You might be eligible for valuable credits that can help lower your overall tax liability and make running your business more affordable. This guide provides an overview of common small 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 leveraging these credits fully.
What’s a tax credit?
A tax credit is an amount that can be deducted from the taxes you owe. It’s the government’s way of encouraging certain activities or businesses and is available in various amounts depending on what’s being incentivized. Tax credits can be either refundable, meaning you get a refund if your credit exceeds your tax liability, or nonrefundable, meaning they can only reduce your taxable income to zero.
What’s the difference between a tax credit and a tax deduction?
A tax credit directly reduces your tax liability, cutting down your taxes dollar-for-dollar, while a tax deduction reduces the amount of income subject to taxation. Credits are typically more beneficial than deductions because they provide a more significant reduction in your tax bill.
Many credits have no minimum spending or income requirement and are available to everyone who qualifies.
List of Small Business Tax Credits You Should Know
Here are some small business tax credits that can help reduce your tax liability and potentially increase your refunds. Knowing about these credits and how to qualify for them is crucial for any small business owner looking to maximize savings.
1. General Business Credit
The General Business Tax Credit combines multiple credits and deductions you’ve earned. Activities that qualify include entering new markets, retaining employees, and purchasing electric vehicles. Use Form 3800 for this credit.
2. Employer Credit for Paid Family and Medical Leave
This credit helps small business owners provide paid leave for employees covered by the Family and Medical Leave Act (FMLA). Eligible employees can access up to 12 weeks of job-protected, unpaid leave, plus group health benefits each year. Use Form 8994 for this credit.
3. Credits for Alternative Fuels
If you’re producing alcohol-based fuels or other alternative fuels like biodiesel, you may qualify for tax credits. These credits incentivize investments in alternative energy sources. Use forms 8849, 8864, 8896, 6478, and 4136.
4. Credit for Small Employer Health Insurance Premiums
You might qualify for a significant tax credit if you provide healthcare coverage to your employees. The IRS offers up to 50% of premiums paid for qualifying health plans, and 35% for tax-exempt employers. Use Form 8941 for this credit.
5. Alternative Motor Vehicle Credit
If you purchased an alternative fuel vehicle in 2022, you could get up to $7,500 in tax credits. This credit doesn’t apply to hybrid or electric vehicles. Use Form 8910 to claim this credit.
6. Credit for Increasing Research Activities
Businesses investing in research and development can get a tax credit up to 20% of their expenses. Though calculating this credit can be complex, it can lead to substantial savings. Use Form 6765 to claim it.
7. Credit for Employer-Provided Child Care Facilities and Services
Businesses that help with childcare costs can get a tax credit up to 25% of expenses, plus an additional 10% for childcare resource and referral costs. This credit is capped at $150,000 per year. Use Form 8882 to claim it.
8. Work Opportunity Tax Credit
Hire individuals who face barriers to employment—like unemployed veterans, ex-felons, or long-term assistance recipients—and you may qualify for this credit. Use Form 5884 to claim it.
9. Credit for Small Employer Pension Plan Startup Costs
Small businesses can get a tax credit up to $500 or 50% of the costs for setting up a pension plan. This credit is available during the first three years of the plan. Use Form 8881 to claim it.
10. Disabled Access Credit
Small businesses with $1 million or less in revenue or fewer than 30 full-time employees can get a tax credit for making their premises accessible to disabled individuals. Use Form 8826 to claim this credit.
11. New Markets Credit
Businesses investing in qualified community development entities (CDEs) can get this tax credit. Use Form 8874 to claim it.
12. Empowerment Zone Employment Credit
You might receive up to $3,000 per employee who lives in an empowerment zone. These zones are designed to promote development in low-income areas. Use Form 8844 to claim this credit.
13. Investment Credit
This credit supports businesses investing in reforestation, alternative energy properties, or building rehabilitation. You may be eligible for a credit valued at 30% of your expenditure. Use Form 3468 to claim it.
14. Earned Income Tax Credit (EITC)
Low to moderate-income workers and families can use the EITC to lower taxes owed or increase their refund.
How to Claim a Small Business Tax Credit
Claiming a small business tax credit can save you money at tax time. Here’s how to maximize your benefit:
1. Gather necessary documents and information, such as income statements, receipts from qualifying purchases, and charitable contribution records.
2. Research to determine eligibility, understanding the requirements for each credit.
3. Calculate potential savings to decide which credits are worth pursuing.
4. Complete and submit the required forms accurately for approval.
FAQ
Are credits included in taxable income?
Most tax credits are non-taxable and don’t need to be reported as additional income. They are typically subtracted from your total taxable income, reducing your overall tax liability.
Is there a tax credit for starting a new business?
While there isn’t a tax credit for starting a new business, the IRS offers deductions up to $5,000 each in your first year of operations, reducing your taxable income.
Is there a tax credit for an LLC?
An LLC can take advantage of various tax credits like the general business tax credit or credits for paid medical and family leave, and alternative fuels. However, for starting an LLC, you can take deductions up to $5,000 each, but no specific tax credits are provided.
Do you need receipts to claim a tax credit?
Yes, you’ll need appropriate documentation and proof of expenses, such as receipts for energy-efficient home improvements, to claim tax credits.
How do you get a large tax refund for your small business?
Maximize your small business tax refund by taking full advantage of eligible deductions and credits, such as health insurance coverage or retirement plan contributions. Research and development credits or renewable energy tax credits can also add to your refund.
