Tax credits are an important type of tax break because every dollar of tax credit saves one dollar in taxes. During National Small Business Week it’s helpful to take note of certain federal tax credits that can only be used by small businesses. Here are five credits — what they are and how you determine “small” (there’s a different definition for each credit).
Small Business Only Tax Credits
Small Employer Health Care Credit
This credit is designed to reward small employers for paying at least half the cost of their employees’ health insurance. The credit had been created to incentivize small employers to pay for coverage, but the myriad of rules and restrictions have made it difficult to know up front whether paying for health coverage will produce a tax credit. However, if you happen to qualify you get the tax break, which is great.
A small employer for purposes of claiming a full credit means having 10 full-time and full-time equivalent employees with average annual wages of less than a set amount ($26,200 in 2017). A partial credit applies for an employer with fewer than 25 full-time and full-time equivalent employees and with average annual wages up to a set amount ($52,400 in 2017).
In addition to the number of employees and their wages, other restrictions include:
- Coverage must be purchased through a government Small Business Health Options Program (SHOP)
- The credit can only be claimed in two consecutive years
Find more details in the instructions to Form 8941.
Retirement Plan Startup Credit
Fewer than half of small businesses with under 100 employees offer a qualified retirement plan. To encourage more to do so, the tax law offers a tax credit for 50% of startup costs up to $500 per year for three years. The credit is meant to cover the cost of setting up and administering the plan and educating employees about it. Costs may be higher, but this credit is helpful.
A small employer for this credit is one with 100 or fewer employees who received at least $5,000 in compensation from the company in the previous year. The plan must cover at least one participant who is not a highly-compensated employee.
Find more details in the instructions to Form 8881.
Employer Wage Differential Credit
If a small employer has an employee who is called to active military service for a period of more than 30 days, the company can take a tax credit of 20% up to $20,000 for wage differential payments. These are payments to make up the employee’s shortfall in earnings when in the service; they help the employee take home in total (military pay plus wage differential payments) what he/she would have received had he/she not been called to duty.
A small employer is one with fewer than 50 employees on average during the year. The company must have a written plan to provide for wage differential payments for all qualified employees.
Find more details in the instructions to Form 8932.
Disabled Access Credit
A small business that pays the costs of access for disabled employees and customers can take a tax credit of 50% of expenses over $250 but not over $10,250; the maximum credit is $5,000 per year. Eligible access expenses include costs to remove barriers to access (e.g., installing ramps), provide interpreters or other methods to provide access to hear-impaired individuals, provide readers and other methods to provide access to visually-impaired individuals, and acquire equipment or devices for those with disabilities.
A small business for this purpose is one with gross receipts not exceeding $1 million in the preceding tax year or no more than 30 full-time employees during the preceding year.
Find more details in the instructions to Form 8826.
There is a 20% research credit designed to encourage businesses to engage in research and development. The credit is available to businesses of any size, but a special way to use the credit is limited to small businesses. Instead of applying the credit as an offset to income taxes, a small business can opt to use it to reduce the employer share of Social Security taxes up to $250,000.
A small business for this purpose is one with gross receipts for the current year not exceeding $5 million and no gross receipts for the five prior years.
There are other rules that apply to these tax credits and there are other tax credit for businesses. Discuss your situation with a tax advisor to learn how you can profit from these special rules.
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