The valuable tax credits that 94% of business owners don’t know about.

Are you a small business owner? Do you have employees and pay taxes every year? If you fit that broad description then you might be missing out on some tax credits that could potentially save you thousands of dollars every year. However, a recent survey of small business owners in California revealed that 94% of them were still not familiar with these legitimate tax programs, like the Research & Development Credits (R&D), the Work Opportunity Tax Credit (WOTC), and the California Competes credit and New Employment Credit (NEC) in California.

In fact, utilizing these legal and ethical write-offs and tax programs when eligible can make the difference between a healthy, consistently profitable business – or a money pit.

You’re probably thinking that you use a good CPA already. I’m sure they’re doing a fantastic job and you should keep using their services. But the fact is that this year’s tax codes span 74,608 pages – and that’s just the federal tax codes, which is 187 times longer than they were a century ago. In addition, there are new amendments, supplements and other changes ever year.

But the good news is that within that massive volume of tax codes lays some hidden gems that can save significant money for most business owners with employees.

According to Noah Carrazco of Innovative Tax Solutions in Sacramento, California, “Just about anyone with employees can see the benefits from these hiring incentives and credits, whether big or small. But for a large portion of our business owner clients, we’ve been able to generate a significant amount of tax credits, saving them money and really helping their bottom line.”

There are scores of business & individual tax credits and hiring incentives available like the Research & Development Credits (R&D), but today we’ll introduce you to one of the most prominent ones that help chiropractors, a Federal Hiring Credit called the Work Opportunity Tax Credit (WOTC).

(You can see the IRS page on the WOTC here.)

The WOTC was first enacted with the Small Business Job Protection Act of 1996 in an effort to promote hiring among certain target demographics. The WOTC is now administered directly by the Federal Internal Revenue Service (IRS) Department, which maintains several WOTC Centers throughout the U.S.

The benefit? The WOTC issues a tax credit that can be used to offset an entity’s (or individual’s) Federal income tax liability, offering a dollar for dollar reduction in your tax liability with up to $9,600 of qualified credits for each employee that meets the criteria. The WOTC can be carried forward for up to 20 years and carried back for 1 year.

Let me reiterate that fact: you can still file for the WOTC on a prior year return, so it’s possible that you haven’t missed the boat if you’ve already filed your 2015 taxes (we certainly hope you have!).

There are also plenty of tax incentive programs on the state level, like the California Competes Tax Credit (CCTC), a state tax incentive available to businesses that locate, expand or remain in California. If you’re business is creating jobs, you may qualify for a dollar-for-dollar reduction in your state tax liability, which can be carried forward up to five years.

Additionally, businesses should explore the New Employment Credit (NEC) in California, which generates a 35% employment credit on qualified wages over a 5-year period for certain employees from target demographics.

There are also similar tax savings programs and credits in each state. What does it all add up to for the 6% of business owners that are taking advantage of these existing credits?

“We see a significant reduction in tax liability for our clients,” adds Carrazco, who’s firm is one of the industry leaders in tax credits, working for a spectrum of clients from Fortune 500 companies to mom-and-pop small businesses. “I don’t know why more business owners don’t take advantage of these available credits.”

That leads to a great question: why don’t more people know about these tax credits and take advantage of them?

Of course, the IRS isn’t going to spend time and money publicizing these credits themselves, effectively taking revenue out of their own pockets. Additionally, with the complexity of just the basic tax codes, it’s nearly impossible for the average CPA or tax preparer to handle compliance (tax preparation) work AND specialize in niche tax credits, like the WOTC, R&D & many others. That would be like being a family physician and a neurosurgeon at the same time. In fact, many well-established and larger tax firms do offer tax credit work, but they often outsource it to firms like Innovative Tax Solutions, working in tandem as a team to leave no stone unturned when it comes to saving their clients money.

So to be very clear, we encourage you to KEEP your current CPA or tax preparer, but use a reputable firm (you want to be careful to avoid the tax credit “consultant” firms in the industry that only pick the lowest hanging fruit when it comes to these credits, but charge more) to piggyback on their compliance work, finding and utilizing these highly specialized credits.

A good firm will work on a contingency basis, which means you only pay IF and WHEN they find you tax credits that you’re eligible for. Basically, you only pay a percentage of the dollar amount you save or get back – a no-risk proposition. If you don’t save money, you pay nothing.

