7 Tax Credits That Every Small Business Owner Should Know About
No one relishes the prospect of paying more taxes than they need to. Nevertheless, by failing to claim tax credits, many small business owners are overpaying their taxes year after year, sometimes by significant amounts.
Why Tax Credits Exist
Both within the United States and around the world, governments reward people and corporate entities for acts that create a positive impact on society, be it strengthening the economy, providing employment, tackling climate change, or driving social improvement.
Tax credits are offered to businesses as an incentive for certain activities that benefit workers, industries, and the public at large. For example, a business may qualify for tax credits because they provide benefits to their employees, or because they are transitioning to greener energies.
For small business owners, claiming all relevant tax credits can make a significant difference to their bottom lines, drastically reducing the amount of tax the small business owner is liable to pay. Unlike tax deductions, which merely reduce taxable income, tax credits are deducted directly from business owners’ tax bills dollar for dollar. This potentially creates huge tax savings, allowing owners to retain more capital and enabling their business to grow and prosper.
Each tax credit has qualifications and limits, so it is important to read the fine print. Here are details on seven tax credits small businesses need to know about:
1. General Business Tax Credit
Rather than representing a single, separate credit, as with all other forms of tax credit, the general business tax credit is a catchall tax credit, enabling business owners to claim the combined value of various individual tax credits that promote particular business activities, such as starting a pension plan, conducting research, or investing in reforestation.
To claim the general business tax credit, individual tax credits must still be accounted for separately on individual forms, with each calculated according to its own set of rules. The sum total of all of these individual tax credits is calculated and claimed using the General Business Tax Credit Form 3800.
General business tax credit is non-refundable, directly reducing tax bills. It can be used to reduce the taxpayer’s tax liability to zero, and, in some cases, carried forward and back for a number of years.
2. Small Employer Healthcare Tax Credit
In order to qualify for this tax credit, employers must meet all of the following criteria:
- Employ the equivalent of 25 full-time employees or fewer.
- Pay at least half of full-time employees’ medical insurance premium costs.
- Pay an average employee salary of $50,000 per year or less.
- Offer Small Business Health Options coverage to all full-time employees.
Businesses that qualify for small employer healthcare tax credit may be able to recoup as much as 50 percent of expenditure on employee healthcare insurance premiums.
3. Disabled Access Credit
Offered by the US Government to encourage businesses to make premises fully accessible to people with disabilities, this credit covers adaptations such as the installation of ramps, upgraded restrooms, display units and providing text in Braille.
Disabled access credit is available to businesses with 30 or fewer employees and a total revenue of $1 million or less. The credit enables qualifying businesses to effectively recoup up to 50 percent of disabled access expenditures up to a maximum credit of $5,000.
4. Credit for Employer-Provided Childcare
This federal incentive encourages employers to provide childcare for employees. It is a general business credit that enables businesses to claim back 25 percent of qualified childcare expenditures, plus 10 percent of qualified childcare resources and referral expenditures. Credit for employer-provided childcare is currently capped at $150,000 per year.
5. Increasing Research Activities Credit
Designed to encourage US businesses to invest in research and development, the calculation of this credit can be complex. Nevertheless, increasing research activities credit does provide scope for substantial tax savings.
The definition of research activities is relatively broad, including activities such as: developing new technology; developing prototypes or models; developing new products, formulas, or processes; developing and applying for patents; developing and improving software technologies; developing and improving manufacturing facilities; conducting environmental testing; and conducting certification testing.
Open to individuals and partnerships as well as corporate entities, this tax credit could cover up to 20 percent of the expenses involved in qualifying research.
6. Family and Medical Leave Credit
Created by Congress in 2017, this tax credit is designed to incentivize small business owners to offer employees leave in circumstances defined by the Family and Medical Leave Act, providing employees with up to 12 weeks of unpaid leave, as well as enabling workers to access other group health benefits. Qualifying reasons for taking family and medical leave include a health emergency, or the birth of a child within the family.
7. Work Opportunity Credit
This credit is designed to incentivize business owners to hire individuals facing significant barriers to employment.
Eligible categories of worker include: vocational rehabilitation referrals; ex-felons; summer youth employees residing within Empowerment Zones; unemployed veterans, including ex-service men and women with disabilities; recipients of Qualified IV-A Temporary Assistance for Needy Families (TANF); individuals receiving food stamps; Supplemental Security Income claimants; and long-term unemployment recipients.
Work opportunity credit is calculated based on wages paid to qualifying employees, providing small businesses with up to $9,000 in tax savings over the course of two years.