Don’t Overlook These Tax Credits and Deductions

It’s no secret that the U.S.’s tax code is full of dark alleys and jumbled jargon containing provisions not highly advertised that can benefit small business.

Here are a few that may benefit your company:

Small Business Health Care Tax Credit

Last month, I reviewed my tax return one last time and was just about to electronically file it when I realized I hadn’t taken advantage of the Small Business Health Care Tax Credit. So I quickly completed Form 8941 and was happy to see a sizeable reduction to my tax liability. And here I am, a tax professional!

It made me think about how many deductions and credits are often overlooked. Apparently, this is the big one for 2010 filers. I recently read a report from the Treasury Inspector General for Tax Administration (TIGTA) that said many small business owners missed out on taking this tax credit. This legislation, which went into effect in March 2010, contained a credit for small business employers who pay at least one-half the cost of health insurance coverage for their employees. Known as the Small Business Health Care Tax Credit, it was designed to encourage small business employers to offer health- care insurance.

The volume of claims for the credit has been low despite IRS efforts to inform 4.4 million taxpayers who could potentially qualify for it. According to the IRS, as of mid-May 2011, just more than 228,000 taxpayers had claimed the credit for a total amount of more than $278 million. The IRS was expecting taxpayers would claim up to $2 billion of credit for tax year 2010! It plans to conduct focus groups to determine why the claim rate was so low. The Congressional Budget Office estimated the credit would cost $37 billion over 10 years.

Domestic Production Activities Deduction

Another deduction available to small business owners is the Domestic Production Activities Deduction, which can be claimed by business owners if their trade or business is involved in the following activities, have employees, and the work is performed in the U.S. (including Puerto Rico):

  1. creation of computer software, film making, sound recordings;
  2. construction of real property;
  3. engineering and architectural services;
  4. electricity, gas, or potable water production;
  5. manufacture, growth, extraction or production of qualifying production property.

For a complete listing of qualifying business activities and for more information, see Form 8903 and read the accompanying instructions to determine if your business qualifies and how much you can deduct. The formula is a bit complicated. The result goes on Line 35 of Form 1040. Check with your tax pro if you did not get this deduction and feel that you were entitled to it.

Work Opportunity Credit

This credit is available to employers who hire workers from a targeted group. Generally, you must request and be issued a certification for each employee from the state employment security agency

(SESA). The certification proves that the employee is a member of a targeted group. You must receive the certification by the day the individual begins work or complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, on or before the day you offer the individual a job.

Following is a list of qualified employees:

Hurricane Katrina employee

• Long-term family assistance recipient

• Qualified recipient of Temporary Assistance for Needy Families (TANF)

• Qualified veteran

• Qualified ex-felon

• Designated community resident

• Vocational rehabilitation referral

• Summer youth employee

• SNAP recipient

• SSI recipient

• Unemployed veteran, or

• Disconnected youth

Calculate and claim the credit on Form 5884.

If you qualified, but did not enjoy these tax benefits, I would encourage you to amend your income tax return to claim them. Uncle Sam deserves his due, but as small business owners, we need all the working capital we can keep in our pockets.

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook