This post was originally published May 23, 2016, and extensively updated March 03, 2022.
At Cook Martin Poulson, we work with small businesses every day. We assist them with business consulting, outsourced CFO services, bookkeeping, and many other things. But perhaps what we are most known for is our proactive approach to business tax planning. For many small and medium-sized businesses, the biggest concern is making sure that they don’t overpay on their taxes. Many come to us with the question:
What tax credits are available for my small business?
This is a great question! Small business owners often miss out on the tax credits that can relieve a heavy burden during tax season.
In this post, we will review 13 small business tax credits that you should know about before you file your tax return.
Is There a Tax Credit for Starting a Small Business?
Before we reveal the 13 small business credits you shouldn't miss, you should know that you may be able to reduce the amount of taxes you pay when you start a business by availing yourself of the tax deduction for starting a small business.
Starting in 2008, the IRS began allowing businesses to deduct some of their startup costs. We should note that this is a deduction, not a credit. The difference is that a deduction allows you to decrease your taxable income while a credit is a dollar-for-dollar reduction in the amount of taxes you owe.
The startup tax break for small businesses permits the deduction of up to $5,000 in business startup costs and up to $5,000 in organizational costs provided that your total startup costs were $50,000 or less. Any amount over $50,000 will reduce the credit. In other words, if your startup costs were $52,000, you could take a $3,000 deduction.
What Tax Credits Are Available for My Small Business?
As we approach tax time, here are 13 small business credits that your business may be able to use to reduce your tax burden.
1. Research and Development Tax Credit
If your business is involved in certain kinds of domestic research or development, you may be able to qualify for the Research and Development Tax Credit.
Some qualified activities include:
- Streamlining internal processes
- Developing or improving technologies
- The building or improving manufacturing facilities
- Applying for patents
- Creating prototypes or models
- Improving products or processes
The credit calculation is complex, and the definition of qualified research is broad. Talk to your tax consultant to see if you have business-related expenses that would qualify you for this credit.
2. Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is available to businesses that hire people, including veterans, who have traditionally faced barriers to employment. It is designed to promote workplace diversity and inclusivity.
The WOTC is available to employers of all sizes. The credit is 25% of a qualified worker's wages if they worked between 120 and 400 hours, and up to 40% of wages for employees who worked over 400 hours. Depending on the employee’s hours and circumstances, the credit may be as high as $9,600 per employee.
3. Credit for Small Employer Health Insurance Premiums
The health care tax credit is designed to help small businesses and tax-exempt organizations that tend to employ lower-income workers. To qualify, your business must:
- Have fewer than 25 full-time employees
- Pay at least half the employee premiums for single health insurance coverage
If you meet these qualifications, you can claim the health insurance premium tax credit, but only for two consecutive years. It can result in substantial savings, with a maximum credit of 50 percent.
4. Disabled Access Credit
The disabled access credit is designed to encourage businesses to be more accessible to disabled individuals, as per the Americans with Disabilities Act (ADA). Your business can qualify for the credit if:
- Your business had gross receipts of $1 million or less; OR
- You didn’t employ more than 30 full-time workers in the previous tax year
The first $250 expenses are not eligible but after that, you may claim up to 50% of the next $10,000 in expenses for a maximum credit of $5,000.
5. Alternative Motor Vehicle Credit
This tax credit is designed to encourage businesses to purchase an alternative fuel source vehicle.
Your business can get a credit of up to $8,000. This credit doesn’t apply to hybrids or electric cars. (See #13 for a credit that does.) You can find the IRS list of qualified vehicles here.
This is an important tax credit to think about when making a new vehicle purchase for your business. You can save on fuel and get a considerable tax credit.
6. Employer-provided Child-care Credit
Many workers take advantage of the dependent care credit when they must pay for childcare services to have a job.
However, there’s also a tax credit for businesses that provide childcare benefits for their employees either on site or nearby.
The child tax credit allows for 25 percent of childcare service expenses plus 10 percent of resource and referral expenses. The maximum credit is $150,000 per year.
7. General Business Tax Credit
The General Business Tax Credit is not a single credit. Rather, it is a cumulative term applied to an array of credits that may be aggregated and carried forward if necessary. Some of the most common credits included in the General Business Tax Credit are some that are elsewhere on this list, including:
- Investment Credit
- Work Opportunity Credit
- Credit for Employer-Provided Childcare Facilities and Services
- Credit for Small Employer Pension Plan Startup Costs
You can find additional information about the General Business Credit here, including information on how the carryforward rule works and which forms you will need to calculate and claim the credit.
