5 Tax Credits Small Businesses Should Know About

As tax season is coming up one of the goals of every small business owner is to minimize their tax bill. So, what are some of the ways to do that? You have probably heard that some business expenses are deductible. An even more effective way to reduce tax liability is through tax credits. In this article, we will discuss the definition of tax credits and the five tax credits small business owners should know about. 

What Is a Tax Credit?

Tax credits are a way for small businesses to reduce their tax bill. Unlike business expense deductions, tax credits offer a dollar for dollar reduction in tax liability for a small business. Some business owners are intimidated by the mechanics of tax credits, but this dollar for dollar reduction makes them one of the most powerful ways for a small business to minimize its tax bill. 

Let’s look at an example to help clarify how a small business tax credit works and how it differs from a small business tax deduction. Suppose your business has an adjusted gross income of $100,000 and has a $10,000 tax credit available. Your accountant has calculated your final tax bill to be $25,000. The tax credit reduces your final bill dollar-for-dollar, which leaves your business with a final tax bill of $15,000.

Now consider what happens if the $10,000 was a tax deduction rather than a credit. Instead of reducing the final tax bill dollar-for-dollar, the $10,000 would be subtracted from the company’s adjusted gross income of $100,000. Assuming a marginal tax rate of 25%, the company’s tax bill will now be (90,000*.25) = $22,500.  

You can see the power of tax credits in the previous example, as the tax credit brings an additional tax savings of $7,500. 

Employer Provided Health Insurance Premiums

One of the benefits to small businesses as a result of the Affordable Care Act is the ability to claim a tax credit in an amount up to 50% of insurance premiums paid under a qualifying agreement. You are eligible for the credit if:

●      You had fewer than 25 employees

●      Average annual wages less than $55,000

●      Pay at least 50% of premiums

●      Plan was purchased through the Small-Business Health Options Marketplace

Please note that the credit can only be claimed for two consecutive years after 2014.  

Credit For Paid Family and Medical Leave

The credit for paid family and medical leave was recently introduced to encourage businesses to provide paid leave to employees for events such as childbirth or health emergencies. If small business owners have a written policy that covers all qualifying employees, they are eligible for the credit. 

The credit amount ranges from 12.5% to 25% of wages paid to qualifying employees on paid leave for up to 12 weeks. The American Rescue Plan increased the cap on the credit from $10,000 to $12,000.  For more information and details on the mechanics of the credit, be sure to check out the IRS information page. 

Disabled Access Credit

This credit encourages small businesses to provide disabled access to facilities. The company can cover up to 50% of expenditures related to enabling disabled access, with a cap of $5,000.  Here's the IRS link for more details.

Employer Provided Childcare Facilities

Many employers cover childcare expenses for their employees either directly or by helping them obtain care. Employers that cover services are eligible for a credit of up to 25% of expenses, with a cap of $150,000 per year. 

Before the changes to the Child and Dependent Care credit for 2021, employees could actually save money by having their employers cover childcare expenses rather than paying for it themselves and utilizing the Child and Dependent Care credit. 

For example, if the employee paid for childcare expenses, they could claim a credit of up to 35% of expenses up to $3,000. This meant that the employee paid $1,950 per year for childcare. The employee would save the $1,950 if the employer paid for the childcare expenses. This may be an area for your small business to discuss to improve their childcare coverage policies that could lead to savings for both company and employee. 

Work Opportunity Credit

This tax credit incentivizes small businesses to hire underrepresented workers from groups including the following:

●      Veterans

●      Long-term unemployed

●      Ex-felons

●      Supplemental Social Security Recipients

●      Designated members of community empowerment zones

The amount of credit depends on which type of underrepresented worker your small business hires, but generally allows up to 40% of the first $6,000, or $2,400. Check out IRS Form 5884 for more details.

Summary

We hope this discussion of the importance of small business tax credits and how they can reduce your tax bill has been informative. The list we covered is not exhaustive, and there may be additional tax credits your small business qualifies for. For more information on taxes and accounting, be sure to check out the rest of the Silva Tax & Accounting website!