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Federal Tax Credits and Incentives

FEDERAL TAX CREDITS AND INCENTIVES

Child and Dependent Care Credits

For 2022, the credit for child and dependent care expenses is nonrefundable and you may claim the credit on qualifying employment-related expenses of up to $3,000 if you had one qualifying person, or $6,000 if you had two or more qualifying persons. The maximum credit is 35% of your employment-related expenses. The more you earn the lower the percentage of employment-related expenses that are considered in determining the credit. Once your adjusted gross income is over $43,000, the maximum credit is 20% of your employment-related expenses.

Tax Credits for Energy Efficiency

Individuals

Taxpayers who make use of renewable energy for upgrades to their homes to improve energy efficiency may be eligible for certain tax credits.

The Residential Energy Efficiency Property Credit includes fuel-cell, solar, wind, and geothermal technology. This credit is for 30 percent of the expenditures made by a taxpayer during the taxable year for: qualified solar electric systems, qualified solar water heaters, qualified fuel cell property, qualified small wind energy property, and qualified geothermal heat pumps. The credit for qualified fuel cell property is limited to $500 for each one-half kilowatt of capacity of the property. The credit is available for property placed in service through December 31, 2022.

  1. n the case of property placed in service after December 31, 2016, and before January 1, 2020, 30%.
  2. In the case of property placed in service after December 31, 2019, and before January 1, 2023, 26%.
  3. In the case of property placed in service after December 31, 2022, and before January 1, 2024, 22%.

The Nonbusiness Energy Property Tax Credit is a credit of 10 percent of the cost of qualified energy-efficient improvements. Qualified improvements include adding energy-efficient exterior windows and doors, insulation, and certain roofs. The cost of installation is not included in the tax credit calculation. There is also a credit available for certain high-efficiency water heaters and stoves that burn biomass fuel, as well as high-efficiency heating and air-conditioning systems. For these purchases, the costs of installation are included in the tax credit calculation. This credit has a lifetime limitation of $500, of which only $200 can be used for windows. In order to qualify for the credit, improvements must have been placed in service in the taxpayer’s principal residence no later than December 31, 2022.

Business

Section 179D Commercial Buildings Energy Efficiency Tax Deduction is a tax incentive that takes the form of a deduction rather than a credit. A deduction of $1.88 per square foot is available to owners of new or existing businesses who install interior lighting, building envelope, or cooling, heating, ventilation or hot water systems that reduce the building’s total energy and power cost by 50% or more. A reduced deduction of $0.63 per square foot is available to owners of buildings with systems that partially qualify.

Deductions are taken in the year in which systems are placed in service. The systems and buildings must have been placed in service by December 31, 2020 in order to qualify.

Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) provides subsidies to firms that hire targeted groups. The Work Opportunity Tax Credit targets veterans, disadvantaged workers, welfare recipients, food stamp recipients, people with disabilities, and others. When the requirements are met, the tax credit can be between $1,200 and $9,600 per employee, depending on the target group of the new employee and the number of hours worked in the first year.

All Work Opportunity tax credits are time sensitive. You have a very short window of opportunity to apply for the credit. Various forms must be filed with the IRS and the State Workforce Agency within 28 calendar days of the employee’s start date in order to get the process started. If the requirements are not met, the credit is lost forever.

The WOTC has expired and then been reinstated multiple times in the past, but the CAA extended it for five years through 2025.

Research and Development Tax Credit

The R&D tax credit is available to companies that are developing or improving processes, software, or products. The tax credit earned is a portion of the increase in R&D spending. Many industries qualify: for example, engineering, computer science, or biotechnology. Starting in 2016, eligible startups with less than $5 million in gross receipts can apply up to $250,000 of their R&D tax credit against their payroll taxes. Qualified R&D activities include products (tangible or intangible), processes, software, formulas, techniques, and inventions. The R&D tax credit was made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) in December 2015.

Disabled Access Credit

The Disabled Access Credit is a non-refundable credit for small businesses that incur expenditures for the purpose of providing access to persons with disabilities. An eligible small business is one that had no more than 30 full-time employees or earned $1 million or less in the previous year. The business may qualify for up to $5,000 in tax credits.

Architectural Barrier Removal Tax Deduction

The Architectural Barrier Removal Tax Deduction provides businesses with an annual deduction of up to $15,000 for expenses incurred to remove physical, structural, and transportation barriers to the mobility of persons with disabilities and the elderly.

For more information on Federal tax credits contact one of our CPAs or visit the IRS website.

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