8 Tax Credits Small Businesses Don’t Know They Qualify For

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As a small business owner, you’re familiar with the art of juggling – from managing day-to-day operations to keeping your clients and employees happy. But when it comes to taxes, you might be leaving money on the table without even realizing it.

Tax credits are like those secret menu items that can sweeten the deal, yet they often go unnoticed amidst the complex tax code. Unlike deductions that lower your taxable income, tax credits are dollar-for-dollar reductions on your tax bill. They’re rewards for doing the things that benefit your employees, the environment, and the economy.

This guide will walk you through some of the most overlooked tax credits that could save your business thousands of dollars each year.

1. Work Opportunity Tax Credit (WOTC)

The WOTC is like a thank you note from Uncle Sam for hiring individuals who face barriers to employment. If you’ve hired veterans, food stamp recipients, or those living in designated community areas, this credit is for you.

It’s not just a pat on the back – employers can claim a tax credit of up to 40% of the first $6,000 in wages paid to each of these employees. But there’s a catch – you need to apply for and receive a certification for each employee from your state’s workforce agency before you can claim the credit. It might sound like a bit of extra paperwork, but the financial reward is worth the effort. Imagine the difference it could make to your bottom line, not to mention the impact on someone’s life by giving them a chance at gainful employment.

2. Employee Retention Credit (ERC)

In the whirlwind of recent economic challenges, the Employee Retention Credit (ERC) stands out as a crucial lifeline for small businesses striving to maintain their workforce. Everything about ERC changes was designed to cushion the blow from the pandemic’s impact, offering a refundable tax credit against employment taxes.

For those who qualify—showing either a significant decline in gross receipts or operations partially or fully suspended due to government orders—the credit amounts to a substantial percentage of qualified wages. With the ability to claim up to 70% of qualified wages paid per employee in 2021, the ERC is a godsend to small businesses. While navigating the credit can be complex, with implications for businesses that also received PPP loans, the financial benefits make it worth delving into the details, ideally with the guidance of a tax professional.

3. Disabled Access Credit

If you’ve ever widened a doorway, installed a ramp, or updated a restroom to be wheelchair accessible, the IRS has a credit that could refund 50% of those costs up to $10,250. It’s for small businesses that earn $1 million or less in revenue or have 30 or fewer full-time employees. This credit isn’t just about compliance with the Americans with Disabilities Act (ADA); it’s about inclusivity and ensuring everyone has access to your business. Plus, it shows your commitment to serving the whole community, which is always good for business.

4. Research and Development (R&D) Tax Credit

Innovation isn’t just for the tech giants and pharmaceutical companies. If you’re experimenting with new recipes in your bakery, developing a unique inventory system for your retail store, or even creating a custom app to better serve your customers, you could be doing R&D that qualifies for tax credits. You could reclaim up to 20% of your R&D expenses, which can include wages, supplies, and contractor fees. The best part? Even if you don’t owe any tax this year, you can carry forward the credit for up to 20 years or use it to offset payroll taxes if you’re a qualifying start-up.

5. Small Business Health Care Tax Credit

Healthcare – it’s one of the biggest concerns for small business owners and their employees. If you’ve taken the step to offer health insurance through the Small Business Health Options Program (SHOP), the IRS offers a credit worth up to 50% of the premiums you pay. You have to employ fewer than 25 full-time equivalent workers in order to be eligible, pay average wages less than $56,000 per year, and cover at least 50% of your full-time employees’ premium costs. Not only does this credit make it more feasible to offer health insurance, but it also helps in attracting and retaining talent.

6. Energy Efficiency Credits

Going green does more than just reduce your carbon footprint; it can also lead to tax savings. Small businesses that make energy-efficient upgrades are eligible for a variety of credits. Installing solar panels, wind turbines, or geothermal heat systems could yield a tax credit that covers a significant percentage of the cost. This isn’t just for new constructions; existing buildings qualify, too, if they undergo energy-saving improvements.

The exact credit depends on the type and scale of the installation, but it’s an investment that pays dividends in more ways than one — through tax savings and reduced energy bills.

7. Employer-Provided Child Care Credit

Balancing work and family is a challenge for many employees, and businesses that help ease this burden are rewarded by the IRS. If you provide childcare resources or services to your employees, you could claim a credit of 25% of the expenses, up to $150,000 per year. This can include the costs of running a childcare facility or contracting with a third-party provider.

Not only does this benefit your employees, but it also enhances your appeal as a family-friendly workplace, which can be a powerful recruitment and retention tool.

8. New Markets Tax Credit

This credit is designed to stimulate investment and economic growth in low-income neighborhoods. By financing businesses and real estate projects in these areas, you can qualify for a credit worth a sizeable percentage of the investment made. It’s a complex credit involving a web of regulations and qualifications, but the payoff is significant, both in tax savings and in fostering positive community impact. The New Markets Tax Credit can be a cornerstone for a business committed to social responsibility and economic development.

Conclusion

Tax credits can serve as a financial lifeline for small businesses. They’re not just reductions on a ledger; they are acknowledgments and rewards for the positive actions your business takes — hiring valued community members, investing in sustainability, caring for your employees, and stimulating economic growth. While it may take some time and effort to navigate the tax code and paperwork, the potential savings and benefits are well worth it.

Remember, these tax credits are designed for businesses just like yours to help them grow and succeed. So, as you prepare for the next tax season, take a closer look at these opportunities and consult with a tax professional to ensure you’re capturing every credit you deserve. Your business, your employees, and your balance sheet will thank you.

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