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7 U.S. Small Business Tax Credits – Explained

Written By Indrajeet Pradhan

One of your primary financial planning goals is to save as much on taxes as you can as a small business. This is also the goal of an accountant preparing small business taxes. By reducing the amount of taxes a business has to pay the government, this business is saving money that can reinvest elsewhere. Suppose you are working with an accounting outsourcing company and leveraging their small business tax accountants to prepare business taxes for your clients. In that case, you must know whether they have expertise in bringing down business taxes. Whether it is S Corp business taxes or any other, you must be able to reduce small business tax liability for your clients. 

While reduced taxes are a primary tax preparation prerogative, small businesses and small business tax accountants must clearly understand tax credits.  

What is a small business tax credit? 

A small business can claim tax credits to bring down its tax liability. Irrespective of the size of the business, there are certain taxes that a business can claim when they file annual taxes. But there is one problem – when the time for taxes finally arrives, businesses scramble to identify the tax credits they are eligible to claim. This scramble means your accounting firm feels the pressure as well. Your clients will want you to maximize the benefits of tax credits. 

So what are tax credits? Small business owners might think of their business as an entity that exists to earn money for them. There is nothing wrong with this line of thinking as their business puts food on the table for them and their family. But, the governments see companies from another perspective. They see these as entities contributing to strengthening the economy, driving employments, and making a significant positive contribution to society. 

Therefore, the government now wants to reward businesses with benefits in the form of a tax credit. From the government’s perspective, they see offering tax credits as a win-win because they expect businesses to invest the money saved on taxes in the business. This investment can result in more employment and benefit the economy in different ways. 

Businesses can benefit from tax credits specific to a particular industry or a specific benefit they bring to society. Tax credits can also be claimed for a particular activity that the business undertakes, such as CSR, R&D, and more. 

Understanding Tax Credits 

A tax credit works because every dollar in the tax credit offsets tax by an equal amount of dollars. Whether a business has elected an S corporation, a C corporation status, or any other, it is imperative that it can recover some of the expenses incurred, thus building capital that can be reinvested in exploring new growth avenues.  

Imagine if a business owes $25, 000 in taxes and it is eligible for a $10,000 tax credit the same is deducted from its tax bill. This means you now owe $15,000 in taxes.  

Different Types of Tax Credits 

The question ‘what is the due date for C Corporate tax returns’ is the question that might be uppermost in your mind, primarily to ensure that you can file returns before the deadline. But something else that you should also be mindful of is the tax credits you will leverage. It is essential to understand that a business will not qualify for all the small business tax credits available out there. Therefore, the expertise of small business tax accountants can help identify the correct tax credits. 

Let’s discuss a few of these tax credits that can be leveraged by small businesses: 

  1. General Business Tax Credit 

This tax credit is essentially an accumulation of all the individual tax credits your business is applying for in a particular tax year. Think of these credits as key government drivers that encourage business owners to take specific actions that will improve the work environment, employees’ lives, and motivate employees. Thus, retain them and drive any other activity that will impact not just the business but also the economy, society, and the environment. For more information: Form 3800 

The following business tax credits are a part of general business tax credits: 

2. Small Business Health Care Tax Credit 

The number of your full-time equivalent (FTE) employees should be less than 25 for the tax year to qualify for small business health insurance credit. Secondly, the average wage shouldn’t be more than $56,000 (as of 2020 – this figure can change every year). Thirdly, the health insurance premiums should be purchased via a qualifying arrangement through the SHOP Marketplace 

This tax credit is to encourage employers to provide health insurance coverage to their employees. It can result in significant tax savings as the credit you can claim can be 50% of the total cost of employer-paid insurance. For more information: Form 8941 

3. Paid Family and Medical Leave Tax Credit  

This tax credit came into being in 2017. As the name suggests, it encourages small businesses to provide paid leaves to employees that the Family and Medical Leave Act covers. There are numerous reasons why employees can avail these leaves, including health emergencies and even the birth of a child. The small business credit is worth 100% of the wages paid to employees when they are on a paid family or medical leave. This paid leave shouldn’t be less than 50% of the regular employee wage.  

