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Top 7 Small Business Tax Credits To Save Your Tax Bills

You might have heard about tax deduction reducing your taxable income but did you know IRS offers small business tax credits to incentivize them to be socially responsible and make contributions to the economic & social well-being of the entire nation. Tax credits directly reduce your tax bill. 

In this article you will find out what are tax credits for small businesses?, What are general business tax credits? and 7 top tax credits for business owners.

What Are Tax Credits For Small Businesses?

Tax credits reduce the amount you owe to the tax authority. Let’s suppose you owe $5,000 in taxes and you qualify for a $2000 tax credit. Your tax liability will be reduced to $3000. In case your credit exceeds your tax liability you might be eligible to get a refund unless it is a non-refundable credit. 

What Is The Difference Between Tax Credit & Tax Deductions?

 A tax deduction lowers your taxable income while a tax credit lowers your tax liability.

For. e.g If you have a revenue of say $50,000 and have an allowable tax deduction of 10,000. Your taxable income is $40,000. If you are in the 22% tax bracket, you have saved $0.22 in taxes on each dollar. This means your total tax savings will be $2,200. But let’s suppose this 10,000 is your tax credit then you would save $10,000 on your tax bill. 

What Is A General Business Tax Credit?

According to the IRS:

Your general business credit for the year consists of your carryforward of business credits from prior years plus the total of your current year business credits. In addition, your general business credit for the current year may be increased later by the carryback of business credits from later years.

Before you add up your individual business tax credits and claim it as a general business tax credit on Form 3800, you will need to have separate forms to figure out each current year's tax credit. 

We are now going to look at the top 7 small business tax credits

1. Employer Credit For Paid Family And Medical Leave 

If your employee experiences a health emergency or the birth of a child, and you grant them paid family & medical leave you can claim it as a tax credit via Form 8994.

According to the IRS:

An eligible employer is an employer with a written policy in place that provides paid family and medical leave and satisfies minimum paid leave requirements

2 primary requirements are:

  • The minimum paid leave should not be less than half of the salary generally paid to the employee. 
  • The employer provides at least 14 days (2 weeks) of paid family & medical leave yearly to all the qualifying employees. 

To be a qualifying employee one has to be:

  • Employed for a year or more
  • The compensation for the previous year should not exceed an amount equal to 60% of the amount applicable for that year.

For the years 2021 & 2022, the applicable compensation is $1,30,000. So an employee must have earned no more than $78,000 (60% of $130,000) in compensation in the preceding year.

Employer credit for paid family and medical leave is an amount equal to the applicable percentage which is based on the rate of payment for the leave under the employer’s policy. 

If the rate of payment is 50% the base applicable percentage is 12.5% and if it is in excess of 50% then the maximum applicable percentage is 25%.

2. Credit For Small-Business Health Insurance Premiums

In 2010, comprehensive reforms took place to make health care available, accessible, and affordable for everyone. And President Obama signed the Affordable Care Act. Since then it is popularly known as Obamacare.

Under this reform, the health insurance premium credit is available for the small businesses that provide health insurance to their employees.

According to the IRS, the following are the eligibility criteria for claiming this credit:

  • You Purchased health insurance coverage from Small Business Health Options Program (SHOP).
  • You paid at least 50% of the employees’ insurance premiums.
  • You had fewer than 25 full-time or 48 half-time employees during the tax year.

4. You paid average annual wages for the tax year of less than $56,000 per full-time employee.

It is noteworthy that applicable after 2013  you can only claim this credit by filling out Form 8941 for the two consecutive years.

3. Credit For Increasing Research Activities

Small businesses are eligible to claim research and development expenses. 

According to the IRS:

“Qualified research means research for which expenses may be treated as section 174 expenses. This research must be undertaken for discovering information that is technological in nature, and its application must be intended for use in developing a new or improved business component of the taxpayer. In addition, substantially all of the activities of the research must be elements of a process of experimentation relating to a new or improved function, performance, reliability, or quality.” 

If you run a sole proprietorship, a partnership, or a corporation whose stock isn’t publicly traded & the annual average gross receipt for the past 3 tax years doesn’t exceed $50million then you qualify to get R&D tax credit via Form 6765.

4. Work Opportunity Credit 

There are a lot of people around us who struggle to be employed because of their background such as veterans including disabled ones, ex-felon, long-term family assistance recipients & other members of the underserved population. The work opportunity credit encourages businesses to employ them. 

How much credit you are eligible to claim will be determined by the number of hours your employees worked for you during the tax year, the wages paid & which category they fall into. 

Use Form 5884 to claim the work opportunity credit

5. Credit For Employer-Provided Childcare Facilities And Services 

Businesses that bear the expenses of child care facilities for their employees are eligible to claim this tax credit via Form 8882. The child care facility must meet the requirement of all applicable state & local laws & regulations. 

If your business qualifies for this credit you can claim 25% of the expenses on child care including 10% of child care resources and referral expenditures. The maximum credit businesses can claim per tax year is $150,000 per tax year.

6. Disabled Access Credit

To co-exist with differently-abled people lots of initiatives are taken. Businesses are either bound by law or incentivized to provide employment opportunities & make their services and product available & accessible to them. 

To achieve this businesses spend on providing text in braille, installing ramps, upgrading storage units & restrooms, etc.

To minimize the financial impact of the cost incurred & to ensure everyone is included the government offers Disabled Access Credit ranging from $250 to $10,000 to businesses that have:

  • 30 or fewer full-time employee
  • $1 million or less total revenue

You can get a relief of about half of the expenses incurred on disability access upgrades. Use form 8826 to claim the credit. 

7. New Markets Credit 

Businesses often choose to invest in qualified Community development entities (CDEs) as part of their social responsibility. These CDEs facilitate low-income communities to have opportunities for growth. 

The government encourages more businesses by offering a new market tax credit to be a part of this cause by acquiring, renovating, or building educational facilities, hospitals, job creation & other projects that aid underserved populations.  

To qualify for this credit, the area where you have invested must have either a poverty rate of 20% or a median family income not exceeding 80% of the area's median income. If you are eligible then use form Form 8874 to claim this credit. 

This is not an exhaustive list of small business tax credits there are many more that small business owners such as empowerment zone employment credit, low-income housing credit, etc. 

Seek advice from a tax professional to ensure you don’t miss out on any tax credit that will help you reduce your tax liability. 

Ines Zemelman, EA
Founder of TFX