Manufacturers, like most businesses, are always looking for ways to minimize expenditures, yet many fail to realize they are leaving money on the table every year when they file their taxes. The following are just a few federal and state credits that Maryland manufacturers should know about:
Before we jump in, it’s important to note that tax credits and deductions are two different financial tools:
The R&D Tax Credit (or more formally known as the IRC Section 41 Research and Experimentation Tax Credit) is commonly missed by manufacturers for several reasons:
The R&D Tax Credit is a dollar-for-dollar reduction in tax liability that can be passed forward for up to 20 years. For Maryland manufacturers that qualify for the credit, there is also a credit against regular state tax for businesses that incur qualified research expenses within the state.
To be clear, the R&D Tax Credit involves more than research and includes things like: the development of new processes, and techniques, formulas and design of new projects. For example, if a manufacturer creates a new process to increase the efficiency and improve the manner in which something is manufactured, they may qualify for the credit.
The total amount of credits depends on the amount of eligible expenses incurred, with a limit of $4.5 million for all Maryland businesses that apply. To claim the credit, a manufacturer must attach Business Tax Credits Form 500CR to the Corporate Income Tax Return Form 500. For some tips from the IRS for how manufacturers can qualify for the R&D Credit, visit the IRS website.
In order to stimulate business in economically distressed communities throughout Maryland, manufacturers located in “enterprise zones” are eligible for income tax credits. There are currently 31 enterprise zones in Maryland (get the complete list of enterprise zones), with a highlighted focus in Baltimore City and Prince George’s County.
To qualify for the credit, manufacturers must be located in an eligible enterprise zone and employ “qualified” employees, meaning the employee must:
Maryland manufacturers located in an enterprise zone may claim credit of $1,000 per new worker. For economically disadvantaged employees, the credit increases to a total of $3,000 per worker for the first year. Business entities are allowed an enhanced tax credit for focus area employees of up to $1,500 or up to $4,500 for economically disadvantaged individuals. For more information on the enterprise zone tax credit, visit the Maryland Department of Commerce’s website.
This tax credit can be earned for the purchase of bio-heating oil equal to three cents per gallon and not to exceed $500. The bio-heating oil must be used for the purpose of space and water heating. To qualify, a business must apply to the Maryland Energy Administration and file a Form 500CR with their tax return. To learn more about the credit, visit the Maryland Energy Administration website.
Maryland businesses that provide commuter benefits in the form of transit passes, transportation to work, or reimbursements for carpooling expenses to in-state employees, are eligible for a tax credit up to 50 percent of the cost of the benefits limited to $100 per month per employee. To learn more about how to qualify for this credit, check out our quick guide on how to qualify for the Maryland Commuter Tax Credit.
Maryland businesses that provide long-term care insurance as part of an employee benefits package are eligible for a tax credit equal to 5 percent of the costs and is limited to the lesser of $5,000 or $100 for each employee covered under the plan. To claim the credit, the business must attach Business Tax Credits Form 500CR to the Corporate Income Tax Return Form 500. For more details on the credit, visit the Comptroller of Maryland website.
Maryland businesses that make a donation of money, goods or real estate property of at least $500 in value to the Neighborhood and Community Assistance Program are eligible for a tax credit equal to 50 percent of their donation limited to the lesser of $250,000 or the taxpayer’s liability for the year of donation, with any unused credit being allowed to be carried forward for five years.
Businesses must receive approval from the Department of Economic Competitiveness and Commerce prior to claiming the credit. To learn more, visit the Comptroller of Maryland website.
Owners of income-producing properties in Maryland have the opportunity to earn a state income tax credit for renovating historic buildings under the Maryland Heritage Structure Rehabilitation Tax Credit. To learn more about how to qualify, visit the Maryland Historical Trust website.
Under Maryland’s Small Commercial Tax Credit, small commercial rehabilitations, defined as projects that do not exceed $500,000 in expenses and are not used for more than 75 percent residential rental purpose, may receive a credit up to $50,000 in a 24-month period. The program is capped at $2 million worth of credits a year. To learn more about the credit, visit the Maryland Historical Trust website.
Under Maryland’s Competitive Commercial Tax Credit, larger, income-producing, “commercial” rehab projects are potentially eligible to earn a state income tax credit that is equal to 20 percent of eligible rehabilitation expenses. The program is capped at $5 million worth of credits a year. To learn more about how to qualify, visit the Maryland Historical Trust website.
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