8. Retirement Plan Startup Costs Tax Credit
Many small business owners want to provide a retirement plan for their employees, but they may be unaware that a tax credit is available to help offset the qualified expenses associated with starting a new retirement plan.
The qualifications for the retirement plan startup costs credit are as follows:
- Your business had 100 or fewer employees who received at least $5,000 of annual wages in the year preceding the startup.
- You have at least one plan participant who is a non-highly compensated employee (NHCE).
- In the three tax years before you qualify for the credit, your employees were not substantially the same employees who received contributions or benefits in another plan sponsored by your company.
If you meet these qualifications, you may take a credit equivalent to the greater of:
- $250 multiplied by the number of NHCEs eligible for participation in the plan; or $5,000
You may claim the credit for each of the first three years of the plan provided you have qualified expenses related to the establishment of the plan or educating your employees about the plan.
9. Empowerment Zone Employment Credit
The Empowerment Zone Employment Credit is available to small business leaders who own and operate businesses in empowerment zones (EZs), which are defined as distressed urban and rural areas that require economic revitalization.
To qualify, your business must be located in a designated empowerment zone and employ people who live in the empowerment zone. The credit is equal to 20% of the first $15,000 of wages that the employee is paid. The maximum credit per employee is $3,000.
The IRS does not limit the number of employees for whom businesses can claim this credit, provided that they live and work in the designated EZ. Any part-time or full-time employee may qualify provided that they worked for you at least 90 days during the tax year.
10. Credit for Employer Differential Wage Payments
Military deployments can pose a financial burden to families and the credit for differential wage payments is designed to minimize that burden. Small businesses can qualify if they agree to pay differential wages to any employees who qualify.
Differential wages are defined as "all or part of the wages that the employer would have paid to a qualified employee" up to 20% of $20,000, for a total per-employee credit of $4,000 per year.
Employees qualify if they have been employed by your company for at least 91 days before their deployment. We should note that before the 2015 tax year, only small businesses with fewer than 50 employees could qualify for this credit; however, with the passage of the PATH Act, all businesses may now take this credit.
11. Employer Credit for Paid Family and Medical Leave
Employers who provide paid family and medical leave to employees may qualify for a tax credit to offset the expenses associated with paid leave. To qualify, the employer must provide payment of 50% or more of the employee's regular wages during their leave.
An eligible employee is someone who has worked for your business for at least one year before taking paid leave and who earned no more than $72,000 in the year preceding the paid leave. Paid leave qualifies if the employee is absent for one of the following reasons:
- Maternity or paternity leave
- Adoption of a child or fostering a child
- Treatment of a serious medical condition or to care for a spouse, child, or parent with a serious medical condition
- To accommodate any qualifying exigency due to a parent, spouse, or child being on active military duty
- Caring for a parent, spouse, or child who is an active service member
The credit is a minimum of 12.5% and increases by .25% for every percentage point that the employee's wages increase over 50%. In other words, if you provide 50% pay, your maximum credit would be 12.5%; if you paid 60% of the employee's usual wages, you would qualify for a credit of 15%, and so on.
12. New Markets Tax Credit
The New Markets Tax Credit Program was established to encourage businesses to invest in low-income communities. (We should note here that individual investors may also qualify for this credit.)
Businesses who choose to invest in qualified communities may spread their credits over seven years, taking 5% of their investment as a credit in each of the first three years. After that, they may take 6% for the remaining four years for a total of 39% in tax credits.
In late 2021, the Community Development Financial Institutions Fund (CDFI) established $5 billion in available tax credits to encourage both individuals and businesses to put money into low-income communities.
13. Plug-In Electric Drive Vehicle Credit
Some small business owners find it necessary to purchase vehicles for business use. If you opt for a vehicle that meets the qualifications, you may be eligible for a significant business tax credit.
The qualifications say that the vehicle must have at least four wheels, weigh less than 14,000 pounds, and draw energy from a battery with at least four kilowatt hours. If your vehicle qualifies, you may take the credit starting in the year you purchase the vehicle.
The credit may range from a low of $2,500 to a high of $7,500 depending on the battery. You may claim the credit only in the year when you begin driving the vehicle.
There are some circumstances in which you may qualify even for the purchase of a two or three-wheel vehicle. You can visit the IRS link above to learn about the electric vehicles that qualify.
Ask Our Tax Pros About Small Business Tax Credits
As a small business owner, it's necessary to pay your taxes, but that doesn't mean you shouldn't take advantage of any tax credits for which you qualify. Working with a dedicated tax pro will ensure that you don't miss any credits when you file your business taxes. Do you qualify for any of these 13 tax credits?