Taking All the Credit
The tax law is peppered with a variety of tax credits that you can use to reduce your federal income taxes dollar for dollar. Next year, a number of new federal credits join a bevy of existing credits. And state income tax rules provide tax breaks similar to federal credits in many cases.
Energy credits
Under the Energy Tax Incentives Act passed in August 2005, some businesses may benefit from new tax credits that start on January 1, 2006. These include credits for:
Fuel-efficient vehicles. If you buy a car for business or personal use, you may be eligible for new tax credits designed to encourage the use of fuel-efficient cars and trucks, including hybrids. The amount of the credit varies with the size of the vehicle and its fuel efficiency.
Note:There is also a new deduction of $1.80 per square foot for improvements to energy-efficient commercial buildings.
Retiree drug credit
If your company health plan offers drug coverage to retirees, you can offset the cost through a new tax credit. Starting January 1, 2006, employers can claim a credit of 28% of premium costs for this benefit for each retiree (called a drug subsidy). Currently, about two-thirds of employers that already offer retiree drug coverage to approximately 10 million retirees plan to continue this benefit.
Usually, this type of benefit is limited to large corporations, but small-business owners should explore this option, especially for departing co-owners. Of course, retirees will prefer employer drug coverage only if it is more favorable than coverage under new Medicare Part D. For details about this new program, continue to monitor www.medicare.gov (details at the Web site were skimpy at press time).
Overlooked credits
You may be entitled to a number of credits for taking certain actions.
Starting a retirement plan. If you do not yet have a qualified retirement plan, you can claim a tax credit of up to $500 per year for the first three years of a new plan. The credit covers administrative costs, including employee education programs. Catch: The plan must cover at least one employee who is not an owner or owner’s spouse.
Providing child-care assistance. Large corporations may set up on-site programs for staff, but small businesses can provide referral services and other childcare assistance. The credit is 10% of referral service costs.
Making your facilities more accessible. Federal law mandates that you make your office, store or other location accessible to the handicapped and elderly. But you can reap a tax credit (“disabled access credit”) for the expenses incurred in complying with the law. The credit is 50% of costs over $250, but now over $10,250 (for a top credit of $5,000).
State tax credits
Don’t overlook special credits offered on the state level to reduce your state and local income taxes. For example, in New York, there are several tax credits for businesses located in so-called Empire Zones (areas designated as economically disadvantaged) that create jobs and make capital investments. California offers some credits that mirror federal tax breaks (e.g., disabled access credit and work opportunity credit). Contact your state tax authority for details.
Copyright © 2005 by BWideas.com, Inc.
