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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