For small business owners, tax season can feel like navigating a maze. While many focus on deductions, tax credits are often overlooked—and they can be even more valuable. Unlike deductions, which reduce your taxable income, tax credits directly reduce your tax liability dollar for dollar. This guide will help you understand lesser-known tax credits available to small businesses and how to claim them effectively.
Why Tax Credits Matter for Small Businesses
Tax credits can significantly reduce your overall tax burden, freeing up resources to reinvest in your business. Many credits are designed to incentivize behaviors that benefit the economy or society, such as hiring employees, investing in clean energy, or providing health insurance. By taking advantage of these credits, you’re not only reducing costs but also aligning your business practices with broader societal goals.
The Difference Between Tax Credits and Deductions
Before diving into specific credits, it’s crucial to understand how they differ from deductions:
- Tax Deductions: Lower your taxable income. For example, if you earn $100,000 and have $10,000 in deductions, your taxable income becomes $90,000.
- Tax Credits: Directly reduce the taxes you owe. If your tax liability is $10,000 and you qualify for a $2,000 tax credit, you only owe $8,000.
Understanding this distinction underscores the value of tax credits and why they’re worth pursuing.
Commonly Overlooked Tax Credits for Small Businesses
1. Research and Development (R&D) Tax Credit
Many small business owners assume this credit is only for large corporations or tech companies. In reality, the R&D tax credit is broadly applicable and can benefit businesses in various industries.
Who Qualifies:
- Businesses developing new or improved products, processes, or software.
- Industries such as manufacturing, agriculture, and even food and beverage can qualify.
How to Claim:
- Maintain detailed records of research activities and associated expenses.
- File Form 6765, “Credit for Increasing Research Activities.”
2. Work Opportunity Tax Credit (WOTC)
The WOTC rewards businesses for hiring individuals from certain targeted groups who face significant barriers to employment.
Who Qualifies:
- Veterans
- Long-term unemployed individuals
- Individuals receiving Supplemental Nutrition Assistance Program (SNAP) benefits
How to Claim:
- Submit IRS Form 8850 and ETA Form 9061 to your state workforce agency within 28 days of the employee’s start date.
3. Disabled Access Credit
Small businesses that make their facilities accessible to persons with disabilities can qualify for this credit.
Who Qualifies:
- Businesses with gross receipts of $1 million or less or fewer than 30 full-time employees.
Eligible Expenses:
- Installing ramps
- Modifying restrooms
- Acquiring adaptive equipment
How to Claim:
- Use IRS Form 8826, “Disabled Access Credit.”
4. Energy-Efficient Commercial Buildings Deduction (Section 179D)
If your business invests in energy-efficient upgrades, you might qualify for this deduction, which was recently expanded under the Inflation Reduction Act.
Who Qualifies:
- Businesses improving the energy efficiency of commercial buildings.
Eligible Upgrades:
- Installing solar panels
- Upgrading HVAC systems
- Improving insulation
How to Claim:
- Consult a tax professional to verify eligibility and file the necessary forms.
5. Employee Retention Credit (ERC)
Initially introduced during the COVID-19 pandemic, the ERC remains an important credit for businesses that retained employees during challenging times.
Who Qualifies:
- Businesses that experienced a significant decline in revenue during qualifying periods.
How to Claim:
- Retroactively apply by filing an amended payroll tax return (Form 941-X).
6. Small Employer Health Insurance Credit
If your business provides health insurance to employees, this credit can offset up to 50% of premiums paid.
Who Qualifies:
- Employers with fewer than 25 full-time employees.
- Average employee wages of $56,000 or less (adjusted annually).
How to Claim:
- File Form 8941, “Credit for Small Employer Health Insurance Premiums.”
How to Identify Tax Credits for Your Business
1. Consult a Tax Professional
A tax professional can help you identify credits you may not be aware of and ensure compliance with IRS requirements.
2. Industry-Specific Research
Many tax credits are industry-specific. For example:
- Restaurants can qualify for the FICA tip credit.
- Agriculture businesses might benefit from credits for sustainable farming practices.
3. Leverage Technology
Modern tax software can identify potential credits based on your financial data. Some programs integrate directly with your accounting systems to streamline this process.
4. Stay Informed About New Legislation
Tax laws change frequently, and new credits are often introduced to address emerging priorities. Keeping up with legislative updates can help you capitalize on new opportunities.
Steps to Claim Tax Credits Effectively
- Organize Your Documentation Maintain detailed records to substantiate your claims. This includes invoices, payroll records, and descriptions of activities or expenses.
- Understand Deadlines Some credits require action within a specific timeframe, such as the 28-day window for the WOTC.
- Work With a CPA or Accounting Partner An accounting partner can provide tailored advice and handle complex filings, ensuring you maximize your credits while staying compliant.
- File the Appropriate Forms Each tax credit has its own forms and requirements. Familiarize yourself with these to avoid delays or denials.
Avoiding Common Mistakes
1. Failing to Substantiate Claims
The IRS requires businesses to provide adequate documentation. Without it, your claim could be denied or audited.
2. Overlooking State Tax Credits
In addition to federal credits, many states offer their own incentives. Research opportunities in your state to maximize benefits.
3. Not Amending Past Returns
If you’ve missed a credit in previous years, you can often amend your return to claim it retroactively. This is especially relevant for credits like the ERC.
Final Thoughts
Tax credits represent a valuable opportunity for small businesses to reduce costs and invest in growth. By understanding the available credits and working with an experienced accounting partner, you can unlock these benefits while staying compliant with IRS regulations. Whether you’re improving energy efficiency, hiring new employees, or conducting R&D, there’s likely a credit that aligns with your business activities. Don’t leave money on the table—start exploring these opportunities today.
