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Make Your Business Less Taxing

Posted by Inc. Apr 3, 2014

Tax law is fundamentally nondiscriminatory, and the federal government does not offer many direct tax breaks to women- and minority-owned businesses, says Mike D’Avolio, a senior tax analyst at Intuit’s professional tax group who is both a CPA and an attorney. “However, the tax code offers many incentives to all business owners, such as enhanced depreciation deductions, the credit for small employer health insurance premiums, and the credit for research and development expenses.” A comprehensive listing and discussion of allowable business expenses and deductions can be found in IRS Publication 535.


One of the few areas where federal tax code does provide direct tax breaks for diverse-owned businesses is incentives for businesses on Indian reservations, including accelerated depreciation and the Indian employment credit. For property used in the active conduct of a trade or business within an Indian reservation, the tax code provides for shorter depreciable lives and, consequently, larger depreciation deductions. “For example, five-year property can be depreciated over a three-year period, and 10-year property can be depreciated over a six-year period,” D’Avolio explains. The federal tax code also includes an Indian employment credit that applies to businesses that hire individuals who live on or near an Indian reservation. In general, the credit is equal to 20 percent of current wages and employee health insurance costs, up to a limit of $20,000.


Many states offer direct or indirect tax breaks and incentives to minority- and women-owned businesses, says Judith H. McQuown, author of Inc. Yourself: How to Profit by Setting up Your Own Corporation (Career Press Inc.; 10th edition May 2004), which is coming out in its 11th edition in 2014. “In New York State, for example, START-UP NY offers 10 tax-free zones to new businesses.” While the program is not exclusive to diverse-owned businesses, the generous tax breaks it provides are particularly appealing to them. They include:

  • A state tax credit that would eliminate any state tax liability for businesses with 100 percent of their assets and payroll in a tax-free area.
  • Exemption from the state organization tax, license fee, and annual maintenance fee.
  • Credit or refund for sales and taxes paid for goods and services used or consumed by the business’ operation in a tax-free area.
  • Exemption from the real estate transfer tax for leases or real property to approved businesses in tax-free areas.


Many other states offer programs that provide significant tax breaks and/or incentives to diverse-owned businesses. “The best way to find out about these programs is to contact your state’s Small Business Administration (SBA) office or Department of Economic Development,” McQuown advises.


Whenever tax incentives are offered to diverse-owned (or any other) businesses, they are typically accessed by claiming them in the company’s tax return, with no need for additional filings, says Jonathan Barsade, founder and CEO of Extractor, Inc., a developer of end-to-end solutions for secure tax sales recordkeeping and compliance, based in Wynnewood, Pennsylvania. However, successfully claiming them requires diligent recordkeeping and close attention to detail. “The most common reason businesses are denied tax breaks, such as exemptions, is because of the absence of proper supporting documentation,” he says. “Exempt transactions are red flags for auditors. The absence of sufficient support is enough to deny the tax break and place the seller on the hook for taxes owed as well as fines and penalties.”


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The federal government sponsors a number of programs designed to help minority-owned enterprises succeed in their business, and one of the most extensive is the Small Business Administration’s 8(a) Business Development Program. The program offers a broad scope of assistance to firms that are owned and controlled at least 51 percent by socially and economically disadvantaged individuals, and its stated goal is to provide such businesses with “access to the economic mainstream of American society” by helping them gain a foothold in government contracting. It is a nine-year program, with participation divided into a four-year developmental stage and a five-year transition stage.


The main benefit of the program is that 8(a) certified businesses gain exclusive access to sole-source contracts of up to $4 million for goods and $6.5 million for manufacturing per contract, says Jean Kristensen, president and CEO of Jean Kristensen Associates, LLC, a New York-based consulting firm that provides tools and resources to small, minority, and women-owned firms seeking to increase revenues through government contracting, certification, and innovative business strategies. “As an 8(a) graduate, I can attest to the fact that certain sole-source contracts provided my firm with the ability to gain experience with government contracting, human capital management, and regulatory compliance that increased our ability to bid for competitive contracts in my industry,” she says. “Many government agencies do require that firms have strong past performance and experience in working with government agencies as a precondition to winning government contracts, and the 8(a) program allowed us to get that experience.”


Exclusive access to those sole-source contracts is surely one of the most important advantages of 8(a) certification, but there are others as well, says Rick Otero, president and CEO of Tampa, Florida-based Cloveer, Inc., which has helped more than 1,500 businesses navigate the 8(a) application process. Among them are:

  • Limiting your potential competition. Larger firms that might otherwise compete for the same contracts do not have access to them, and there are fewer than 10,000 8(a)-certified business concerns in the entire country.
  • Making you more attractive to larger federal government prime contractors. Since businesses not considered “small” by the SBA definition for this program do not have access to 8(a) contracts, certification makes your company more attractive for teaming, joint ventures, or mentor/protégé relationships.
  • Making it easier for federal agencies to purchase your products or services because 8(a) set-aside contracts require less time, paperwork, and bureaucracy than other types of federal contracts.
  • Faster start times, because 8(a) contracts take less time to be awarded than most other procurement methods.


Applicants to the 8(a) Business Development program undergo a rigorous screening process designed to ensure that only the most qualified firms receive certification, Kristensen says. The general eligibility requirements are:

  • The business must be majority owned by an individual or individuals, and they must be American citizens by birth or naturalization.
  • The business must be majority owned and controlled/managed by socially and economically disadvantaged individual(s), and they must meet the SBA requirements for both social and economic disadvantage. Social disadvantage eligibility is presumed for members of certain groups, including African Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, and Subcontinent Asian Americans. Applicants are presumed to be economically disadvantaged if they can provide documentation proving their assets, income, and net worth fall below these threshold levels: $4 million, $250,000 averaged over three years, and less than $250,000, respectively.
  • The business must be a “small” business by SBA 8(a) standards, a designation that is subject to a range of variables.
  • The business must demonstrate potential for success.
  • The principals must show good character.


Obtaining 8(a) certification requires a high level of involvement on the part of the applicant and the willingness to commit to a nine-year process, during which time all eligibility requirements have to be maintained. The SBA recommends that potential applicants start by taking an online training and self-evaluation course. If you do not meet the key eligibility criteria in the self-assessment test, you will be directed to other SBA resources deemed most appropriate for your business at its present stage of development.


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Content created exclusively for Bank of America.



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