But just like with any financial advice, don’t take our word for it (we’re certainly not tax experts!). Instead, do your own research and ask plenty of questions. Feel free to broach this subject with your current CPA but remember that many of them aren’t up to date on the intricacies of the federal and state hiring incentives and credits – or may not even be aware of them at all.

Just remember your good friends at The Alfano Group Real Estate Agency when you keep more of your hard-earned money at tax time – and invest in real estate!

Are you overpaying on your taxes? Try these 10 most underutilized income tax deductions.

Every year come April 15 (or the 16^th) Americans owe approximately $1.4 trillion in income taxes to the IRS. While that’s a lot of coin, did you know that the average U.S. citizen only plays an actual income tax rate of 10.1 percent? That’s the revelation of a study by the U.S. Congress’s Joint Committee on Taxation. If that number seems a little low compared to our higher standard tax brackets, it should highlight the fact that a lot of people are utilizing write-offs, deductions, and other tax shelter strategies to reduce their personal tax liability.

So if you’re paying higher than 10.1 percent or just want to see if you can save money, where should you get started? After all, the IRS tax codes for personal income span almost 12,000 pages over six volumes, which would take a lifetime for a regular person to read and decipher. And with codes, laws, and rules changing every year, the business of reducing tax liability is best left to the experts. But what we can encourage is for we - the hard working and tax-paying people - to take advantage of every legal and ethical deduction available. Here are the 10 most commonly overlooked personal income tax deductions (and of course, consult your CPA or tax professional for specifics).

1. Charitable Donations

Did you clean out your closet, garage, or attic and donate things to your local Goodwill or shelter this year? Or do you regularly tithe or donate at your church, mosque, or temple? If so, you are entitled to take a deduction for charitable contributions – but only to qualified organizations (not individuals) and for monetary gifts up to $250. You can even deduct the fair market value of any property or goods you donate!

2. Mileage Deductions

You may know by now that people who are self-employed can deduct a certain percentage of their mileage to and from work, but in fact, the IRS also allows mileage deductions for medical purposes, moving, and when doing service for a charity. If you drive a lot for any of these purposes, the savings could add up!

3. Energy Efficiency Tax Credits

If you invested in energy efficient products or home upgrades, there are a handful of great tax credits available for some. These include the Residential Energy Property Credit for a credit on energy-efficient doors, windows, insulation, roofing, heating and cooling systems, the Residential Energy Efficient Property Credit, Plug-in Electric Vehicle Credit, Credit for Conversion Kits, and the Treatment of Alternative Motor Vehicle Credit as a Personal Credit Allowed Against AMT.

4. New Vehicles Sales Tax Deduction

If you bought a new car this year, you may be entitled to a special tax deduction for the sales or excise taxes on that transaction. In the past, the deduction was for vehicle purchase prices up to $49,500, and even included some other fees or taxes imposed by the state or locality in certain cases. The rules on this deduction change frequently, so ask your tax pro!

5. State Tax Deduction

If you itemize your tax deductions on Schedule A of your tax forms, you can probably deduct either state and local income taxes or state and local general sales taxes. Even if you didn’t save your receipts (most of us don’t have receipts for every single purchase throughout the year!) you can opt to use a standard amount for your state.

6. Mortgage Deductions

If you paid “points” on your mortgage closing (charges paid to obtain a lower interest rate or pay closing costs or fees), these points can be deductible. These apply for a both a purchase loan and refinances, and are on top of the standard mortgage interest deduction homeowners enjoy.

7. Unemployment Deductions

Are you currently between jobs but actively looking for work? If that’s the case, you may be entitled to certain credits and deductions, such as the Earned Income Tax Credit, as well as deducting expenses related to your job search. These include employment agency fees, funds spent on resume preparation and post, and some travel expenses if the trip is taken primarily for a job search.

8. Tax Preparation Credit

Did you purchase software to file your own taxes (hopefully not!), or go to a Certified Public Accountant, Enrolled Agent, or other professional tax agency for tax preparation (much better)? Those fees may be fully deductible, even down to the convenience fees charged for the electronic payment of your taxes.

9. Parental Repayment of Student Loans

If parents are paying back their child’s student loan, the IRS considers this a gift to the child. So as long as the child is no longer claimed as a dependent, Mom or Dad can deduct up to $2,500 of student-loan interest they pay each year. That might make you rethink how you pay off your student loans!

