State Tax Credit Program Offers Relief for Small Businesses

Sponsored Feature

Kirk Hicks, a certified public accountant in Omaha, poses for a portrait, Wednesday, Oct. 20, 2021. (Scott Stewart/Daily Record)
By 
Kirk Hicks
For The Daily Record

In 2021, the Nebraska Legislature dramatically expanded both the benefits and the timeframe for a relatively low-profile but significant tax credit program for qualifying small businesses in Nebraska.

Most people are unaware of these changes, though, and the official website of the program does not mention the program’s benefits or detail this year’s enhancements.

There were three improvements made to the tax program:

• The maximum credit amounts are now as follows: $20,000 for an individual business (double the previous $10,000); $20,000 for an individual “key person” in a qualifying business (up from $10,000); and $40,000 for a married couple, each with their own qualifying business (up from $10,000).

• The term of the program has been extended dramatically. It had been set to expire Dec. 31, 2022, but it’s now extended through 2032.

• The related party rules previously in effect have been significantly reduced. They now only apply in the case of minor children. Previously, the strict rules had been applied to relatives up and down owners’ family trees. Now both people in a marriage can earn the individual limit, presuming they run different business, eliminating a prior “marriage penalty.”

For some, the elimination of that marriage penalty was the most significant change. For others, the doubling of the credit amount and the extension for another decade are pretty major improvements.

Since the Nebraska Advantage Microenterprise Tax Credit Act program is set to grant up to $2 million per year to qualified applicants, its expansion reflects a $20 million infusion of tax credits over the next 10 years.

Program Eligibility

Generally speaking, if you own a business located in Nebraska, have no more than 200 hours per week of paid wages and salaries — that’s five or fewer full-time employees — and agree to participate in the federal E-Verify program, you are probably eligible.

But in addition to that — and this is vitally important — you have to submit an application no later than Nov. 1, 2021, to be accepted into the program by the Nebraska Department of Revenue.

The department’s review can take place after Nov. 1, but if you do not submit your application by that deadline, you are simply out of luck to receive credits for qualified growth in the 2021 program.

Earning Credits

Qualifying businesses earn tax credits by growing in one of two ways: (1) investment and (2) compensation in a two-year timeframe. Business owners could be earning them right now, every day!

Investment growth includes:

• Money spent on depreciable property, even buildings and virtually all business assets excepting licensed motor vehicles.

• Repairs to said property.

• Increasing lease obligations for leases that acquire the use of a business area such as an office, warehouse, retail or similar space.

• Advertising costs.

• Professional fees.

Compensation growth is W-2 wages plus employee payments for health insurance premiums. It does not include the amounts paid in excess of 150% of Nebraska’s average wage. In 2022, the wage limit is set at $77,168 per year or $1,484 per week. In 2021, the wage limit was set at $71,760 per year or $1,380 per week.

So, what is the calculation used to determine how much money you receive in tax credits? The credits you receive are a function of the growth you have in a given year, as compared to a base period.

The credit amount is 20% of growth.

The growth in spending in each of the two categories, 1) investments and 2) compensation, are each multiplied by 20% to find the total credit amount you can receive.

Ideal Businesses

New businesses are a virtual “slam dunk” to earn the $20,000 maximum credit, as any spending done by the business in its first two years are much larger than the $0 amounts spent prior to opening.

For other qualifying businesses, some activities that might well result in earning credits include:

• Signing a lease for space (office, retail, warehouse, etc. all count) for the business.

• Buying assets to use in your business (except motor vehicles).

• Building a website for your business or building a storefront.

• Payroll paid to you or your employees to work in the business.

Important Details

The Nebraska Advantage Microenterprise Tax Credit Act has a couple provisions to be aware of.

First, there is a critical difference in how the program treats businesses that are S corporations compared to sole proprietorships and partnerships.

The program rewards growth in wages paid; plain and simple. That sounds easy enough. But then understand that a sole proprietorship, at the end of the year, hopefully has a net profit, as does a partnership or a single-member limited liability company that decided to be disregarded for tax purposes.

These profits are taxed fully for self-employment tax purposes, as would the case be if the same business was an S corporation and all the profits were paid out as wages.

But the wages paid by an S corporation to its owners count for this tax credit, whereas the self-employment earnings for the other sort of business entities do not count for the program.

That means if you are operating your business as a sole proprietorship or other business entity type noted above, and your profits are increasing year after year, you could be received these tax credits at a rate of 20% of your increased profits — if you were an S corporation. Compared to earning none of those tax credits, simply deciding to be an S corporation could help you earn up to the $20,000 maximum tax credit.

Second, in the case where a lease is signed, the value on which the credits are calculated is not that year’s lease payment amount. It’s instead the increase in rent per month times the number of months of the new lease, for a lease term of up to 10 years. So even if you were a first-time renter in your new space for only a few months, but you signed a 60 month lease, you can receive credits on the full 60 months of rent.

How Do I Sign Up?

If you’re interested in receiving these credits for your business, give me a call and I can analyze your business, determine your eligibility and estimate the amount of tax credits you may be able to earn.

Then I can help you with the paperwork and virtually all other aspects of qualifying to participate in the program.

All you need to do from there is grow your business — something you’re already working on!

 

Contact Kirk Hicks, CPA PC, by phone at 402-598-0840 or by email to kirk@kirkhickscpa.com. Find more information on the tax credits at kirkhickscpa.com.

This feature in The Daily Record is a paid promotion and was not produced by the newspaper’s staff.

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