One of the best ways to cut costs as a business owner is to take advantage of all the tax deductions and tax credits for which you’re eligible. As a business owner, you’re concerned with the bottom line–increasing your net profits. That probably means you spend most of your time trying to increase your income while cutting costs and increasing your profit. In this article, we’ve outlined most of the tax credits available to business owners.
What is a Tax Credit?
Although they’re similar and will both save your business money, tax deductions and tax credits are different from each other. Tax credits directly reduce the amount of taxes you owe. Tax deductions, on the other hand, lower the percentage of your taxable income.
Tax Credit Example
To illustrate tax credits, let’s say you owe $1,800 in taxes but are eligible for a $1,200 tax credit. If this is the case, your tax bill would be reduced to $600. In other words, your tax bill is reduced, dollar-for-dollar, by the amount of your tax credit.
Tax Deduction Example
On the other hand, tax deductions decrease the percentage of your taxes that are taxable. Let’s say, for example, that you are in the 24 percent tax bracket. A $1,000 deduction will reduce your taxable income by $240. So, if your taxable income was $60,000, you only be taxed on $59,760.
How Do Tax Credits Work?
Typically, tax credits are generally considered superior to deductions because they usually have a more significant impact on your tax bill. There are three basic types of tax credits: nonrefundable, refundable, and partially refundable. (use this)
Nonrefundable Tax Credits
When a tax credit is nonrefundable, you can only reduce your tax bill to $0. After $0, any remaining amount of unused tax credits are “lost,” since any negative amount is not refunded to you.
Nonrefundable tax credits are only valid in the reporting tax year. They expire after you file your tax return, and they cannot be transferred over to future years.
Refundable Tax Credits
As you might expect, refundable tax credits are paid out in full to eligible taxpayers. If a refundable tax credit decreases your tax bill below zero, you will receive a refund for the negative amount.
There is a lesser-known type of tax credit, known as a partially refundable tax credit. In this scenario, when a tax credit results in a negative balance on your tax bill, you will be refunded the lesser amount of either 40% of the tax credit or $100.
The General Business Tax Credit
One of the first things to do when trying to determine your eligibility for tax credits is to understand the General Business Credit (GBC). This tax credit is not a single tax credit, but rather numerous tax credits that are designed to promote behaviors like research and development, reforestation, and oil recovery.
Once you’ve explored the credits listed below and completed each of their respective forms, enter the total amount of tax credits on the Form 3800. If you are only eligible for one tax credit, then you do not need to complete Form 3800, General Business Credit.
Rehabilitation, Energy and Reforestation Investments Credit
If your business has invested significant amounts of money into renovating old facilities or incorporating alternative energy sources, you may be eligible for this tax credit. This tax credit has an annual cap of $10,000 and will typically cover 10% of your expenditures.
For this tax credit, you’ll need to fill out Form 3468, Investment Credit
Work Opportunity and Welfare-to-Work Expenses Credit
If you hire employees who face employment barriers, your business may be eligible for this tax credit. The IRS has outlined ten categories of workers that contribute to your company’s eligibility for this tax credit:
- Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
- Unemployed veterans, including disabled veterans
- Designated community residents living in Empowerment Zones or Rural Renewal Counties
- Vocational rehabilitation referrals
- Summer youth employees living in Empowerment Zones
- Food stamp (SNAP) recipients
- Supplemental Security Income (SSI) recipients
- Long-term family assistance recipients
- Qualified long-term unemployment recipients (for people who begin work after 2015).
The wages you pay to each eligible employee go toward calculating your final tax credit amount. Over two years, this tax credit can save you a maximum of $9000 per eligible employee.
To claim this tax credit, use Form 5884, Work Opportunity Credit.
Alternative Fuel Credits
If your company has either sold or used eligible biofuels, biodiesels, or low-sulfur diesel throughout the year, you may qualify for this tax credit. To qualify for this tax credit, you must adequately outline the composition of the fuel(s) used, how they were used, and the process for paying excise tax.
To claim this tax credit, use the appropriate form below:
- Form 8864, Biodiesel and Renewable Fuels Credit
- Form 8911, Alternative Fuel Vehicle Refueling Property Credit
- Form 6478, Alcohol and Cellulosic Biofuels Credit (for companies that produce biofuels)
Credit for Increasing Research Activities
Developing patents, creating software, and prototyping products are all some of the activities that entitle you to this tax credit. Whether you’re a partnership, corporation, or individual, this tax credit has the potential to cover up to 20% of your expenses.