10. Working Parents Credits

If you paid for the care of a qualifying individual (usually a child, but it could even be your spouse!) so you could either look for work or go to work, you can claim a credit for those expenses. Eligible costs include monies paid to a cook, maid, babysitter, housekeeper, or cleaning person, dependent care centers, elective pre-schools, before and after school programs, and day camps.

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We hope that learning about these most underutilized tax credits will help you at least ask more questions when you’re in your professional tax preparer’s office, and hopefully save some money!

A history of taxes in the United States, part 2: Post World War I and later

As we inch closer to April 15, we can’t help but have taxes on the mind. While some are looking forward to a refund check, many others lament the day they have to turn over their hard earned money to the government. But we all have to pay taxes, even if we don’t think our system is particularly fair. But was our tax system always like this? In part one of this blog, we looked at a timeline of taxes in the early history of the United States. Today we’ll outline the modern history of taxation, starting with the end of World War I. Maybe after reading this you’ll have a new perspective and appreciation for the amount you have to pay!

Post World War I

Right after World War I, the U.S. economy experienced a huge surge, and the government saw record levels of tax revenue come into its coffers. In 1918, the last year of the war, government tax receipts reached $3.6 billion. But by 1920, those receipts reached $6.6 billion, despite the fact that taxes rates had been lowered after the war.

Sales Tax

Sales taxes were first introduced in the United States, starting with West Virginia in 1921. By 1933, 11 more states added sales tax, and 18 more by 1940. As of 2010, Alaska, Delaware, Montana, New Hampshire and Oregon were the only states without sales tax.

The Great Depression

The salad days of a booming economy were ended with the historic stock market crash of 1929. In the ensuing months and years, government tax receipts fell accordingly, to a paltry $1.9 billion by 1932.

That same year, President Herbert Hoover signed the Revenue Act to try and lift the country from the brink of collapse, and generating more tax revenue was a big part of that. Between Hoover and President Franklin Roosevelt’s New Deal, taxes were increased across the board to make up for a heavy deficit to fund government programs. In 1936 the top tax rate was 76%!

Social Security

In 1935, President Franklin Roosevelt signed the Social Security Act, which set up the system of social security, among other things. Social security taxes were first collected in January of 1937, and the first benefits were paid out in 1940.

World War II

By 1940 the U.S. was preparing war once again and supporting its allies, and taxes were ramped up accordingly. Income tax rates were 23% for citizens who made $500 or more, and those rates climbed all the way up to 94% for the richest Americans. By 1945, 43 million Americans paid taxes every year and the government collected $45 billion, up from only $9 billion in 1941.

Post War

After the war ended, the Revenue Act of 1945 scaled taxes back by $6 billion, but the government couldn’t bring them lower because of the big payouts into social security and other expanded programs.

The Pricey ‘50s

Even as the war ended and the country saw great prosperity, the withholding system of pay-as-you-go and high tax rates continued. The highest tax rates were still over 80% and a lot of wartime tax codes were never repealed.

Inflation in the 60’s and 70s

The U.S. saw incredible inflation during the decades of the 1960s and 70s, with the deficit growing as Medicare was added to the burdensome social security system. Even President Nixon was forced to pay more than $400,000 in back taxes!

Reaganomics takes on taxes

President Reagan brought the Economic Recovery Tax Act to life in 1981, lowering every individual tax bracket by 25% The Act also changed the method companies used for accounting for their taxes. By 1985, more than 400,000 Americans were millionaires because of the tax cuts under Reaganomics.

But President Reagan wasn’t done, signing the Tax Reform Act in 1986, which lowered the tax rate among the richest payers from 50% to 28%, which was the lowest it had been since 1916.

The Clinton Era

Democratic President Bill Clinton in office signaled the end of tax reductions during the 1980s. Starting in 1993 taxes generally were increased, and in 1997 the negative income tax was introduced, which awarded tax credits for some people.

Bushanomics?

A Republican in the executive office once again meant more tax cuts. Starting in 2001 with the Economic Growth and Tax Relief Reconciliation Act, Bush’s cuts reversed Clinton’s increases, except for continuing growth in tax credits. The new tax act was expected to save taxpayers $1.3 trillion over the next decade, making it one of the largest tax cuts since World War II.

How are we now?

