Seven Commonly Overlooked Tax Credits Your Small Business Should Be Claiming

Every small-business owner should be taking advantage of tax credits. Tax credits are a powerful tool that can help you reduce your taxable income and make a direct impact on your annual tax bill.

But you may not be aware of the wide range of tax credits that are available to you. This oversight means you could be leaving thousands of dollars on the table. Here, I will review some of the most overlooked tax credits, and how you can take advantage of them.

Tax Credits Vs. Tax Deductions

There are two primary ways you can save on your small-business taxes this year: claim your tax deductions and take advantage of tax credits. Assuming you meet the requirements, you can claim deductions and credits on your tax returns.

A tax deduction lowers your tax liability by reducing your taxable income. These deductions are usually expenses that your business incurs throughout the year.

Inventory, insurance and startup costs are all examples of small-business deductions. At the end of the year, you’ll subtract your deductions from your adjusted gross income to figure out how much you owe in taxes.

In comparison, a tax credit is a dollar-for-dollar deduction on your tax bill. If you receive a tax credit for $500, that means you’ll pay $500 less in taxes. Tax credits have far more impact on your tax bill and can help you save more money.

Here are seven commonly overlooked small-business tax credits you may qualify for. You can also find a full list of tax credits on the IRS’s website.

General Business Tax Credit

The general business tax credit isn’t a single tax credit, but a group of tax credits designed to promote certain business activities. It includes tax credits for providing employees health insurance, research and development and purchasing a qualified electric vehicle.

To qualify, you’ll need to fill out a separate form for each of the tax credits you’re claiming and add them up on Form 3800.

Paid Family And Medical Leave

You’re eligible for this tax credit if you offer paid medical leave to your employees. Under the Family and Medical Leave Act, certain employees can take up to 12 weeks of unpaid leave. For instance, the birth of a child or a family medical emergency are qualified reasons.

If you claim this tax credit, you’ll receive a percentage of the wages you paid your employees while they were on medical leave. To qualify for this tax credit, you must have a written policy in place and provide at least two weeks of paid family and medical leave to full-time employees each year.

Alternative Fuel

If your business is involved in producing alternative fuels, like methanol and ethanol, you may be eligible for this tax credit. The IRS offers this tax credit to business owners that help the U.S. reduce its dependence on oil. However, it only applies if you’re involved in the production of alternative fuels, not the consumption.

Employer-Provided Child Care Facilities And Services

If you provide child care for your employees either on-site or through a contract with an outside facility, you’re eligible for this tax credit. The credit is available for 25% of child care expenses, plus 10% of qualified resources and referred expenditures. The credit is capped at $150,000 each year, and you’ll claim it by filling out Form 8882.

R&D Tax Credits

The federal research and development (R&D) tax credit is another great way to reduce your tax liability. It’s available to companies developing new business products, software, techniques or processes. Many business owners mistakenly think their company won’t qualify for the R&D tax credit, but it’s much broader than you may realize. Your company may be eligible for this tax credit if you spend time developing new products, improving existing products or developing patents or prototypes. And since the credit is retroactive, you can claim it for up to three previous tax years. You’ll fill out Form 6765 to document any qualifying R&D expenses.

Small-Business Health Insurance Premiums

If you’re a small-business owner who provides health insurance for your employees, you may qualify for this tax credit. But first, you’ll have to meet the following criteria:

• You have fewer than 25 full-time employees.
• Your annual wages for the year were less than $56,000 per full-time employee.
• You pay at least half of your employees’ health insurance premiums under a qualifying arrangement.
• If you qualify, you could receive 50% of the amount you paid in health insurance premiums. However, you can only claim this credit for two consecutive years.

Work Opportunity

The Work Opportunity Tax Credit is available to companies that hire workers that typically face employment barriers. This target group includes individuals like veterans, ex-felons and SNAP recipients.

The credit is based on three primary criteria:

• The category of employees.
• The amount paid to those employees during their first year.
• The total number of hours they worked.

Before you can apply for and receive the credit, you must ensure a new hire is a member of the target group. After a new hire has been certified, you can claim the Work Opportunity Tax Credit against your income taxes.

Both tax credits and deductions can save you money come tax season. But unlike deductions, which take a percentage off the top, tax credits take off whole dollar amounts and can help you save more on your tax bill.

The best way to ensure you’re not overlooking these deductions is to work with a small-business accountant. The right accountant can help you identify any tax credits your business qualifies for. And tax credits often come with a lot of regulations, so an accountant can help you navigate these complexities.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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