Finance Your Nutraceutical Business with Tax Credits

September 17, 2008

Looking to grow your business in today’s uncertain economic climate? There are a number of opportunities to finance business growth.

Looking to grow your business in today’s uncertain economic climate? There are a number of opportunities to finance business growth.

The most common ways are borrowing and obtaining investment capital. Another way is to let the federal and state governments finance it for you. By effectively utilizing tax credits, the money you save can be utilized for business expansion, and-unlike the more traditional financing methods-there is no interest to pay and you don’t need to give up equity or profits. The only costs you will incur for this method of financing are the fees of a qualified professional to assist you in selecting and applying the appropriate credits for your business.

Many people think that the only way to effectively reduce their tax burden is to generate significant deductions against taxable income. Although appropriate deductions certainly help, the most a business will save from deductions is approximately 42% of each dollar of deduction. This is the effect of combining the top federal and state tax rates and allowing for deduction of the state tax against federal taxable income.

Often overlooked is the available 100% tax savings from utilizing tax credits. Many business owners are unaware of the tax credits available to their businesses and not all tax preparers are familiar with all available tax credits, including when and how to apply them. Although there are many types of business tax credits, most of them fall into two broad categories known as refundable and nonrefundable credits.

A refundable credit is one that does not require the existence of a tax liability to enable its use. In other words, with a refundable credit, if you don’t have a tax liability to offset, you will receive a check or checks from the federal, state, or both governments, depending on which credits apply.

A nonrefundable credit is one that can only be used to offset a tax liability. Most nonrefundable tax credits have carry-back and carry-forward provisions available if there is no liability available for offset in the year of the credit. As one can imagine, there are many more nonrefundable tax credits available than there are refundable credits.

Companies in the nutraceutical industry are prime candidates for tax credits. Supplement manufacturers spend considerable funds for research and development (R&D), thus they can take advantage of R&D credits offered by many states.

Additionally, many may have been entitled to utilize both state R&D credits and the federal R&D credit in prior years but failed to include them on their tax returns. In these cases, prior returns can be amended to include the credits, and if losses occurred in those years, the credits can be carried forward to offset future income tax liabilities. If there were profits in those years, the tax credits can be used to obtain refunds of the taxes paid. The carry-forward provisions differ from state to state, but the federal R&D credit can be carried forward for up to 20 years. Although the R&D credits would be available primarily to manufacturers and formula laboratories, there are other credits that can apply to distributors and retailers.

Here are a few of the many available tax credits.

Federal Credits

1. Investment credit: Unlike the old (expired) investment tax credit for purchases of equipment used in a trade or business, this credit consists of the sum of the rehabilitation credit, the energy credit, the qualified advanced coal project credit and the qualified gasification project credit. The amount of the credit ranges from 10–26% of qualified expenditures in these areas.

2. Work opportunity credit: Equals 40% of the qualified first-year wages paid to members of a targeted group, limited to $6000 per year ($12,000 for a qualified veteran) per individual.

3. Empowerment zone employment credit: Equals 20% of the first $15,000 of wages paid to each employee who resides in a designated empowerment zone and who performs substantially all employment services within the zone in the taxpayer’s trade or business.

4. Employer-provided child-care credit: Equals 25% of the qualified child-care expenses (provided by the employer), plus 10% of the qualified child-care resources and referral expenditures. The total credit allowed for a given tax year cannot exceed $150,000.

5. Research and development credit: The federal R&D credit (which was 20% of a defined incremental amount) expired on December 31, 2007. Currently, Congress is considering reinstatement of the credit. As mentioned above, even though the credit cannot presently be utilized for 2008, a company’s 2008 tax liability may be able to be offset by carrying forward credits earned but not utilized in prior years due to the occurrence of losses in those years.

State Credits

State tax credits vary from state to state. Some types of credits are available in multiple states, although their methods of calculation differ among the states that offer them. Here are several types of state credits, utilizing California’s method of calculation, for the purpose of illustration.

1. Research and development credit: Equals 24% of a defined portion of a taxpayer’s basic research payments, plus 15% of the excess of the taxpayer’s qualified research expenses for the taxable year over a fixed-base percentage of the taxpayer’s average annual gross receipts for the four preceding taxable years.

2. Enterprise zone (“EZ”) sales and use tax paid credit: Equals the sales or use taxes paid or incurred on up to $20 million of qualified property purchased and placed in service during the enterprise zones designation period. The total amount of both the EZ sales and use tax credit and the EZ hiring credit for the taxable year, including carryovers, may not exceed the amount of tax that would be imposed on an employer’s business income attributed to the EZ.

3. Enterprise zone (“EZ”) hiring credit: Equals 50% of qualified wages paid or incurred during the employee’s first year of employment, decreased by 10% per year over the next four years. Seasonal employees are considered continuously employed.

These are only a few of the many tax credits available to supplement industry companies considering business expansion. When considering financing needs and sources, don’t forget the benefits of properly utilized tax credits.

Gregory N. (Greg) Lippe, CPA, is managing partner of the CPA firm of Lippe, Hellie, Hoffer & Allison, LLP (Woodland Hills, CA). He is also treasurer of the Consultants Association for the Natural Products Industry (CANI; Clovis, CA). For more information, visit www.Cani-Consultants.org or call 818/449-5700.