You may be eligible for valuable credits that can help reduce your overall liability and make running your business more affordable.
This guide provides an overview of some of the most common business tax credits and what they could mean for you in terms of savings. With this information, you can make more informed decisions when it comes to filing your taxes and utilizing these credits to their fullest potential. Let’s dive in!
What is a tax credit?
A tax credit is an amount of money that can be subtracted from the amount of taxes you owe.
It’s a way for the government to incentivize certain activities or businesses and is available in different amounts depending on the type of activity or business being incentivized.
Tax credits can either be refundable or nonrefundable. A refundable credit will result in a refund if the amount of your credit exceeds your tax liability, while nonrefundable credits can only reduce your taxable income to zero.
What’s the difference between a tax credit and a tax deduction?
A tax credit and a tax deduction are two common methods of reducing your tax liability, but there is an important distinction between the two.
A tax deduction reduces the amount of income that is subject to taxation, while a tax credit directly reduces your tax liability.
Tax credits are often more advantageous than deductions because they allow you to reduce your taxes dollar-for-dollar, whereas deductions can only reduce taxes proportionally based on the amount deducted.
Many credits have no minimum spending or income requirement and are available for everyone who qualifies for them.
List of Small Business Tax Credits You Should Know
There are some tax credits available that can help reduce a business’s tax liability and potentially increase the amount it receives in refunds. Knowing about these tax credits and how to qualify for them is essential for any small business owner looking to maximize their savings.
Here is a list of small business tax credits every small business owner should be aware of:
1. General Business Credit
The catchall General Business Tax Credit is a great way to add up the individual credits and deductions you’ve earned.
Some of the activities that qualify for this credit include entering new markets, retaining employees, and purchasing electric vehicles. Fill out Form 3800 for this credit.
2. Employer Credit for Paid Family and Medical Leave
Small business owners can take advantage of a tax credit authorized by Congress in 2017 to help them provide paid leave for employees covered by the Family and Medical Leave Act (FMLA).
This law allows eligible employees to access up to 12 weeks of job-protected, unpaid leave, plus access to group health benefits each year. Complete Form 8994 for this credit.
3. Credits for Alternative Fuels
Business owners could be eligible for tax credits for producing alcohol-based fuels such as methanol and ethanol, as well as other alternative fuels like biodiesel or renewable diesel.
These niche credits help to incentivize investments in alternative sources of fuel, increasing U.S. energy independence while reducing dependence on imported oil.
For these credits, use forms 8849, 8864, 8896, 6478, and 4136.
4. Credit for Small Employer Health Insurance Premiums
You could qualify for a significant tax credit if you provide healthcare coverage to your employees.
The IRS states employers may be eligible for up to 50% of premiums paid towards qualifying health insurance plans, and 35% of premiums paid for eligible tax-exempt employers. Use Form 8941 for this credit.
5. Alternative Motor Vehicle Credit
Business owners could take advantage of up to $8,000 in tax credits if they purchased an alternative fuel source vehicle in 2022.
This credit does not include hybrid or electric vehicles because they rely on conventional fuel sources. Use Form 8910 to take advantage of this tax credit.
6. Credit for Increasing Research Activities
Businesses looking to support domestic research and development may qualify for a tax credit of up to 20% of their expenses.
Though the process of calculating the credit can be complicated, it can lead to big savings. This credit is only applicable to certain types of research and if your business is eligible, use Form 6765 to claim this credit.
7. Credit for Employer-Provided Child Care Facilities and Services
Businesses that assist their employees with childcare costs may be eligible for a tax credit of up to 25% of expenses, plus an additional 10% for childcare resource and referral costs.
This credit is capped at $150,000 per year. To claim this credit, use Form 8882.
8. Work Opportunity Tax Credit
Businesses that hire individuals who have traditionally faced barriers to employment can benefit from a tax credit.
This includes, but is not limited to, unemployed Veterans (including disabled Veterans), ex-felons, and long-term family assistance recipients. To claim this credit, use Form 5884.
9. Credit for Small Employer Pension Plan Startup Costs
Small businesses may be eligible for a tax credit of up to $500 or 50% of costs when setting up a pension. This credit is available over the first three years of the plan.
To qualify, businesses must have fewer than 100 employees earning at least $5,000 each and cannot have established a 401(k) or other qualifying retirement plan in the last three years. To claim this credit, use Form 8881.
