Small Business Tax Credits: What Are They and How to Qualify
At Tax Americano, we believe that “failing to plan is planning to fail,” especially when it comes to your small business taxes. Many business owners miss out on valuable tax credits that could save them thousands simply because they aren’t aware of what they qualify for. Unlike deductions that reduce your taxable income, tax credits directly lower the amount of tax you owe, dollar for dollar. In this article, we’ll explore some of the most common small business tax credits, what they are, and how your business can qualify for them.
Research and Development (R&D) Tax Credit
The R&D Tax Credit incentivizes businesses involved in developing new products, processes, or technologies. This credit isn’t just for tech giants—small businesses working on innovation and improvements can also benefit.
How to Qualify:
Your business must engage in activities that involve research or development, like creating prototypes or refining manufacturing processes. Document your efforts, including costs related to wages, supplies, and research expenses.
Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit rewards businesses that hire individuals from specific groups that face barriers to employment, such as veterans or long-term unemployed individuals.
How to Qualify:
To claim the WOTC, you must hire from eligible groups and submit the necessary paperwork to the IRS within 28 days of the employee’s start date. The credit ranges up to $9,600 per qualified hire, depending on their specific group.
Disabled Access Credit
The Disabled Access Credit helps small businesses cover costs for making their premises more accessible to individuals with disabilities, aligning with the Americans with Disabilities Act (ADA).
How to Qualify:
Small businesses with gross receipts under $1 million or fewer than 30 full-time employees can qualify. Eligible expenses include removing barriers, installing ramps, or providing sign language interpreters.
Employer-Provided Childcare Tax Credit
Businesses that offer childcare services for their employees can benefit from the Employer-Provided Childcare Tax Credit, making it easier to support working parents.
How to Qualify:
This credit is available for businesses that provide childcare facilities or contract with local providers. The credit is 25% of childcare expenses and 10% of resource and referral costs, up to $150,000 annually.
Energy-Efficient Commercial Buildings Deduction
The Energy-Efficient Commercial Buildings Deduction is designed for businesses that reduce their energy consumption through the installation of energy-saving systems like efficient HVAC, lighting, or insulation.
How to Qualify:
Your building must meet energy efficiency standards that reduce costs by at least 50%. You’ll need an independent contractor to certify that your improvements comply with IRS guidelines.
New Markets Tax Credit (NMTC)
The New Markets Tax Credit encourages businesses to invest in low-income communities through certified Community Development Entities (CDEs).
How to Qualify:
To qualify, you must invest in a CDE. The credit equals 39% of your investment, claimed over a seven-year period, and is designed to promote growth in economically disadvantaged areas.
Small Employer Health Insurance Premium Credit
The Small Employer Health Insurance Premium Credit helps small businesses offset the cost of providing health insurance to their employees through the Small Business Health Options Program (SHOP).
How to Qualify:
Your business must have fewer than 25 full-time employees and pay an average annual wage of less than $56,000. The credit can cover up to 50% of the health insurance premiums you pay.
Retirement Plan Startup Costs Credit
The Retirement Plan Startup Costs Credit is available for small businesses that set up a new retirement plan, such as a 401(k) or SEP IRA, encouraging you to help your employees save for the future.
How to Qualify:
Businesses with fewer than 100 employees qualify for this credit. It covers 50% of your plan’s startup costs, up to $5,000 per year, for the first three years.
Employee Retention Credit (ERC)
The Employee Retention Credit was created during the COVID-19 pandemic to help businesses keep their employees on payroll. While primarily available in 2020 and 2021, some businesses may still be eligible.
How to Qualify:
If your business experienced significant revenue loss or had to suspend operations during the pandemic, you could claim the ERC based on wages paid during that time.
Paid Family and Medical Leave Credit
The Paid Family and Medical Leave Credit offers incentives to businesses that provide paid leave for employees who need to care for family members or take medical leave.
How to Qualify:
Your business must provide at least two weeks of paid leave to full-time employees and a proportional amount to part-timers. The credit ranges from 12.5% to 25% of wages paid during the leave period.
How to Claim These Tax Credits
To make the most of these small business tax credits, it’s essential to stay organized and track all qualifying expenses. Work with a tax professional or accountant to ensure you meet all IRS requirements and file the necessary forms. At Tax Americano, we’re here to help you with your tax planning because “failing to plan is planning to fail.” Don’t leave valuable tax savings on the table—start planning today.
Small business tax credits can make a big difference in your bottom line, providing direct savings that allow you to reinvest in your business. Whether you’re hiring new employees, going green, or supporting your team with benefits, these credits are designed to reward business growth and innovation. Reach out to Tax Americano to see how we can help you identify and claim all the credits you deserve.