Federal Tax Credits for Global Businesses Expanding in the United States
While taxes may not be the only variable considered by companies looking to do business in the United States, they often get a great deal of attention. Equally important are the tax credits and strategies that can help any business, foreign or domestic, reduce the impact of taxation on the bottom line.
Here are four federal income tax credits that are now available to qualified foreign companies hoping to establish or expand their presence in the U.S. market.
Research and development (R&D) tax credit
The R&D tax credit has been around since 1981. It is meant to offer incentives to companies in the United States to invest in the development of new or improved products, manufacturing processes, software, techniques, inventions, and formulas.
In 2015, the Protecting Americans Against Tax Hikes Act made the credit permanent and expanded its benefit to certain small businesses and startups. Thanks to tax reform, the value of the net R&D credit was enhanced when the corporate tax rate was reduced from 35 percent to 21 percent. If eligible, a company can generate approximately 4.5 percent to 6 percent in an annual federal income R&D tax credit based on qualifying expenditures.
New Markets Tax Credit (NMTC)
The purpose of the New Markets Tax Credit (NMTC) is to encourage investment in low-income community businesses, while also effectively reducing the borrowing or financing costs to the business. Typical projects include manufacturing and industrial facilities, community centers, commercial offices, retail, and mixed use (commercial and residential) properties.
NMTC investors provide capital to community development entities (CDEs) and, in exchange, are awarded credits to reduce their federal tax obligations. Investors can claim their allotted tax credits in as little as seven years — 5 percent of the investment for each of the first three years and 6 percent of the project for the remaining four years — for a total of 39 percent of the NMTC project.
In addition, projects benefitting low-income people in low-income communities (by definition about 40 percent of the census tracts in the country) may benefit from loan forgiveness programs.
Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit (WOTC) is a point-of-hire credit that can help employers offset the cost of new employees.
When a company hires people from targeted categories (for example, long-term unemployment recipients, qualified veterans, qualified ex-felons, and certain rural residents) and employs them for at least 120 hours in their first 12 months, it can reduce its federal tax liability by up to $9,600 per person, and offset its alternative minimum tax (AMT). Tax reform in 2017 extended this credit, allowing claims on qualified employees hired through December 31, 2019.
Energy efficient home tax credit
This credit is equal to $2,000 per unit for newly constructed or qualified owner-occupied or rental housing units that meet certain energy-savings standards. The tax credit is claimed by the unit owner in the year in which the unit is occupied. A dwelling unit can be a detached house, townhouse, or apartment. In an apartment building, the tax credit is received for each qualified apartment unit. Buildings cannot be more than three stories above grade. This tax provision expired as of December 31, 2017, but legislation was introduced in February 2019 to retroactively extend the credit through December 31, 2019.
How we can help
CLA’s federal tax strategies professionals can help international organizations of all sizes claim and support U.S. federal tax credits. Getting the most out of tax credits requires a deliberate approach. Many international investors either miss a credit opportunity or do not capture the full array of activities that may be eligible. It begins with a deep discussion on a wide range of tax savings opportunities and strategies.