By 2009, tax rates had risen significantly once again, with a top marginal rate of 35%. The Tax Foundation calculated that U.S. citizens had to work all the way through April 11 every year just to pay their taxes.  That day became known as Tax Freedom Day, conspicuously right before the IRS filing deadline, April 15.

A history of taxes in the United States, part 1.

We often complain about taxes, but we all agree they’re necessary. Most of us think someone else should be paying more in taxes, yet we all try to pay as little as possible. And Benjamin Franklin put it best when he said: “In this world, nothing can be said to be certain, except death and taxes.”

The current obligation to pay the IRS come April 15 (or on the 16^th) is all-too familiar, but questions remain: how did taxes start in the this country; have the tax codes always been the same; and are we paying more or less than most U.S. citizens in throughout our history? We’ll answer these questions and more with the history of taxation in the U.S.

Taxes and the Revolutionary War.

Of course it was unfair taxation without representation that led to the American Revolution in 1773 and the birth of the United States. To raise money, the newly forming government collected tariffs and duties on liquor, tobaccos, sugar, legal documents, and other goods and services.

Oldest U.S. tax.

As our new country formed, the leaders were very careful not to start imposing too many taxes for fear of mirroring the British system they just rebelled against. In fact, direct taxation was Constitutionally prevented. But they did institute an estate tax in 1797, but was repealed and reinstituted over the years as the young nation tried to raise funds for wartime.

Whiskey Rebellion.

In 1791, Alexander Hamilton proposed a tax on all alcohol. Needless to say this was massively unpopular, and lead to the Whiskey Rebellion in Pennsylvania.

First property tax.

With the war against France in 1790, the new U.S. government raised money by implementing the first property tax.

Early taxes.

From 1791 to 1802, the government limited taxation as much as possible. Of course that’s hard to do when you need to run a nation, so they imposed internal taxes on distilled spirits, carriages, refined sugar, tobacco, snuff, property sold at auctions, corporate bonds, and slaves.

War of 1812.

Previous methods of levying and collecting taxes through property to fund wars were inefficient, so to fund the War of 1812, the government looked for higher duties and excise taxes, instead. Those included taxing gold, silverware, jewelry, and watches, among other items and services.

The Civil War.

The internal war that ripped our country in half was also disastrous economically, basically a war of economic attrition. Both sides incurred massive amounts of debt and scrambled to raise funds for the war effort without seeing their currency become worthless through super inflation. Congress passed the Revenue Act of 1861, a tax levied against those who made more than $800 yearly income. That tax was not rescinded until 1872.

The Revenue Act also created the office of Commissioner of Internal Revenue and beloved Internal Revenue Service. They were given the right to assess, levy, and collect taxes, as well as enforce tax laws through property seizure and prosecution. This was the predecessor to our modern tax system, as it was based on the principles of graduated or progressive taxation and withholding income.

During the Civil War, if someone made $600 to $10,000 a year they paid taxes at a 3% rate. In 1866, the IRS collected $310 million, the most in its young history and a tax mark that wouldn’t be reached again until 1911.

Taxes were unconstitutional?

Interestingly enough, the Constitution still forbade any direct taxation of its citizens that wasn’t levied in proportion to each state’s population. But the Wilson-Gorman Tariff Act in 1894 did just that with a flat tax. The Supreme Court found it unconstitutional in 1895.

The 16^th Amendment.

In 1913, the 16^th Amendment removed the “proportional to state’s population” clause from the Constitution (or managed to override it). That allowed renewed tax initiatives like an income tax on people who made more than $3,000 a year, although this was less than 1% of the population.

In a fascinating twist, the term “lawful income” in the Amendment was changed to just “income” in 1916, because of course criminals weren’t off the hook from paying taxes. This opened the door for Al Capone and others organized crime figures to later be convicted on tax evasion charges.

World War I.

Among three Revenue Acts to pay for the Great War in Europe, a federal income tax was implemented in 1913. The income tax progressed as income rose: 1% up to $20,000 income, 2% from 20k-50k, 3% from 50k-75k, 4% from 75k-100k, 5% on 100k-250k, and 6% on 250k-500k, and 7% for those who made $500,000 or more.

There was no filing status yet, so everyone paid the same based on income, no matter if they were single, married filing jointly, heads of household, etc. At this time, 5% of Americans were paying taxes, which was the highest in their history. World War I’s Revenue Acts also introduced new estate taxes and taxation of excessive business profits, the first backlash against the robber baron corporations that were starting to form.