Top Tax Credits for Small Businesses

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By: Ramesh Patel

Small business owners can save on their taxes by taking advantage of tax credit opportunities. There are multiple small business tax credits that may be a fit for your business. Work closely with your Chugh CPAs, LLP professional to proactively plan and minimize your tax bill.

what is a tax credit?

A tax credit is a dollar-for-dollar reduction in the amount of tax that you owe. A tax deduction allows you to decrease your taxable income.

startup tax deduction 

While we are covering tax credits in this article, you should be aware of the startup tax deduction for new small businesses. Using this deduction, small businesses can deduct up to $5,000 in startup costs in the year costs were incurred if their total startup costs were $50,000 or less. If your startup costs are higher than $50,000, the deduction amount will be reduced.

small business tax credit 

There are 13 tax credits available to small businesses which may help you reduce your taxes owed.

  1. Research and Development Tax Credit

If your business conducts certain types of research or development activities in the United States, it may qualify for the Research and Development (R&D) Tax Credit.

A variety of research or development activities qualify for the credit, including:

  • Creating or testing the feasibility of:
    • A new product.
    • Software.
    • Process.
    • Formula.
  • Improving internal processes.
  • Conducting beta testing.
  • Documenting research results.
  • Supervising technical workers who are performing R&D.
  • And more.\

A broad variety of research activities qualify, so we recommend meeting with your tax professional to determine if you have expenses that would be a fit for this tax credit.

  1. Disabled Access Credit

The Disabled Access Credit encourages businesses to invest in accessibility for individuals with disabilities, based on the Americans with Disabilities Act (ADA).

Your business may qualify for the credit if in the previous tax year, it:

  • Had gross receipts of $1 million or less, or
  • Employed 30 or fewer full-time workers.

Expenses of up to $250 and below are not eligible. Expenses of $251 – $10,000 may qualify for a tax credit of up to 50%, with a maximum credit of $5,000.

  1. Empowerment Zone Employment Credit

This credit incentivizes businesses to operate in distressed urban or rural areas that need economic revitalization, or empowerment zones (EZs).

Businesses qualify for the credit if they are based in an EZ and employ people who live there. If eligible, your business can qualify for a credit of 20% of the first $15,000 of wages paid to an employee, up to a maximum of $3,000 per employee.

Your business can claim this credit for an unlimited number of employees who also live in the EZ. Part-time and full-time employees employed by the company for at least 90 days during the tax year may qualify.

  1. General Business Tax Credit

The General Business Tax Credit refers to multiple tax credits for which your small business may qualify. Credits in this category include:

  • Work Opportunity Tax Credit
  • Investment Tax Credit
  • Credit for Small Employer Pension Plan Startup Costs
  • Employer-Provided Childcare Credit

These credits can be aggregated and carried forward if necessary. This means that if you are not able to claim the full amount of a tax credit in the current year, you can carry forward the excess credit to a future tax year.

  1. New Markets Tax Credit

Businesses and individual investors may qualify for this tax credit, which is designed to encourage investment in low-income communities.

If your business invests in a qualified low-income community, you can spread your credits across seven years. You may take 5% of the investment as a credit in the first three years, and 6% in the remaining four years. The total tax credit amount is 39% over the course of seven years.

Your business must be certified as a Community Development Entity (CDE) to take advantage of this tax credit. CDEs are intermediaries that provide financial counseling, loans, and investments in Low-Income Communities (LICs).

  1. Small Business Health Care Tax Credit

If your organization tends to employ lower-income workers, you may qualify for the health care credit. To qualify, your business must:

  • Have fewer than 25 full-time employees.
  • Pay at least half of the employee premiums for single health insurance coverage.

Qualifying small businesses may claim the credit for up to two consecutive years. The credit’s savings can be large, with maximum credit available at 50% of health care costs.

  1. Retirement Plan Startup Costs Tax Credit

This tax credit offsets certain qualified expenses related to starting a new retirement plan.

Your business may qualify for the credit if it meets the following conditions:

  • 100 or fewer employees who received at least $5,000 in wages in the year before starting the retirement plan.
  • At least one employee participating in the plan is a non-highly compensated employee (NHCE).
  • For the three years before qualifying for the credit, your employees were not substantially the same as those who received contributions in another employer-sponsored retirement plan at your company.

If your business qualifies, you can take a tax credit worth the greater of:

  • $500.
  • $250 multiplied by the number of NHCEs eligible for the plan, or up to $5,000.

You may claim the credit for each of the first three years of the retirement plan, if you have eligible expenses related to establishing the plan or educating your employees about the plan.

  1. Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) is offered to businesses that hire people that traditionally face barriers to employment, such as veterans. The credit aims to promote workplace diversity.

The WOTC is available for up to a percentage of a qualified worker’s wages:

  • 25%: For employees that worked between 120 and 400 hours.
  • 40%: For employees that worked over 400 hours.

The credit may be available up to $9,600 per employee.

  1. Employer-Provided Child Care Credit

With this credit, businesses can save money on their taxes if they provide childcare benefits to their employees.  

Employers can claim up to 25% of expenditures on qualified childcare for their employees. Additionally, the credit is available for up to 10% of qualified childcare resource and referral expenditures. The maximum credit available is $150,000.

  1. Employer Credit for Paid Family and Medical Leave

Employers may qualify for this tax credit if they provide paid family and medical leave to their employees. Employers must pay at least 50% of the employee’s regular wages during their leave to qualify for this credit.

Eligible employees include those who have worked for your business for at least one year before taking paid leave, and who earned up to $72,000 maximum during the year before taking the leave.

Paid leave qualifies if taken for one of the following reasons:

  • Parental leave for the birth, adoption, or fostering of a new child.
  • Medical treatment for a serious condition, either of the employee or their spouse, child, or parent.
  • An emergency for a parent, spouse, or child on active military duty.
  • Caring for a parent, spouse, or child on active military duty.

The credit is available at a minimum of 12.5% and increases by 0.25% for every percentage point that you pay an employee’s wages above 50%. For example, if you pay an employee 50% of their wages when on leave, your maximum credit for that employee’s wages would be 12.5%. If you paid the employee 70% of their normal wages, your tax credit would be 17.5%.

  1. Credit for Employer Differential Wage Payments

Differential wage payments to military personnel are all or part of the wages that they would have received if they were working. Differential wages can be claimed as a credit if paid to a qualified employee up to 20% of $20,000, or a total of $4,000 per employee per year.

Employees qualify for the credit if they have been employed for at least 91 days with your company before deploying. Businesses of all sizes qualify for the credit with the passage of the Protecting Americans from Tax Hikes (PATH) Act.

  1. Alternative Motor Vehicle Credit

Businesses that purchase a vehicle with an alternative fuel source may qualify for a credit of up to $8,000. You can claim the credit for vehicles purchased between 2015 – 2021. Credit amounts may vary based on the car’s make and model.

  1. Plug-In Electric Drive Vehicle Credit

If you purchase a qualifying vehicle for your business, you may qualify for a tax credit in the year you began driving the vehicle.

Vehicles qualify for the credit if they:

  • Have at least four wheels.
  • Weigh fewer than 14,000 pounds.
  • Draw energy from a battery that has at least four kilowatt hours.

The credit amount ranges from $2,500 to $7,500 and varies based on your vehicle’s battery. Certain two and three-wheel vehicles may qualify under certain circumstances.

conclusion

At Chugh CPAs, LLP, we are skilled in working with small business owners to proactively plan their tax savings.