The world of federal tax credits is an ever-evolving one that continues to keep tax professionals on their toes. Whether it is mid-December and CPAs across the country are eagerly awaiting the government to pass its latest tax extender bill, or it is mid-March and the IRS provides additional guidance on tax credit regulations passed months prior that changes the game, one thing remains constant — there is little leeway for delinquency in taxpayer compliance with federal tax credit programs.
Eligibility (and Ability)
Most general business tax credits for which a taxpayer is eligible must be claimed in the year in which the opportunity for the tax credit presents itself. When determining whether or not your business is eligible to claim a federal tax credit, evaluate the rules and regulations as they pertain to that specific credit to ensure not only that your business has met the requirements, but also that you will be able to fulfill the compliance requirements that come along with claiming that credit.
In addition to the years in which (and only in which) the credit is eligible to be claimed, it is also important to pay attention to the timeframe over which it may be used. For example, the Research and Development (R&D) credit is claimed in the year that the eligible research and experimental expenditures are incurred in the normal operation of the taxpayer’s business, and does not carryforward into future years. On the other hand, the federal New Markets Tax Credit (NMTC) terminates after a seven-year credit period, with a portion of the credit eligible to be claimed in each year on the anniversary date of the initial investment. Although the NMTC spans across seven years, the allocation of credits must be used within the first five years after which the credit is awarded.
Further comparing the two credits above gives us a good idea of the potential differences in complexity when it comes to claiming various federal tax credits. The R&D credit requires nothing more than filing Form 6765 (“Credit for Increasing Research Activities”) and sound documentation of the expenditures being claimed. On the other hand, the process of claiming the NMTC involves additional steps and consists of a very competitive application process. To claim the NMTC, an entity must meet a myriad of rules and regulations regarding the location and use of funds invested in a project. Further, the credit is obtained through a Community Development Entity (CDE) that has successfully applied to and received an allocation of NMTCs from the U.S. Department of Treasury’s Community Development Financial Institutions Fund (CDFI).
The types of tax credits a business can potentially claim are as varied as the compliance requirements and complexities that go along with them. It is important to consult your tax advisor prior to claiming any federal tax credit if you want to maximize your opportunities and remain compliant.
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