Nine tax credits for small businesses that can help increase their profits.

Introduction

Tax credits for small businesses are incentives the government provides to encourage business growth and economic development. These credits are usually applied against income tax and can help reduce a business’s overall tax liability. 

They can provide a significant source of capital for small businesses, allowing them to reinvest in their operations and expand their reach. 

Common tax credits for small businesses include credits for research and development, credits for hiring and training employees, credits for investing in renewable energy, and credits for purchasing energy-efficient equipment.

Small business owners should know about the various tax credits they can take advantage of. Here are 9 tax credits that may apply to your small business.

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Overview: What is a tax credit and why it is important?

Businesses benefit from tax credits by reducing their tax liabilities and providing benefits to their customers, employees, and the environment at the same time. The IRS leverages tax credits to influence business decisions and provide dollar-for-dollar reductions on their tax obligations. You should also have tax professionals and tools available to assist you in preparing your company tax return, in addition to understanding how the credit is calculated. 

Your business’s tax bill is lowered by a certain dollar amount or percentage when you use tax credits. Tax credits are the most efficient way to reduce your tax liability because they offer a dollar-for-dollar discount. Small businesses can take advantage of dozens of tax credits. Make sure you don’t miss out.

The purpose of tax deductions and tax credits differ, but both can save you money.

There are two types of tax breaks that may help you save on taxes: tax credits and deductions. However, they work differently and have different effects on your tax liability.

Tax Deductions:

Tax deductions are expenses that can be deducted from your income. Taxable income is determined by subtracting certain expenses, such as mortgage interest, charitable contributions, and business expenses, from your income. The tax liability is then determined by your taxable income.

Suppose you have $50,000 in taxable income and $10,000 in deductions, which makes your taxable income $40,000. Therefore, you would only pay taxes on $40,000 instead of $50,000. Depending on your tax bracket, you will save different amounts of tax.

Tax Credits:

Tax credits, on the other hand, are dollar-for-dollar reductions in your tax liability. This means that if you owe $1,000 in taxes and you have a $500 tax credit, your tax liability would be reduced to $500.

There are two types of tax credits: refundable and non-refundable. Despite their ability to reduce your tax liability to zero, non-refundable tax credits cannot be refunded if the credit exceeds your tax liability. Even if your tax liability exceeds the credit, you may be able to receive a refund for refundable tax credits.

For example: If you owe $500 in taxes but have a $1,000 refundable tax credit, you would not only reduce your tax liability to zero but also receive a $500 refund.

Overall, tax deductions and tax credits both help reduce the amount of taxes you owe to the government. However, tax credits are more beneficial than tax deductions because they directly reduce the amount of tax you owe, while tax deductions reduce the amount of your income that is subject to taxation. 

What are the 9 best tax credits for small businesses?

1. Credit for Small Businesses on Health Care

The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations provide health insurance to their employees.

To be eligible for the credit, a small business must meet the following criteria:

• A company with fewer than 25 full-time equivalent employees (FTEs).
• An average wage of less than $54,200 per FTE per year is paid.
• Employers must contribute at least 50% of employee health insurance premiums through Small Business Health Options Programs (SHOP).

The tax credit is worth up to 50% of the employer’s premium payments made for their employees’ health insurance coverage, up to a maximum of 35% for tax-exempt organizations. The credit is available for two consecutive years.

For example, if a small business pays $50,000 a year toward the health insurance premiums for its employees and meets all the eligibility requirements, it could receive a tax credit of up to $25,000 for each of the two years.

It’s important to note that the tax credit is only available to eligible small businesses that purchase health insurance through a SHOP Marketplace, and the credit is only available for two consecutive years. Additionally, the credit is only applicable to the income tax portion of an employer’s federal tax return.

