Most taxpayers are alright with paying their share of taxes on income that they have earned throughout the year. However, there are ways taxpayers can reduce their federal and state income tax liability. One of these ways is through tax credits. Some credits not only reduce the amount that an individual ends up owing on their personal tax returns, some are refundable to the taxpayer.

One of the credits that can reduce the amount a person owes on their federal tax liability is the Credit for Increasing Research Activities which is completed by filing Form 6765.  This credit is generally allowed for the expenses paid or incurred for qualified research. According to the Internal Revenue Service qualified research means "research for which expenses may be treated as section 174 expenses. This research must be undertaken for discovering information that is technological in nature and its application must be intended for use in developing a new or improved business component."

A taxpayer has two different methods to calculate the research and development credit, the regular calculation and the alternative simplified research credit. Regardless of the method that is chosen to calculate the credit, the taxpayer needs to keep detailed records of its qualified research expenditures that they are using on the form to claim the credit.

In order to calculate the credit using the regular calculation method the base amount needs to be calculated. Your base amount is a percentage of the average yearly gross receipts for the previous four tax years. The base percentage cannot exceed 16%.  This amount cannot be below 50% of the current year qualified research expenses.  Your credit is then calculated by taking the amount above, adding any amounts paid or incurred to energy consortia, plus payments to qualified organizations and multiplying it by 20%. 

The simplified method calculation is as follows. You add up all of your qualified research expenditures. Next, you take the total of your qualified research expenditures for the previous three years and divide that number by 6. You then subtract that from your current year research expenditures and multiply that by 14%. The taxpayer then needs to determine if they are taking the reduced credit or not. If they do they need to multiple their credit by 79%; that is what is the new credit is. If they choose not to take the reduced credit, then the current expenses need to be reduced by the credit amount.

This credit is then shown on a K-1 as a pass-through credit if reported by an S-Corporation or Partnership, and will reduce your tax liability if there is income from the source of the credit. However, if you are a start-up company and do not have any income, there is an election that can be made to take this credit and use it as a payroll tax credit, as long as you are a qualified small business.

There are several federal tax credits that can be refunded to a business or individual when the tax return is filed. One of these is the Credit for Federal Tax Paid on Fuels. If you are a manufacturer and use forklifts, the cost of liquefied petroleum gas multiplied by $.50 would be a refundable credit. If you are a manufacturer and use nontaxable undyed diesel fuel, the number of gallons used would be multiplied by $.243 to arrive at the refundable tax credit.

New York State also offers several tax credits that can help reduce state income tax liability. One of these credits is the Investment Tax Credit. The investment tax credit is a nonrefundable credit that is worth 4% of the cost of the qualified property (higher for R&D property) that is placed into service during the year. Qualified property for this credit is defined as tangible property, including buildings and structural components of the building that were acquired after 1968 (2005 for film production facilitates), is depreciable under IRC Sections 167 or 168, the useful life is four years or more, was acquired under IRC 179(d), is located in New York State and is principally used by the taxpayer in producing goods by the following: manufacturing, assembling, processing, refining, extracting, farming, agriculture, horticulture, floriculture, viticulture, or commercial fishing. The property can also be used in industrial waste treatment or air pollution control facilities, in research and development or in qualified film production facilities. 

If the Investment Tax Credit is taken, you may also be eligible for the Employment Incentive Credit.  If in the preceding two years the employment numbers increased to 101% but less than 102%, you receive an additional 1.5% credit of the investment tax credit base. If employment increased to 102% but less than 103% you receive an additional 2% credit of the investment tax credit base. If employment increases to 103% and greater you receive an additional 2.5% credit of the investment tax credit base.

Another credit that is available in New York State is the Manufacturer’s Real Property Tax Credit. This credit is allowed if you are subject to tax under Tax Law Article 9-A or 22, a qualified New York manufacturer that paid real property taxes on property in New York that is owned or leased by you, and used the property during the year for manufacturing, assembling, processing, refining, extracting, farming, agriculture, horticulture, floriculture, viticulture, or commercial fishing. The amount of the credit is 20% of the eligible real property taxes paid during the tax year.

The above credits are only a few credits available both at the federal and state level. Please contact your Dermody, Burke & Brown advisor for any additional information regarding these and other credits.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.