Maximize Your Savings: A Comprehensive List of Small Business Tax Credits
As a small business owner, it’s essential to stay informed about the various tax credits available to you. These credits can significantly reduce your tax burden, but it can be challenging to keep track of all the options. In this blog post, we’ll provide a comprehensive guide to commonly missed small business tax credits that employers can claim. By understanding and utilizing these tax credits, you’ll be able to maximize your savings and keep more money in your business.
1. Small Employer Tax Credit for New Retirement Plans
Small business tax credits are available to employers who establish new qualifying retirement plans. The credit is 50% of your qualified startup costs, up to the greater of:
- $500; or
- The lesser of (1) $250 multiplied by the number of non-highly compensated employee (NHCEs) who are eligible to participate in the plan, or (2) $5,000.
Qualified startup costs include ordinary and necessary expenses a small business must pay to establish, manage, and educate staff members of a qualified retirement plan. The credit is available for the first three years of the plan.
Small businesses can get an additional $500 tax credit by implementing an automatic enrollment feature in a plan, whether it is new or already exists. The credit is given for the first three years the feature is in use. Combined, these credits can add up to a maximum of $5,500 per year ($16,500 over three years).
2. Small Business Healthcare Tax Credit
The Small Business Health Care Tax Credit, worth up to 50% of the costs you pay for your employees’ premiums (35% for non-profit companies), may be available to you. Employers can use the Small Business Health Care Tax Credit Estimator to find out if they qualify for the tax credit and how much it might be worth to them. Even if you are a small business employer who didn’t owe any tax for the year, you are still able to carry the credit back or forward to other tax years.
All of the following conditions must be met to be eligible for the tax credit:
- Employer provides its employees with a qualified health plan via the Small Business Health Options Program Marketplace (or qualify for a limited exception to this requirement)
- The average annual wage for your employees is around $56,000 or less
- You pay at least fifty percent of your full-time employees’ premium costs
3. Employer-Provided Childcare Facilities and Services Tax Credit
Small Business may receive a significant tax break if they offer specific childcare benefits thanks to the Employer-Provided Childcare Tax Credit. Employers can save more on taxes using the credit than they can with just deductions, and employees can exclude some daycare benefits from their taxable pay.
Eligible employers can receive an Employer-Provided Childcare tax credit of up to 25% of qualified childcare expenses and 10% of qualified childcare resource and referral expenses (used to help employees find childcare services). The maximum credit amount is capped at $150,000.
Expenses covered by the Employer-Provided Childcare Tax Credit include:
- expenses incurred to acquire, construct, or expand a qualified childcare facility
- expenses associated with running childcare facility, such as employee training, or salaries for qualified childcare professionals
- expenses incurred through a contract with a qualified childcare facility (including home-based providers)
- expenses incurred through a contract with a childcare provider to provide childcare resources and referrals.
4. Disable Access Credit
The Disabled Access Credit provides a non-refundable credit for qualifying small businesses that incur eligible expenses to provide access to persons with disabilities. Each small business can claim the maximum tax credit of $5,000 (half of the qualified expenses up to $10,250; the first $250 is not eligible for a credit).
Eligible access expenses include:
- removal of barriers (e.g., widening a doorway, installing a ramp)
- accessibility services (e.g., sign language interpreters)
- printed materials in alternate formats (e.g., large-print, audio, Braille)
- modification of equipment
Small businesses can qualify if:
- their annual revenue is less than $1 million, or
- they have 30 or fewer employees
5. Employer Credit for Paid Family and Medical Leave
The employer tax credit for Paid Family and Medical Leave was initially only accessible for tax years 2018 and 2019 under the Tax Cuts and Jobs Act of 2017. However, the benefit was extended to cover the tax years 2021–2025 by the the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
Employers who give their employees paid family and medical leave are eligible for this credit. A written policy that complies with the following standards must be in place by eligible employers:
- Must be guaranteed all qualifying employees at least two weeks of paid family and medical leave each year
- Must pay at least 50% of a qualified employee’s regular salary while they are on leave
The credit is calculated as a proportion of the salary paid to eligible workers while they are on family and medical leave. The credit ranges from 12.5% to 25% of wages paid for up to 12 weeks of family and medical leave per year.