2. The Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) is a federal tax credit offered to firms that hire persons from specific specified categories who have traditionally encountered job hurdles. It was established by the Small Business Job Protection Act of 1996 and has been renewed and changed multiple times since then. The targeted groups eligible for the WOTC include

• Those unemployed for 27 weeks or more are considered long-term unemployed.
• Recipients of Temporary Assistance for Needy Families (TANF)
• Veterans
• Rehabilitated felons
• Designated community residents (individuals who live in empowerment zones, enterprise communities, or renewal communities)
• Vocational rehabilitation referrals
• Employed as summer youth (16-17 years of age)
• Supplemental Nutrition Assistance Program (SNAP) recipients
• Supplemental Security Income (SSI) recipients

A tax credit amount depends on the targeted group, the hours worked by the employee, and the wages paid to the employee during the first year of employment. Employees can receive a maximum credit of $9,600.

Employers must submit IRS Form 8850 to their state workforce agency within 28 days of hiring a new employee. Employers must also submit ETA Form 9061 or 9062 to certify the employee’s eligibility.

3. The Energy Efficiency Tax Credits

Energy Efficiency Tax Credits are a type of tax credit offered by the government to encourage people and businesses to invest in energy-efficient goods and systems. These tax credits are intended to encourage the use of renewable energy sources, reduce carbon emissions, and promote sustainable growth.

There are several forms of energy efficiency tax credits available, including household energy-efficient upgrades such as solar panels, wind turbines, geothermal heat pump systems, and energy-efficient doors and windows.

The amount of tax credit offered varies based on the type of product or system utilized, as well as the quantity of the investment. 

The availability and quantity of tax credits may vary from year to year, and certain tax credits may have expiry dates. It’s always a smart move to speak with a tax expert or the state’s tax agency for the most up-to-date information on potential tax credits.

4. The Renewable Energy Tax Credits

The government offers renewable energy tax credits to stimulate the use of technologies such as solar, wind, geothermal, and biomass. Renewable energy tax credits are designed to encourage the use of renewable energy sources and reduce fossil fuel dependence.

There are two significant tax incentives for renewable energy provided by the federal government of the United States: the Investment Tax Credit (ITC) and the Production Tax Account (PTC). 

ITCs provide a tax credit for up to 26% of the cost of installing solar panels, while PTCs allow taxpayers to share 2.5 cents for every kilowatt-hour generated by wind turbines. Many states offer their renewable energy tax credits in addition to federal incentives. California, for instance, offers homeowners a solar tax credit of up to $2,000 for installing solar panels on their homes.

These tax credits have played a crucial role in making renewable energy more cheap and available to a broader range of consumers and companies. As a result, clean energy is growing into an important emerging source of power in many regions of the world.

5. The Disabled Access Credit

The Disability Access Credit incentivizes businesses to make their sites accessible to clients with impairments. The credit is designed to cover the expenses of making physical infrastructure upgrades to a business, such as adding wheelchair ramps, accessible parking spots, or improved restroom facilities.

It is offered to firms with total annual revenues of $1 million or less, or with 30 or fewer full-time employees, and can reimburse up to 50% of disability access costs ranging from $250 to $10,000. This means you may claim up to $5,000 in Disabled Access Tax Credit in a single year. 

Businesses with 15 or more workers are required under the ADA to offer reasonable accommodations to employees with disabilities, while additional ADA regulations govern public access to certain types of enterprises. 

To lessen the financial effect of such modifications, the government grants this tax credit. The idea is to incentivize companies to make investments in accessibility upgrades that would otherwise be prohibitively expensive.

6. The Qualified Small Business Stock Credit

The Qualified Small Business Stock Credit, often known as Section 1202, is a tax credit offered by the United States government to promote investment in small enterprises. It permits investors to deduct a part of the gain on the sale of eligible small company shares from their taxable income. 

To qualify for the credit, the stock must fulfill specific conditions, such as being a domestic C company with gross resources of $50 million or less at the time the stock was issued, and retaining for a minimum of five years before it may be sold.