Employees have to bear in mind that they are only eligible for this tax credit if they have a written policy that underlines the number of paid leaves provided to employees. As a small business, you will need to provide a minimum of two weeks of paid family and medical leave to employees working full-time. If you have part-time employees, then the leaves are to be pro-rated.  For more information: Form 8994 

4. Small Business Credit for Disabled Access 

As the name suggests, the focus of this tax credit is to motivate small businesses to ensure their offices are disabled-friendly. This includes modifying or adding infrastructure that makes it easier for people with disabilities to work in the office and ensures they are not constrained or uncomfortable in any way or manner. Small businesses with total revenues of $ 1 million or less or those with 30 or fewer employees are eligible for this tax credit. The tax credit you get is 50% of the investment you make (ranging from $250 to $10000) in improving access for people with disabilities.  For more information: Form 8826 

5. Small Business Tax Credit for Alternative Motor Vehicles 

It is becoming increasingly apparent to countries worldwide that climate change problems have to be addressed with necessary immediacy. Therefore, the government is doing everything it can to push behavioral changes amongst the population and drive purchase decisions that reduce carbon footprint in some way or the other.  

This tax credit is a step in this direction, with owners eligible for a tax credit of up to $8000 if they buy an alternative fuel source vehicle. This does not include hybrids or electric cars, as these are categorized as conventional fuel sources. For more information: Form 8910 

6. Investment Tax Credit with focus on Rehabilitation, Energy, and Reforestation 

This is an ‘environment-friendly’ tax credit wherein a small business is eligible for a tax credit if it has made investments in renovating an old building, reforestation, or alternative energy sources as a part of business functioning. The credit eligibility is typically 10% of the expenses incurred with a cap of $10,00 per year. For more information: Form 3468 

7. WOTC or the Work Opportunity Tax Credit 

For some reason or the other, certain groups have found it challenging to find employment. WOTC is a workforce program that encourages small businesses to increase workplace diversity proactively and at the same time improve access to jobs for all individuals. 

The categories targeted through this credit include: 

  • Unemployed veterans 
  • Ex-Felon 
  • Vocational Rehabilitation Referral 
  • Long-Term Family Assistance Recipient 
  • Qualified IV-A Recipient 
  • Designated Community Resident (DCR) 
  • Summer Youth Employee 
  • Qualified Long-Term Unemployment Recipient 
  • Supplemental Nutrition Assistance Program (SNAP) Recipient 
  • Supplemental Security Income (SSI) Recipient 

For More Information: Form 5584 

How Outsourcing Helps Optimize Small Business Tax Credits 

As an accounting firm, you must always be hard-pressed, especially in the busy tax season. In a best-case scenario, you might be able to take care of all your tax preparation work, but at a considerable cost in the form of mental peace and work-life balance. Purely looking at this from the small business tax filing perspective, you might also want to free up time invested in preparing small business taxes but still ensure they get done on time.  

But the question here is not just when are business taxes due and whether business owners file their taxes. The question is also whether the correct tax credits have been identified that bring down the business’s tax liability. This is where outsourcing to a tax preparation outsourcing services provider can come in to help you out. Work with someone with deep-seated expertise in preparing not only taxes but also small business tax credit.  You free up valuable time at your end and ensure your clients are delighted with tax preparation because you have brought down the tax liability, courtesy of the proficiency of the outsourced tax accountants.  

Making the right decision is half the battle won. Next, manage client expectations better by outsourcing C and S corp business tax preparation to deliver maximum small business tax credit advantages. 

ABOUT Indrajeet Pradhan

My name is Indrajeet Pradhan and I am the Marketing Manager for QX Accounting Services – North America, and wordsmith behind the QXAS blog. Hope you enjoyed reading this piece. My job is to help accountants access the knowledge they seek through blogs, guides, and other content assets that are meaningful and actionable. More Posts(19)  

Originally published May 28, 2021 07:05:28, updated May 28 2021

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