When an employee is on family and medical leave, you can claim a minimum 12.5% of the cost of the paid leave if you pay them 50% of their regular salary. After that, the credit rises on a sliding scale for paid leave benefits with greater wage replacement rates, up to a maximum of 25% of the cost of paid leave that compensates employees at 100% of their regular wages.
6. Research Tax Credit
On August 16, 2022, President Biden signed the Inflation Reduction Act (H.R. 5376) into law, which doubled the federal research and development (R&D) credit to offset payroll taxes for eligible small businesses for tax years starting after 2022.
Prior legislation allowed small business entrepreneurs to use their eligible R&D credits to deduct up to $250,000 of the 6.2% employer portion of Social Security tax due. This limit was increased to $500,000, giving an additional $250,000 that can be utilized to reduce the 1.45% employer share of the Medicare payroll tax liability.
Even if an eligible business has little to no income tax liability, the credit enables it to take advantage of the sizable R&D tax benefit, possibly creating significant cash flow.
Keep in mind that not all research qualifies. For the research to be eligible for the credit, it must be:
- conducted to remove technical uncertainty on the creation or improvement of a product or process, including computer software, procedures, formulas, and inventions
- a project to find knowledge of a technological kind (meaning based on physical, biological, engineering or computer science principles)
- designed to be used in the development of a new or improved business product or process
- elements of a process of experimentation linked to a new or enhanced function, performance, reliability, or quality
7. Employee Retention Tax Credit
Employee Retention Tax Credit (ERTC) program was created in March 2020 to provide financial assistance during the pandemic. Since then, the ERTC has twice been expanded, making it available to more struggling businesses. Although the ERTC program has officially ended, businesses can still claim the ERTC retroactively for tax years 2020 and 2021. The ERTC is a refundable tax credit of up to $26,000 per employee. You may be eligible if your business experienced the following:
- full or partial government shutdown
- a decline in gross receipts
- disruption in operations or supply chains
- began operations after February 15, 2020
- reduction in goods or services
- reduction in operating hours
8. Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) may benefit businesses in a tight labor market by helping to reduce some of the compensation expenses associated with a new hire.
The WOTC is a business tax credit provided to employers who hire members of one of 10 targeted groups (e.g. veterans, SSI recipients, long-term unemployment recipients). The maximum credit is 40% of up to $6,000 in paid wages for each employee that works at least 400 hours. Therefore the maximum credit amount is $2,400. Employer may qualify for a partial WOTC credit of $1,500, for qualified employees that work a minimum of 120 hours. Qualifying employees must be:
- verified as members of a targeted group
- in their first year of employment
Recently Updated to Certification Process: The Pre-Screening Notice and Certification Request for the Work Opportunity Credit (Form8850) must be completed by the employer and the job applicant on or before the day a job offer is made in order to fulfill the requirement to prescreen a job applicant for eligibility to qualify an employer to receive the WOTC.
Partner with a Trusted Tax Accountant at Eco-Tax
It is essential for small business owners to stay informed about the various tax credits available to them, as it can make a significant difference in their overall tax burden. This guide highlighted some of the commonly missed small business tax credits that employers can claim, but there may be many more that apply to your business specifically.
At Eco-Tax, Inc., we specialize in tax planning and preparation for small businesses, and we can help you navigate the complex world of tax credits and deductions. Our team of experienced professionals will work with you to ensure that you are taking advantage of all available credits and deductions, so you can maximize your savings and invest in growth and expansion. Contact us today to schedule a consultation and let us help you with your tax planning and preparation this tax season and beyond.
