For a significant period of time, since 1873 in fact, the Supreme Court has held that the taxing power of the states is limited by the dormant commerce clause. State taxes on interstate activity must be “fairly apportioned,” meaning that if more than one state may legitimately tax the same income, each state may only tax its fair share. This flows from the Commerce Clause’s negative converse, i.e. its restriction prohibiting states from enacting legislation that overly burdens or discriminates against interstate commerce. In many cases dealing with the taxation of multi-state businesses, courts have enforced the requirement that state taxes be fairly apportioned.
The US government defines a small business as one with sales of $7 million to $25 million a year and up to 1,000 employees. There are more than a few tax breaks available for small businesses and many have been extended for 2016. Some notable tax extenders include I.R.C. § 179 and bonus depreciation as well as tax credits for research and development, work opportunity, and energy production.
*I.R.C. §179 & Bonus Depreciation
Two important tax breaks for small business have been extended: I.R.C. § 179 and bonus depreciation. I.R.C. § 179 allows businesses to deduct the full price of any qualifying equipment or software purchased or leased during the year. The tax-extension bill makes permanent the $500,000 maximum deduction for new and used equipment that was purchased or leased in 2015. Bonus depreciation, which was extended through 2017, allows business owners to depreciate 50 percent of the cost of new equipment purchased in 2015. The two tax incentives can be used together.
Under I.R.C. § 179, taxpayers may claim certain business expenses in the year in which they were incurred rather than depreciating the costs over several tax years. The limit of $500,000 is double the previous limit and large enough that the average small business owner can write off most, if not all, of their equipment purchases in the year of the transaction.
The 50 percent bonus depreciation provision also was extended. After the full $500,000 is taken, exhausting the claim, an additional 50 percent of the adjusted basis of certain depreciable business property purchased and placed in service during 2015 may be deducted.
*Research and Development Credit
Originally enacted to act as an economic stimulus. Internal Revenue Code (IRC) § 41 enables a taxpayer to claim a tax credit for qualified research expenses paid or incurred by the taxpayer during the taxable year in carrying on any trade or business. The availability of this tax credit is established by the definition of qualified research expenses under I.R.C. § 41 and the regulations under I.R.C. § 174. New York State income tax law also permits an New York tax credit for qualified research expenses. An investment tax credit equal to 9% of qualified investment in R&D buildings and tangible personal property (the credit is 7% for personal income taxpayers).
*Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers who hire veterans and individuals from other target groups with significant barriers to employment. There is no limit on the number of individuals an employer can hire to qualify to claim the tax credit, and there are only a few simple steps to follow to apply for the WOTC. After the required certification is secured, qualifying employers can claim the tax credit as a general business credit against their income tax.
*Energy Tax Credits: Investment Tax Credit & Production Tax Credit
The Federal Production Tax Credit (PTC) and Investment Tax Credit (ITC) are incentives for
development and deployment of renewable energy technologies. The Production Tax Credit (PTC) reduces the federal income taxes of qualified tax-paying owners of renewable energy projects. The Investment Tax Credit (ITC) reduces federal income taxes for qualified tax-paying owners based on capital investment in renewable energy projects. The ITC is earned when the equipment is placed into service.
In December of 2015, the House and Senate agreed by significant margins to grant extensions to the 30 percent investment tax credit (ITC) for solar energy and the 2.3-cent-per-kilowatt-hour production tax credit (PTC) for wind power. Other technologies—including geothermal, marine energy and small hydropower—received one-year extensions to their 30 percent ITC under the joint spending and tax measures passed. New York State also offers a tax credit for biofuel production.
In addition to the tax breaks mentioned above, there are an abundance of good old-fashioned deductions that can help lower a small business owner’s tax liability, including:
• Automobile expenses related to business;
• Membership fees in trade organizations, professional groups and chambers of commerce;
• Classes, seminars, and other training in a profession;
• Banking, credit card and ATM fees incurred in business;
• Business travel and meal costs;
• Professional journals, newspapers and books necessary to conduct business.
• Internet and other telecommunication, including cellphone, charges for business use. Only the amount used for business may be deducted;
• If a small business operates from home, expenses relating to that portion of the residence that is work space should be deducted;
• State and local sales taxes.
If you are a small business owner and have questions about any credits or deductions that may reduce your business tax liability, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
Taxpayers that itemize deductions on Schedule A, (and file Form 1040) can deduct the cost of state income taxes on their federal tax return. The ability to deduct the full cost of these taxes has its obvious advantages. Taxpayers may either claim such a deduction from state and local income taxes or state and local sales taxes, but not both. Basically, to be deductible, the tax must be imposed on a taxpayer and must have been paid during the particular tax year. Taxpayers that elect to deduct state and local general sales taxes, may use either their actual expenses or the optional sales tax tables.