Tax time can be stressful for small business owners. However, the more knowledgeable you are about your tax situation, the less likely you are to leave money on the table. Taking advantage of small business tax credits can be a good opportunity to make the most of your tax return.
Everyone loves tax breaks, and as a small business owner, it’s important to know ways you can save to keep your business moving forward. Small business tax credits, for example, are subtracted from the amount of taxes you owe – reducing the amount of money you need to pay, dollar for dollar.
Tax credits are often given to businesses as incentives for options like purchasing greener products, and many credits are only offered during a specific period.
Below, we will discuss common tax credits available for small businesses; explain how to claim the credits; and highlight the differences between tax credits and deductions.
Small Business Tax Credits
There are several tax credits that small businesses could potentially qualify for. Here are a few of the more common options.
Paying Family and Medical Leave for Employees
You would use Form 8994 to calculate tax credit for providing employees with paid family leave and medical leave for tax years post-2017. An employer must offer qualifying employees a minimum of two weeks of paid family and medical leave yearly, among other criteria. The credit offers between 12.5% and 25% of certain wages that were paid to qualifying employees during the time off. The credit can be taken within three years of the due date of your return.
Small Employer Health Insurance Premiums
As part of the Affordable Care Act (ACA), tax credit is available for qualifying businesses that offer employees health insurance premiums for tax years following 2009. Employers can use Form 8941 to calculate the amount of the credit. Tax years post-2013 only offer the credit for a period of two consecutive tax years.2
To be a qualifying small business employer, during the tax year, the business must have paid employee health insurance coverage premiums abiding by a qualifying arrangement, have fewer than 25 full-time equivalent employees, and have paid average annual wages less than $56,000 per full-time employee.
Research and Development Tax Credit
This tax credit was intended to incentivize innovative research and development (R&D). Qualified research activities and basic research payments can both be claimed toward the tax credit. These pursuits may include:
- The development of novel products
- Improving current products
- Creating or bettering current software and prototypes
To calculate and claim credit for increasing R&D activities, businesses can file Form 6765. If you think your business may qualify, consult with your tax preparer because this credit involves various parts, and could involve different forms depending on your business classification.
Disabled Access Credit
This credit is for small businesses that spend money on creating access for those with disabilities. Form 8826 provides details on qualifying costs. Qualifying small businesses can use the credit every year that costs are incurred toward increasing access.
Examples of eligible expenditures include:
- Removing barriers that keep a business from being accessible to those with disabilities
- Increasing accessibility for those with hearing or visual impairments
- Getting or adapting equipment to accommodate individuals with disabilities
How To Claim Small Business Tax Credits
To take a general business credit, fill out the appropriate credit form provided by the IRS for business credits applicable to your current year. You will likely need to also fill out Form 3800. Any accumulation of business credits from earlier years coupled with any current business credits will create your current year’s worth of general business credit.
Tax Credits vs. Tax Deductions Explained
- Tax credits directly decrease the amount of tax a small business owes by a dollar-for-dollar amount. For example, a $200 tax credit will decrease a business’s tax bill by $200.
- Tax deductions don’t have as much of a direct impact on a filer’s tax liability as tax credits. Instead, they lower your taxable income, and how much money you save depends on your tax rate.
- While a tax credit gives the same benefit to all businesses that can claim the full amount, how much a business benefit from a tax deduction depends on the business’s tax liability and marginal tax rate. Businesses in higher tax brackets benefit the most.
- Tax credits usually can’t decrease a business’s tax liability by less than zero; however, there are some exceptions in which the business can receive funds back. Deductions can’t make taxable income lower than zero.
Bottom Line
In addition to taking advantage of the tax credits you qualify for to help offset your costs, don’t forget that adding the new equipment you need into the mix this year could help you save with the Section 179 deduction next year.
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