To claim this tax credit, you can use Form 6765 (Credit For Increasing Research Activities) or Form 8974 (Qualified Small Business Payroll Tax Credit for Increasing Research Activities).
Note that smaller businesses would not claim this tax credit directly, instead of offsetting up to $250,000 of their Social Security taxes for the given year.
Disabled Access Credit
Investing in company improvements that enhance accessibility for those with disabilities may make you eligible for this tax credit. This tax credit can potentially cover up to 50% of your expenses, with a maximum tax credit amount of $5,125.
To claim this tax credit, use Form 8826, Disabled Access Credit.
Qualified Plug-in Electric and Electric Vehicle Credit
If your business purchased and used an eligible type of plug-in electric vehicle on or after 2010, you might qualify for this tax credit. Depending on the battery capacity of your electric vehicle, this tax credit is worth between $2,500 and $7,500. To calculate your potential tax credit savings, you can use this calculator provided by the Environmental Protection Agency.
To claim this tax credit, use Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit.
Alternative Motor Vehicle Credit
If your company purchases and regularly uses a vehicle that uses alternative fuel, you may be eligible for this tax credit. Note that this does not apply to plug-in electric vehicles or hybrid vehicles. Although this tax credit is worth up to $8,000, it’s essential to realize that only a few vehicles, like the Mercedes-Benz 2012 F-Cell, are currently eligible.
To claim this tax credit, use Form 8910, Alternative Motor Vehicle Credit.
Empowerment Zone and Renewal Community Employment Credit
If your employees work or live in low-income areas, you may qualify for this tax credit. An Empowerment Zone (EZ) are focus areas in which the U.S. Department of Housing and Urban Development (HUD) would like to encourage economic development. To determine whether your employees live or work in an eligible zone, use the HUD’s website.
If you qualify for this tax credit, you could potentially receive up to $3,000 per eligible employee (up to 20% of the first $15,000 you pay in wages).
To claim this tax credit, Form 8844, Empowerment Zone and Renewal Community Employment Credit.
Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips
If you are in the food and beverage industry, this tax credit may be for you. To qualify for this tax credit, you need to employ workers in the food and beverage industry, let Social Security or Medicare taxes on those tips. Tipped employees outside of the food and beverage industry are not eligible for this tax credit.
To claim this tax credit, use Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips.
New Markets Credit
If you invested in an organization that creates jobs in low-income communities, you might be eligible for this tax credit. The U.S. Department of Treasury refers to job-creating organizations as community development entities. You can find a list of these entities here.
To claim this tax credit, use Form 8874, New Markets Credit.
Credit for Small Employer Pension Plan Startup Costs
This tax credit may be for you if your company:
- Has 100 or fewer employees who each receive a minimum compensation of $5,000
- Has not had a 401(k) or another qualified retirement plan in the past three years
- Has plans on starting a pension plan for your employees
This tax credit is worth up to 50% of your startup costs (with a maximum amount of $500) and is claimable for the first three years of the new pension plan.
To claim this tax credit, use Form 8881, Credit for Small Employer Pension Plan Startup Costs.
Employer-Provided Child Care Credit
As an employer, if you pay childcare expenses for your employees, you may be able to receive up to 25% of those expenses as a tax credit (there is a maximum amount of $150,000). For scenarios where you are also an “employee” of a corporation, you could be eligible to receive the same benefits as your employees.
To claim this tax credit, use Form 8882, Credit for Employer-Provided Child Care Facilities and Services.
Credit for Small Employer Health Insurance Premiums
Paying the health insurance premiums for your employees may allow you to deduct up to 50% of those expenses, provided your company meets the following criteria:
- Has fewer than 25 full-time employees
- Pays at least half of the insurance premiums for your employees
- Purchase coverage through the Small Business Health Options program
To claim this tax credit, use Form 8941, Credit for Small Employer Health Insurance Premiums.
Family and Medical Leave Credit
If you provide paid leave to your employee(s) for family or health-related reasons, this tax credit may apply to you. The tax credit is worth between 12.5% and 25% of what you paid to the employee, depending on their pre-leave pay. To qualify for this tax credit:
The employee must have been on your payroll for at least a year
You must have paid a minimum of 50% of the employee’s regular earnings
To claim this tax credit, use IRS Form 8994, Employer Credit for Paid Family and Medical Leave.