At J. Bradford Investment Management, we work with a number of small and medium sized businesses and inevitably the topic of minimizing tax liability comes up. Some businesses have the ability to impact taxes through their accounting policy and other firms discover great strategies through effective retirement plan design and compensation plan strategies. Consultants and CPAs are well-equipped to help businesses of all sizes build strategies that are right for them.
However, many businesses get to the end of their fiscal year and “the number is the number” and there just aren't that many strategies left to impact the tax bill. If your business falls into that category or if your business is still looking for and exploring tax credit strategies, one potential option to consider is a business tax credit to support a development initiative in your state or local community. These programs are often not well publicized and need to be researched at the state and local level.
For example, here in New Hampshire, we have a great tax credit program available through the New Hampshire Community Development Finance Authority, which according to the CDFA website “...brings together worthy nonprofit projects and conscientious businesses to foster community development. Put another way, it lets businesses vote with their dollars about which programs mean the most to them and their communities.”
Thinking a tax credit and fostering innovation sounds good? Here's the basics of how it works:
- Say a New Hampshire based business had a very successful year and owes the NH business profits tax, NH business enterprise tax, and/or the insurance premium tax.
- Let's say that business had taxable NH income of $125,000 that was subject to the 8.5% tax rate. That's a liability of $10,625.
- Let's say they are willing and able to make a donation of $10,000.
- They would then research the eligible non-profit recipients.
Let's further say that they found an organization that was just the kind of innovative, community based non-profit that they felt good about giving to and were excited about the project that the non-profit was undertaking. And maybe they feel even better that there might be opportunities for future collaboration or joint events. Perfect! They are ready to commit and give!
One awesome organization they may have chosen is one that I am on the Advisory Board of -- MakeIt Labs in Nashua. Their intention is to foster creativity and innovation in the area though memberships, partnerships and collaborations at their existing maker-space, as well as future expansion to host even more incubation and innovation space for entrepreneurs and small businesses.
Whether it is MakeIt Labs or any of the other deserving organizations, the state of NH has a very defined process for how the commitment and transfer of funds get processed.
To continue our example and the impressive benefits of this program, the business making the donation would get:
- A 75% credit for the donation
- Reduced income for the donation so federal and state taxes are lower
- The ability to use and carry-forward the credits over 5 years
- The net impact is usually that the credit is worth 89 cents to 90 cents of the donation
- And the business has played a direct role in steering tax dollars to a worthy project
- This calculator can help you estimate the exact impact for your business. Your accountant or CPA can help ensure you maximize the benefit for your particular situation. http://www.nhcdfa.org/tax-credits/tax-calculator?/tax-credits/tax-caculator
At the end of the day, the business making the donation gets a significant reduction in taxes and helps make a huge impact in their community in a way that's important and meaningful to that company and their employees. So if you are a NH business looking for a tax credit and the ability to help foster and encourage innovation, this credit is absolutely worth looking into.