Little Known Tax Credit for Growing Businesses
The holidays are upon us. For a business owner this time of year is filled with reflection on how the year went, what worked, what didn’t, and how to do better next year. For those businesses that expanded last year or are planning to expand in 2016 there are certain incentives Kentucky currently offers to reward growing businesses. One credit in particular is often overlooked and underutilized. I will discuss the credit below and some of the pitfalls related to the credit with suggestions for how to avoid them.
Kentucky Small Business Tax Credit
The Kentucky Small Business Tax Credit (“KSBTC”) was first enacted in 2009 and was later simplified, in July of 2014, to help stimulate the use of the credit. Certain businesses are eligible for a non-refundable state income tax credit between $3,500 and $25,000. Eligible small businesses include sole proprietors, partnerships, limited partnerships, corporations, limited liability companies, joint ventures, associates, or cooperatives that have fifty or fewer full time employees. The amount of the KSBTC is the lesser of $3,500 per eligible position or the total dollar amount invested in qualifying equipment or technology, with a maximum tax credit of $25,000 per applicant for each calendar year.
A business may apply for the credit once one eligible position has been created and filled for twelve consecutive months, and the business has spent at least $5,000 in qualifying equipment or technology purchases within six months prior to or after filling an eligible position. The application must be submitted within 24 months of the fulfillment of the first requirement. Additionally, Kentucky has an annual statutory limit of $3,000,000 with the credit being given on a first come first serve basis.
A dentist decides to hire a new dental hygienist and add $8,000 in equipment to accommodate his growing practice. Assuming the hygienist position meets the requirements of an eligible position and the equipment meets the applicable requirements the dentist would receive a credit of $3,500.
If the dentist instead hired a receptionist and a hygienist which both met the eligible position requirements and spent the $8,000 on equipment the credit would double to $7,000.
To be considered an eligible position for the KSBTC a business must hire a new employee subject to Kentucky income tax and the new employee must work an average of 35 hours per week. Additionally, the new employee must make 150% of the federal minimum wage, which currently equates to $10.88 per hour. Finally, the eligible position must increase the base employment of the small business. Base employment is a detailed calculation that considers the number of full-time employees a company has the day before hiring for an eligible position. The idea is that the company’s number of full-time employees twelve months from the hiring of an eligible position should be higher than the base employment. If the employee hired into the eligible position ceases to work for the company then the company has 45 days to refill the position to maintain eligibility.
Qualifying Equipment or Technology
For investments in business property to be considered qualifying equipment or technology they must be tangible property purchased for use in the business with a minimum cost of $300 per unit excluding non-allowable cost such as shipping. The property must have a useful life of more than one year and be purchased in the previously mentioned timeframes. Examples of qualifying equipment or technology include computers, equipment, furniture, fixtures, furnishings, and vehicles. Some items specifically excluded are real property, buildings, and consumable supplies.
Through the years as a practitioner I have seen many wonderful tax savings opportunities for business owners to capitalize on, just like the KSBTC. In my experience these programs are unfortunately underutilized. The biggest challenge to claiming the KSBTC is the timeframe. You must coordinate the hiring of an eligible position with the purchase of enough qualified property. Once you have done that you must wait up to a year to submit the application. The other primary issue is that this credit encompasses multiple disciplines that are often performed by different people. You have payroll, accounting, and taxes all involved on some level to claim the credit. Many times your CPA doesn’t know if you have hired new employees and your payroll provider doesn’t know anything about tax credits. Bookkeepers generally want nothing to do with taxes due to the liability. Generally, the business owner assumes one of the professionals they work with will certainly alert them of the opportunity if they qualify. However, due to the discussed pitfalls above this doesn’t always happen. This leaves the business owner looking for someone to put it all together.
So how do you make sure you don’t miss out on this credit and get your application in as soon as possible? For the do-it-yourselfers out there the answer is simple… organization. When you hit the qualifying events put all the deadlines on your calendar. Get the information together for the application as soon as the hire has been made and property purchased. Then set your calendar appointment for submission of the application and wait. For the business owners that are so busy they will never remember the deadlines they need to seek professional help. For example, Sizemore Strategic Solutions offers a tax credit monitoring service included with our payroll service that alerts business owners to potential credit opportunities and helps ensure deadlines are met. Either way you go don’t leave money on the table.