The maximum gain a taxpayer can deduct for a single investment is $10 million or ten times their basis in the stock. By offering investors a tax break, the government hopes to encourage investment in startups and small businesses.

7. The Research & Development Tax Credit

The R&D Tax Credit is a tax incentive provided by the United States government to encourage corporations to participate in research and development operations. 

Businesses must carry out activities that fulfill specific requirements, such as producing new or enhanced goods or processes, performing scientific or technological tests or research, or enhancing the design or function of current items or processes. 

The credit amount is calculated as a percentage of the company’s qualified research expenses (QREs) for the fiscal year. QREs might include employee salary, materials, and contractor expenditures associated with qualified R&D activities.

The R&D Tax Credit is accessible to businesses of all sizes and can be used to reduce both normal income tax liability and alternative minimum tax liabilities. It is meant to boost innovation and economic progress by providing corporations with an incentive to participate in R&D operations.

 By paying part of the expenses involved with R&D, the government intends to encourage firms to explore new technologies, produce new products, and enhance existing processes, which may help to promote economic development and generate employment.

8. The New Markets Tax Credit

The New Markets Tax Credit (NMTC) is a tax incentive program established by the United States government to stimulate investment in low-income neighborhoods. It gives investors a tax credit for investment in eligible community development enterprises (CDEs), which provide finance and other assistance to companies and projects in these regions. 

The NMTC is equivalent to 39% of the entire investment made by the investor in a qualifying CDE and is claimed over seven years, with 5% claimed in each of the first three years and 6% claimed in each of the next four years. The purpose is to generate economic growth, create employment, and enhance the quality of life in such communities.

To be eligible for the New Markets Tax Credit, a project must be situated in a low-income neighborhood or census tract with a poverty rate of at least 20% or median family incomes that do not exceed 80% of the area median income. It must also contain a qualifying business with at least 50% of its personnel residing in a low-income neighborhood.

Projects that qualify for the credit generally involve the purchase, refurbishment, or building of real estate in low-income regions, or the expansion of existing enterprises in those areas. 

Examples of projects include

• Building or refurbishment of educational facilities or community centers

• Residential property restoration enterprises that fix and flip.

• Hospital construction and rehabilitation.

• Building or renovation of industrial facilities that provide employment.

• Building or rehabilitation of institutions that support women, minorities, or other underrepresented populations.

9. The Low-Income Housing Tax Credit

In the United States, the Low-Income Housing Tax Credit (LIHTC) is a tax incentive program designed to promote the construction and preservation of affordable housing. Developers who build or renovate rental properties that meet certain affordability criteria can receive the credit.

To receive the LIHTC, a developer must set aside a certain percentage of units in the rental property for households with incomes below 60% of the area median income for a minimum of 30 years. A portion of the credit is based on the cost of constructing or rehabbing affordable units, and the rate of improvement depends on the condition of the property, the cost, and the availability of ICHTCs. 

LICHTC provides safe and stable housing for low-income families, seniors, and individuals with disabilities. The Affordable Housing Policy helps low-income individuals and families have access to affordable housing. By preserving low-income communities, the policy fights against homelessness and housing insecurity.

Consult your tax professional about small-business tax credits

If your small business qualifies for any of the above tax credits, speak with an accountant. In summary, small-business tax credits may prove to be valuable resources for businesses seeking to lower their tax bills and improve their bottom line. However, verifying eligibility is difficult, as is navigating the complicated tax system.

The owners of small businesses should consult with a certified tax expert to ensure they are taking advantage of all credits and deductions available to them. 

Tax specialists can assist businesses in maximizing tax savings and meeting their financial goals by advising them on how to claim tax credits. To find out more about the small-business tax credits available to you, don’t hesitate to contact a tax professional.

Tax season is here, and it’s time to take advantage of all the small-business tax credits available. Work with a tax professional and save time, money, and stress. Norcross’s best accountants and tax professionals can help you maximize your deductions and credits so that you can save the most on your taxes. 

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