Taking credit: 2016 federal & California business tax credits update.

• Author: Langreck, John
• Position: Taxation issues

Recent developments in federal and California business tax credits offer opportunities to reduce or eliminate taxes, but many of these programs are poorly understood and underutilized. We will examine several of the credits available to business taxpayers.

Tax Credits 101

A tax credit is a dollar-for-dollar offset of tax liability and more valuable than a deduction that simply lowers taxable income. The business tax credits that are the focus of this article are nonrefundable credits. As a result, taxpayers do not receive an immediate benefit if the credits are not utilized in the current year. These credits are not refunded, but will be applied against tax liability in future periods.

In some cases, the credits do not expire, while others have a limited term. There also may be an opportunity to amend prior year returns to claim the credits and request refunds. Lastly, many states, including California, allow tax credits to be assigned to other members of a combined reporting group.

PATH

The Protecting Americans from Tax Hikes Act (PATH) of 2015 was signed into law in December 2015 and included several provisions that are beneficial to taxpayers beginning in 2016.

For example, the R&D tax credit was retroactively renewed and is now permanent. This credit rewards businesses that develop new or innovative products, as well as those making process improvements that are technological in nature. The credit had previously expired on 16 separate occasions, only to be retroactively renewed with a one-year lapse during 1995-96.

Another component of PATH is a provision to allow businesses (and business owners) to claim the R&D tax credit against AMT if annual gross receipts do not exceed $50 million. In addition, startup businesses with less than $5 million in gross receipts beginning in the 2016 tax year that also have no gross receipts for the prior five-year period can offset up to $250,000 of the employer portion of OASDI (Social Security tax).

The PATH Act also extended the Work Opportunity Tax Credit (WOTC) through Dec. 31, 2019.

The WOTC rewards employers hiring individuals from targeted groups that have traditionally faced barriers to employment and is administered by the California Employment Development Department.

The credit is available to both for-profit businesses and tax-exempt organizations.

PATH expanded the targeted groups to include long-term unemployment recipients hired on or after Jan. 1, 2016. Long-term unemployment (LTU)...