10. Disabled Access Credit
Businesses with total revenue of $1 million or less, or those with 30 or fewer full-time employees, may be eligible for a tax credit that encourages the installation of ramps, upgraded restrooms, improved storage units, and text in braille to make their premises accessible to people with disabilities. Claim this credit using Form 8826.
11. New Markets Credit
Using Form 8874, businesses that invest in qualified community development entities (CDEs) which are designed to assist low-income communities, can claim this tax credit, if they’re eligible.
12. Empowerment Zone Employment Credit
Through the U.S. Department of Housing and Urban Development, businesses may be eligible for up to $3,000 per full-time or part-time employee who resides in an established empowerment zone, which was created to promote development in low-income areas. Use Form 8844 to claim this credit.
13. Investment Credit
This tax credit supports businesses that invest in reforestation, alternative energy property used in business, or building rehabilitation.
These businesses may be eligible to claim a tax credit valued at 10% of their expenditure, up to $10,000 per year. This tax credit can be claimed on Form 3468.
14. Tax Credits for Paid Leave
Under the Families First Coronavirus Response Act (FFCRA), employees who are ill or quarantined due to COVID-19 can receive up to 80 hours of paid leave benefits, with a maximum of $511 per day or $5,110 in total.
Businesses are eligible for these tax credits on wages paid through September 30, 2021, and can be claimed using Form 941.
15. Employee Retention Credit
The CARES Act provides businesses with a tax credit incentive to keep their employees employed, even if the business was closed or experienced reduced sales.
This Employee Retention Credit is worth up to a maximum credit of $5,000 per employee for 2020 and $7,000 per employee each quarter in 2021.
16. Earned Income Tax Credit (EITC)
Low to moderate-income workers and families can take advantage of the Earned Income Tax Credit (EITC) for a tax break.
If you qualify, the credit could be used to lower your taxes owed or add to your refund.
How to Claim a Small Business Tax Credit
Claiming a small business tax credit can provide major savings when filing taxes, and with the right preparation and knowledge you can maximize your benefit.
To make sure you are getting the most out of these credits, consider these steps for claiming them:
- Gather documents and information. Before applying for any tax credit, it is important to make sure you have all the necessary documents and information on hand. This includes income statements, receipts from qualifying purchases, and records of charitable contributions.
- Do research to determine eligibility. Different credits have different requirements and qualifications. Doing some research beforehand will help you understand which credits you are eligible for.
- Calculate your potential savings. Calculating your potential savings based on the various credits available will help you decide which ones are worth pursuing. Look into any limitations or restrictions that may apply before moving forward with a claim.
- Complete the application forms. Once you have gathered everything needed and determined which credits to pursue, complete the required forms accurately and submit them according to exact instructions in order to get approval.
Are credits included in taxable income?
Generally speaking, most tax credits are considered non-taxable and do not need to be reported as additional income for federal tax purposes.
Credits are most often subtracted from your total taxable income when filing taxes, resulting in a lower tax liability.
Depending on the specific credit being used, there may be certain items that must be reported independently when filing returns.
Is there a tax credit for starting a new business?
There isn’t a tax credit for starting a new business. However, the IRS offers two potential tax deductions of up to $5,000 each in the first year of your operations, which can be subtracted from your taxable income for that year.
Is there a tax credit for an LLC?
There are many tax credits that an LLC can take advantage of such as a general business tax credit, a credit for paid medical and family leave, and alternative fuel credits. However, to start an LLC, there are two potential tax deductions you can take worth up to $5k each, but no tax credits.
Do you need receipts to claim a tax credit?
It’s important to note that in order to claim tax credits, you must provide the appropriate documentation and proof of expenses. This requirement applies to individual and business tax credits alike.
For example, if you are claiming a credit for energy-efficient home improvements, you must be able to show receipts for the purchases of items like HVAC systems and insulation.
How do you get a large tax refund for your small business?
It’s possible to maximize your small business tax refund by being mindful of the deductions and credits you are eligible for.
Make sure you’re taking advantage of any exemptions or deductions that apply to your particular business structure, such as health insurance coverage or retirement plan contributions.
You’ll also want to look into tax credits that could apply to your situation such as research and development tax credits or renewable energy tax credits.
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