
Research and Development Tax Credit
Businesses may also want to consider the R&D tax credit, which rewards innovation. Businesses that increase their research expenses may be eligible for this credit. However, it should be noted that starting in 2022, this credit will look different from past years. After 2021, companies can no longer immediately expense R&D costs; instead, they will be required to charge R&D expenses to a capital account and then deduct them over a five-year period.
The good news is that the R&D Tax Credit may be taken retroactively if you determine that your company engaged in research activities in recent years that would qualify your business for the tax credit. Filing amended tax returns to recoup tax dollars paid in previous years is a good way to fight the effects of inflation today.
Tax Credits for Small Businesses to Offset Inflation
Ultimately, businesses are looking to offset inflation in any way they can. By working with an experienced accountant, businesses can determine their eligibility for these tax credits and help mitigate the impact of the current economic climate.
Contact your Landmark advisor for a discussion about these and other tax credits that may benefit your company.