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Tax Credits for Targeted Groups Can Help Some Businesses

Filed under Federal Taxes. Fact checked on February 10, 2014.

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Many tax businesses are designed to encourage businesses to take certain actions, or to reward certain types of investments. While not available for all business owners, they can be valuable tax saving options if you qualify.

Most tax credits are complex, highly targeted and aimed at large corporations who can afford the investment necessary to claim the credit. 

However, there are a few credits that might be worth exploring, even if you are a small business owners. Some of the more likely candidates are discussed in this article. There are:

  • Credit for FICA taxes. If you have tipped employees and are required to pay FICA taxes on tips they report to you, this credit may save you tax dollars.
  • Empowerment Zone credit. If you are operating in a disadvantaged area and your employees live in the same area, then you should investigate whether you qualify for an empowerment zone credit.
  • Credits of Special Interest to Farmers. While not exclusively for farmers, these three credits are likely to be of the most interest to those involved in agriculture or forestry.
    • Renewable resources (wind & biomass) electricity production credit.
    • Gasoline tax credit for fuels used for special purposes.
    • Reforestation credit.
  • Rehabilitation credit. If you rehab very old, nonresidential real property, you may be able to claim a credit for a portion of your expenses.
  • Low-income housing credit. If you build or acquire property that's used for low-income housing, you may be eligible for a credit.

You May Be Eligible for Credit for FICA Tax on Tips

Employees who get $20 or more in tips in a single month must report their tips to their employers. If you have tipped employees, you have to pay Social Security and Medicare (FICA) taxes to the tune of 7.65 percent on tips that are reported to you, even though you don't have any control over the amounts. 

The purpose of the rule is to make sure that tipped employees are adequately covered by Social Security pension, disability, and survivors' benefits. However, the rule was seen to place a particularly heavy burden on the restaurant industry.

You are entitled to a tax credit for any FICA taxes you pay on the tips (even if your employee does not report them to you) provided that:

  • your provides food or beverages for customers to consume on or off the premises, and
  • your waiters, waitresses, or delivery personnel are customarily tipped by your patrons.

Calculating the Credit. The credit equals the employer's FICA obligation (7.65 percent) attributable to tips that exceed those tips treated as wages for purposes of the minimum wage requirements of the Fair Labor Standards Act (FLSA). The FICA tip credit is based on an old minimum wage rate of $5.15 per hour. As a result, even though the minimum wage has increased, the amount of the tip credit will not be reduced.

Exceptions. If you pay your employees below the minimum wage, with the expectation that tips will bring them up to the minimum, you can't claim the credit for FICA on the portion of the tips that is used to bring them up to the minimum wage.

Also, no double-dipping is allowed. If you claim this credit, you can't take a business expense deduction for the FICA taxes on which the credit is claimed. However, because tax credits are generally worth more than deductions, you're generally better off with the credit.

Claiming the credit. The FICA tax credit is claimed on Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, and is part of the general business credit. The total of all your general business credits can't reduce your current year's tax bill below the larger of (a) your tentative minimum tax or (b) 25 percent of the part of your regular tax bill that exceeds $25,000.

Rehabilitation and Low-Income Housing Credit Provide Tax Breaks for Specialty Housing

If you rehabilitation an extremely old or historic property, you can claim a tax credit for some of your expenses. Also, a credit is available to offset the cost of investing in low-income housing.

Rehabilitation Credit Seeks to Spur Investment

This tax credit is designed to encourage the rehabilitation of older real estate or certified historic buildings. It allows you to take a tax credit for the expenses you have for renovating, restoring, or rehabilitating (but not enlarging or adding new construction to) certain structures.

Rehabilitation Credit Percentage Varies Based on Structure

The percentage of expenses you can take as a credit is 10 percent for buildings originally placed in service before 1936, and 20 percent for buildings listed in the National Register of Historic Places. The credit is further limited to the tax paid on $25,000 and is phased out for taxpayers with adjusted gross incomes between $200,000 and $250,000. If a project involves both rehabilitation and enlargement, only the costs allocated toward rehabilitation are eligible for the credit.

If you claim this credit, you must reduce the depreciable tax basis of the property by the amount of the credit.

To be eligible for the credit the rehabilitation expenditures must be for nonresidential real property. An exception to this rule applies to certified historic structures, which may be used as residential rental property. The building must be "substantially rehabilitated;" that is, the expenses in some 24-month period must be more than the greater of $5,000 or your adjusted basis in the building. Also, unless the building is a certified historic structure, at least 75 percent of the external walls must be retained, with 50 percent or more kept in place as external walls, and at least 75 percent of the existing internal structural framework of the building must be retained in place.

Use Form 3468 to Claim the Credit

The rehabilitation credit is part of the investment tax credit, and can be recaptured (paid back to the IRS) if the qualifying property is sold or disposed of within five years of the time it's placed in service. The credit is claimed on Form 3468, Investment Tax Credit.

Low-income Housing Credit May Benefit a Few

A tax credit is available for low-income housing that's constructed, rehabilitated, or acquired after 1986. The credit amounts to 70 percent of the qualified basis of non-federally subsidized units, or 30 percent of the qualified basis of units financed with tax-exempt bonds or other federal subsidies, but it must be claimed over a period of 10 years. 

The property must continue to meet the "low-income" requirements for at least 15 years. If you purchase qualified property on which the credit is being claimed, before the 10 year period is up, you may be able to "step into the shoes" of the seller and claim the remainder of the credit.

The credit is claimed on Form 8586, Low-Income Housing Credit, and is part of the general business credit. The total of all your general business credits can't reduce your current year's tax bill below the larger of (a) your tentative minimum tax or (b) 25 percent of the part of your regular tax bill that exceeds $25,000.

If you're interested in investing in low-income housing to take advantage of the tax credit, you will definitely need the assistance of an attorney who is well-versed in this very complicated subject.

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