Business tax credits can be a great way to reduce your tax bill and improve your cash flow. But for many small business owners, keeping track of all the different small business tax credits can be a challenge. Find out everything you need to know about federal business tax credits, including some of the best options for small businesses.
What are business tax credits?
Tax credits are essentially “rewards” given to businesses and individuals. They are offered as incentives for activities that provide benefits for society, industry, and employees. For example, you may be able to get a business tax credit for conducting research, providing benefits to your employees, or implementing climate-friendly initiatives.
Federal business tax credits can have a serious impact on your business’s bottom line because they reduce the amount of tax your business needs to pay. For example, if you owe $10,000 in taxes, but claim a $3,000 business tax credit, you can subtract that amount from your tax bill, leaving you with just $7,000 to pay in taxes. Plus, the more small business tax credits you get, the less you’ll need to pay in tax.
What’s the difference between business tax credits and tax deductibles?
One of the key areas of confusion around small business tax credits is the difference between tax deductions and tax credits. It’s relatively simple. Essentially, tax deductibles are provided to small businesses for every business-related expense that you claim on your taxes, such as travel, rent, and supplies. However, only a certain percentage of every dollar that you deduct is taken off your tax bill. For instance, if you’re in the 10% tax bracket, then $1 of deductions results in 10 cents of savings. By contrast, federal business tax credits directly decrease your taxes dollar for dollar.
Small business tax credits to pay attention to
Now that you’ve got a basic understanding of business tax credits, it’s a good idea to look at some of the different options. Remember, this is an inexhaustive list as there is an enormous range of federal tax credits for businesses, some of which are very obscure.
General Business Tax Credit
Serving as a catchall for a range of different individual tax credits (retaining employees, purchasing electric vehicles, etc.), the General Business Tax Credit requires you to fill out separate forms for each of these credits before adding them up. Fill in Form 3800 to claim for this tax credit.
Small Business Health Care Tax Credit
Small businesses that pay health insurance premiums for employees enrolled in selected health plans (offered through a Small Business Health Options Program Marketplace) may be eligible for the Small Business Health Care Tax Credit. In order to claim, you’ll need to use Form 8941.
Work Opportunity Credit
Tax credits are also available for businesses that hire employees who face barriers to employment, such as ex-felons, unemployed veterans, and long-term family assistance recipients. You’ll have to fill in Form 5884 to apply for this business tax credit.
Rehabilitation, Energy, and Reforestation Investments Credit
If your business has made investments in building rehabilitation, reforestation, and alternative energy property, you may be eligible for this tax credit. You can claim on Form 3468.
Disabled Access Credit
Making your offices and facilities accessible to people with disabilities (installing ramps, upgrading restrooms, etc.) can make you eligible for the Disabled Access Credit, assuming your business has 30 or fewer full-time employees or a total revenue of $1 million or less. Use Form 8826 to claim for this tax credit.
Remember that claiming for federal business tax credits is a continual process, as the criteria for eligibility can change over time. For example, you can only claim a tax credit for business purchases in the year you started using the project, while new federal tax credits for businesses may become available as your business grows. If you’re unsure about the different tax credits for new business owners, hiring a tax professional can be a great way to navigate this complex area of the business world.
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