Is your painting business leaving money on the table? Probably. Many painting companies fail to take advantage of several IRS business tax credits available to them.
The first three tax credits can be claimed under the general business credit on Form 3800. The general business credit is not a refundable credit. However, the credit can reduce taxes owed (tax liability) dollar for dollar. Any unused credit can be carried back one year or forward up to 20 years. So, in other words, these tax credits can save your painting business money to keep more of your profits.
1. HEALTH INSURANCE CREDIT
First, consider the health insurance premium tax credit; especially if your painting business has a health insurance program or you are considering providing one. This credit allows employers to claim 35% of premiums paid by the employer for employees. To qualify the employer must have less than 25 full-time employees for the tax year and pay an average annual wage of less than $50,000 per employee. The employer must also pay at least 50% of the premium cost for all employees.
As an example, let’s assume your painting business has 12 employees who make an average of $40,000 a year. You start a health insurance program that pays 50% of the cost of health premiums for the employee. Your health insurance program provides employees with a Silver plan with an annual price of $3,780 per employee. The business pays half the cost and the employee pays the other half. This results in a $22,680 cost to your business (12 x 3,780 = $45,360; $45,360 / 2 = $22,680). Once tax season comes, your business will get a tax credit, and reduce your tax liability, dollar for dollar by $7,938 (22,680 x .35). So the actual cost of the health insurance program for the 12 employees is $14,742 after the tax credit, effectively saving your business 35% of the cost.
2. PENSION PLAN CREDIT
Second, consider the small employer pension plan startup cost tax credit. To take advantage of this credit, your business must provide a new qualified defined benefit or defined contribution plan (to include 401(k) plan), SIMPLE plan, or simplified employee pension. The tax credit is the lesser of 50% of the cost to establish and educate employees on pension plan or $500 per year for the first 3 years of plan. Check out this site on the basics on establishing a 401(k) program.
3. Work Opportunity Tax Credit
Third, consider the work opportunity tax credit. This credit rewards businesses for employing certain targeted groups that have a high unemployment rate or special employment needs. Examples of targeted groups that a painting company might hire: unemployed veterans, food stamp recipients, and ex-felons. I recommend you have your hiring manager keep a PDF copy of the work opportunity tax credit qualifications, and identify qualified new-hires. The maximum tax credit ranges from $1,200 to $9,600, depending on the employee hired.
For example, your painting business hired a veteran that had not had a job in 6 months. You paid the new-hire veteran $12.00 an hour, and the veteran work half of the tax year (960 hours). Your business would qualify for a $4,608 tax credit. This saves your business 40% of the wages paid to that veteran.
4. Section 199 for New Construction Paint Jobs
Unlike the first three items in this list, Section 199 is a deduction. The amount of a deduction reduces your taxable income before the tax rate is applied. A deduction is not as attractive as a tax credit, but it still can be valuable.
If your painting business is involved in the new construction of residential or commercial property, your business might be eligible for the Domestic Production Activities Deduction. To qualify, your painting business must have put the first coat on a newly erected building (can't be a re-paint). This deduction allows your painting business to deduct 3% of the income derived from the qualified production activity (minus activity expenses). Note: you will need to pay out employee wages to be able to qualify for this credit.
Some mistakenly believe painting contractors cannot claim this deduction. This is untrue; in the proposed tax law, the IRS gives a specific example on how painting businesses can qualify for this deduction.
Ensure you consult your tax accountant on the tax credits mentioned above. Your tax accountant should provide you some tax planning guidance to allow you to limit your tax liability throughout the year and keep more of your earnings.
About the Author
Daniel Honan is a bookkeeper and tax accountant who is also a former painting business owner and military officer. With his painting and accounting experience, he is uniquely positioned to help painting contractors save time, money, and resources.