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Post COVID Tax Credits: Continued Ways to Subsidize Your Business

By: Nancy Ortmeyer Kuhn

Now that the PPP loans/grants are a thing of the past and other incentives granted to businesses during the COVID shut-down have largely expired, it is important for businesses to re-examine the tax credits that are still available.  A few of the credits, some new and some renewed, are outlined below:

FICA Tip Credit

Restaurants and bars paying employees in part through tip income should check out the FICA Tip Credit available to them.  If the employer pays FICA taxes on the wages paid to its employees attributable to third-party tip income, the employer may be eligible for the Tip Credit.   The credit is only applicable to that portion of the wage that exceeds minimum wage, for these purposes capped at $5.15 per hour regardless of state or local law.   The credit is calculated by multiplying reported tips by 7.65%, and is reported on IRS Form 8846.

Research & Development Tax Credits

There are several different types of R&D credits, most requiring an election on IRS Form 6765 by eligible businesses. The primary credit was doubled by the Inflation Reduction Act from $250,000 to $500,000, and is refundable.   (IRC section 41)

The Qualified Small Business Payroll Tax Credit is for the purpose of encouraging small businesses to engage in research and development of new processes for their businesses.  The credit available to a small business for the increased research activities is generally equal to 20% of the excess of qualified research expenses (“QRE”) over a base amount.  The calculations and elections are made on Form 6765, which also explains qualification criteria.

A qualified small business (“QSB”) may elect to apply a portion of the research credit to offset payroll taxes.  This credit is designed to benefit eligible startups that have little or no income tax liability. The election must first be made on Form 6765, and then the credit is claimed on Form 8974 and filed with the QSB’s employment tax returns.  The credit is first applied to the social security tax, then Medicare tax, and then any amount remaining (sometimes up to $500,000) can be carried over to offset FICA tax liability in future years.

EV Clean Energy Credits for Businesses and Tax-Exempt Organizations

Up to $40,000 may be claimed as a qualified commercial clean vehicle credit, pursuant to IRC section 45W. A business or tax-exempt organization may qualify for this credit.  The maximum credit is $7,500 for qualified vehicles with gross vehicle weight ratings (GVWR) of under 14,000 pounds, and $40,000 for all other vehicles.  The vehicles must be approved as qualifying for the credit and generally sourced and assembled in the U.S.  The credit is the lesser of 15% of the adjusted basis in the vehicle (30% if the vehicle is not powered at all by gas or diesel) or the incremental cost of the vehicle.  A qualified plug-in electric vehicle yields the largest credit. The renewable energy credits are nonrefundable, and therefore cannot exceed a business’ tax liability.  However, tax-exempt organizations without tax liability now have the “direct pay” option –  if the organization has no tax liability, they can opt for “direct pay” and monetize the clean energy credit starting in 2023.  Essentially, the direct pay option allows a tax-exempt organization to convert a nonrefundable credit into a refundable credit.

Businesses which install electric charging stations are also eligible for the lower of $100,000 per elective charging station, or 30% of the cost of equipment and installation, starting in 2023.  Individuals installing home charging stations are eligible for the lower of 30% of the cost or $1,000.  More information regarding qualifiers for these credits is contained in IRS Form 8911, which is the form filed to claim the credit. Many states also offer incentives to invest in clean energy, which can be reviewed on each state’s website.

It is the responsibility of each taxpayer to determine whether any of the tax credits recently implemented or expanded by the Inflation Reduction Act are applicable to the taxpayer’s unique set of facts.  While the credits listed above are a small sample of available credits, a more complete list can be reviewed on the IRS Website, along with identification of the required IRS form(s) to be filed to claim the credit.   Best to contact your tax expert for a full review of available tax credits in this post-COVID world.