Summary: During Aprio’s recent “Take the Credit” webinar, Dave Carter-Hanson and Shazan Rizvi discussed the fundamental differences between deductions and credits, various types of lucrative incentives, and how the Inflation Reduction Act (IRA) revolutionized how companies can monetize certain tax credits.
Many organizations review last year’s tax results only at filing time. In this article, we explore why the most successful companies gain a competitive edge by proactively leveraging tax credits and incentives as a strategy to unlock resources to fuel growth, innovation, and capital projects.
Tax Credits 101: Moving Beyond the Deduction
Mastering tax strategy begins with understanding the hierarchy of tax benefits. While “deduction” and “credit” are often used interchangeably in casual conversation, their financial impacts differ significantly.
A tax deduction reduces your taxable income. For example, with a 21% tax rate, a $100 deduction will decrease your taxes by $21. Though it reduces the portion of your income that can be taxed, which can lead to lower overall taxes, it does not reduce your tax bill by the full amount of the deduction.
Meanwhile, a tax credit directly lowers your tax liability dollar-for-dollar, making it generally more beneficial than a deduction. In our example, a $100 tax credit results in a $100 tax savings. It directly reduces the amount of tax you owe, therefore increasing your business’s cash flow by the full amount of the credit.
Understanding Different Types of Benefits
When evaluating tax incentives, it is essential to understand how the benefit is monetized to increase your cashflow.
- Cash Grants: Direct capital from government entities.
- Property Tax Abatements: Reductions in local property tax burdens related to physical facilities.
- Payroll Tax Credits: Incentives that reduce the employer’s portion of social security or other payroll taxes.
- Refundable Income Tax Credits: Credits that can result in a check from the government, even if you have no tax liability.
- Other General Business Credits: Credits that reduce an entity’s income tax liability.
What is The New Frontier: Transferability and the IRA?
Historically, many credits could only be monetized by companies with tax liabilities, which generally meant that only profitable businesses benefited.
The 2022 Inflation Reduction Act (IRA) fundamentally changed this dynamic by introducing transferability for specific tax incentives. For eligible credits, if your business generates a credit but cannot use it due to low or no tax liability, you can:
1. Sell the credits by transferring them to another entity for cash.
2. Request a refund. In some cases, companies can get a direct refund from the government.
This shift turns tax credits into a liquid asset. It lets companies use these incentives as non-dilutive financing, enabling them to fund projects without giving up equity or taking on high-interest debt.
A Strategic Shift: From Year-End to CapEx Planning
Aprio’s speakers emphasized that the finance department needs to shift its mindset. During the session, a poll showed that 39% of attendees approach credits opportunistically, while only 11% actively incorporate them into capital expenditure (CapEx) and cash flow decisions.
Government entities at the federal, state, or local levels often act as co-investors in businesses. They offer these incentives to encourage specific behaviors, such as:
- Hiring new employees,
- Purchasing and upgrading equipment,
- Expanding or moving facilities, or
- Improving internal processes and technology.
Tax credits should be viewed as a financing lever built directly into the business model. If these incentives are implemented during the project planning phase rather than at year-end, businesses can more accurately calculate the Return on Investment (ROI) of their initiatives.
Who Can “Take the Credit?”
There is a common misconception that lucrative tax credits like the R&D credit are limited to large manufacturers or scientists in lab coats. In fact, these incentives extend to a wide variety of sectors, including manufacturing, engineering, software and technology, government contracting, construction, healthcare, and restaurants.
If your company is solving technical problems, hiring people, or expanding its footprint, there is a high probability that you are eligible for some form of credit or incentive.
Final Thoughts: Don’t Leave Cash on the Table
The tax landscape is complex, but that complexity brings opportunities. Whether you are a startup founder seeking to extend your runway or a corporate CFO aiming to enhance your organization’s global tax position, the “Take the Credit” mindset is essential.
The right time to evaluate your credit eligibility is now. Move tax credits into your strategic planning process to unlock value for your business.
