Top Small Business Tax Credits You Can Leverage For Your Organization

As a small company, it can be expensive to run your business. If you’re like most small businesses, you’re probably eager to find ways to help you save on some of your costs. One approach that may minimize your expenses are small business tax credits. Since small businesses of all types pay an average federal tax rate of 19.8%, these credits can be an effective way to lower your tax liability. Let’s find out how.

In this article, we’ll discuss what tax credits for small businesses are, which ones may be available to you, and how you can claim the credits. After reading this, you’ll know how to take advantage of these savings opportunities so you can put your money into growing your business instead.

What is a business tax credit?

A tax credit reduces the amount of taxes you owe. So if you owe $500 in taxes but are eligible for a $300 tax credit, your liability is $200. A tax deduction, on the other hand, actually lowers the amount of your taxable income.

Generally speaking, tax credits are designed to encourage or reward certain behavior that’s beneficial to the economy, environment, or other purpose the government deems important. They can be available on both a federal and state level.

What small business tax credits are available?

There are many small business tax credits that you may be able to take advantage of. Here are some of the more popular ones.

Health Insurance Premium Credit: If you qualify for the small business health care tax credit, it would be worth up to 50% of the costs you pay for your employees’ premiums (35% for non-profits). Eligible employers are those with less than 25 full-time employees with an average salary of $56,000 a year. You must offer SHOP coverage to all your full-time employees and pay at least 50% of their premium costs. In order to claim the credit, you’ll need to file Form 990-T, even if you don’t normally.
Disabled Access Credit: This tax credit is intended to help small businesses cover ADA-related eligible access expenditures. It’s important to note that it’s only for adapting existing facilities and not for new construction. The credit is available for businesses that had previous tax year revenues of $1,000,000 or less or 30 or fewer full-time employees. The amount is equal to 50% of eligible expenditures in a year, up to a maximum of $10,250. To claim the credit, you’ll need to file Form 8826.
Paid Family and Medical Leave Credit: If you provide paid family and medical leave to your employees, you may be eligible for a tax credit equal to the percentage of wages you pay to employees while they’re on leave if they earn below a certain amount. To qualify, you must have a written policy in place and provide at least 2 weeks of paid leave annually that is not less than 50% of the wages normally paid to employees.
Research and Development (R&D) Credit: if your business is investing in innovation to continue growing, you may be able to take advantage of the R&D tax credit. This option allows you to offset the value of the credit, which is for expenses paid or incurred for qualified research, against your business’ tax liability. In order to qualify, your business must show a component of hard science like engineering in the research you’re conducting. So you can’t be an accounting firm, for example. To claim the credit, you’ll need to complete Form 6765.
Employer-provided Childcare Credit: With this credit, you can take advantage of a tax incentive to offer childcare benefits. The credit allows you to claim 25% of qualifying expenses, including building or acquiring and then operating an in-house childcare center or amounts paid to contract with a licensed childcare program. You can also claim a 10% credit for costs associated with contracting with a third-party referral service. The credit is capped at $150,000. For the credit, you’ll need to use Form 8882.
Retirement Plan Startup Cost Credit: If you’ve started – or plan to start – a SEP, SIMPLE IRA or 401(k) plan for your employees, you may be able to claim a tax credit of up to $5,000 for 3 years for the costs of launching it. To qualify, you must have 100 or fewer employees who received at least $5,000 in compensation in the previous year and at least 1 plan participant who was a non-highly compensated employee. Also, employees can’t be the same as those who received contributions or benefits in another plan sponsored by you in the past 3 years. Claiming the credit requires you to file Form 8881.
Employee Tip Credit: If you have tipped employees, the Fair Labor Standards Act (FLSA) requires that you pay them a minimum of $7.25/hour or higher if mandated by local law. If workers don’t earn enough in tips to reach this threshold, you’ll have to pay the difference. The good news? If your employees earn enough in tips to make up the difference, you only need to pay a cash wage of $2.13/hour; the other $5.12 is considered a federal tip credit. (Some states may have a different tip credit amount – or don’t allow it at all – so be sure to check your local laws.) Keep in mind that you can only take the credit if employees spend 80% or more of their time on tip-producing work. For the credit, you’ll use Form 8846.
Work Opportunity Credit: If you hire employees from one of ten targeted groups who have consistently faced significant barriers to employment, you may be able to claim the Work Opportunity Tax Credit (WOTC). This credit is equal to 40% of up to $6,000 in wages paid to or incurred on behalf of an individual who is in their first year of employment, is certified as a member of a targeted group, and performs at least 400 hours of service. To claim the credit, you must complete Form 8850 on or before the day an offer of employment is made, which must be submitted to the designated state agency, then you’ll file Form 5884 if you’re a taxable organization or Form 5884-C if you’re tax-exempt.

How do I claim a tax credit?

As we just described, there are certain requirements you must meet and forms you need to file to claim the tax credits for small businesses. It’s also important to note that if you’re eligible for more than 1 credit, you’ll need to file Form 3800 with your tax return. This form lists every small business tax credit you’re eligible for. By adding up those credits, you’ll calculate your General Business Tax Credit. There’s a limit on the amount you can claim each year, which you can determine by adding your net income tax and alternative minimum tax, then subtracting either the greater of your tentative minimum tax for the tax year or 25% of the amount of your regular tax liability that’s greater than $25,000.

How to Maximize Your Small Business Tax Savings

Small business tax credits can represent an important way to lower your tax bill. And the ones we listed here are just some of the most common. To take full advantage of savings, you’ll want to talk to your tax professional to determine your eligibility.

If you’re looking to claim a credit that involves your retirement plan or wages, your payroll company can help. Visit our dedicated small business web page to learn how we can help you capitalize on these incentives.