5 Small Business Tax Credits to Know
Are You Using All the Tools Available to You?
If you’re a small business owner, you should be using every tool in your arsenal to grow and protect your business. This includes taking advantage of the many federal tax credits available. Since this can be a confusing topic, I’m going to share a primer on how tax credits work, which ones you should be aware of, and the forms you need to file in order to capitalize on them.
Tax Credits vs. Tax Deductions
Sometimes, people use the terms “tax credits” and “tax deductions” interchangeably. However, they are not the same thing.
Deductions work to decrease your taxable income, which can have the effect of putting you in a lower tax bracket if you report business income on your personal return. Most companies claim tax deductions for their ordinary business expenses.
Tax credits, on the other hand, reduce your tax bill on a dollar-for-dollar basis. So, if you owe $15,000 in taxes, a $5,000 credit would mean you now only owe $10,000.
How to Claim Your Small Business Tax Credits
Tax credits are absolutely advantageous, but you’ll need to file the appropriate paperwork and follow IRS rules. If you happen to be eligible for more than one small business credit, you’ll be required to submit IRS Form 3800 with your tax return. Since this form lists every credit that you might be eligible for, you’ll use it to add up the total value of your tax credits – each of which also requires its own form, which we will detail below. (If you’re only eligible for one tax credit, you’ll simply submit its individual form, and you won’t need Form 3800.)
Are These Small Business Tax Credits on Your Radar?
I could write thousands of words on all the possible tax credits available to you as a small business owner, but today we’ll focus on five of the most important ones at the moment.
1. Work Opportunity Tax Credit
Meant to incentivize the hiring of underserved populations, you may be eligible if you have hired one or more employees who are:
- SNAP or long-term family assistance recipients
- Considered long-term unemployed
- Receiving Supplemental Security Income (SSI)
- Summer youth employees
In this case, the size of the tax credit varies depending upon which category your employees fall into, as well as how many hours they logged for you during the tax year. The highest credits go to companies that hire veterans and long-term family assistance recipients. This credit requires Form 5884.
2. Small Business Health Care Tax Credit
This opportunity arose from the Affordable Care Act (also known as Obamacare). It applies to companies that provide health insurance to their employees and who also meet the following qualifications:
- Have fewer than 25 full-time employees
- Pay a wage of less than $56,000 per year, on average
- Pay at least 50% of employee health insurance premiums
- Offer SHOP coverage to all full-time employees
With this tax credit, the smaller the business, the larger the credit. You’ll need Form 8941.
3. Employer-Provided Child Care Credit
This tax credit is specifically for companies that help their employees obtain childcare or pay for said childcare expenses. The following expenses are covered:
- Funds used to construct, remodel, or expand an on-site childcare facility
- Operational expenses for an existing childcare facility (such as childcare employee salaries)
- Money used to contract with a qualified facility to provide care for employees’ children
- Funds used to provide childcare resources and/or referrals
If you qualify for this credit, you can claim 25% of your childcare expenditures, plus an additional 10% of resource and referral expenditures. The credit, however, is limited to $150,000 per year. It requires you to submit Form 8882.
4. Disabled Access Credit
This tax credit financially rewards companies that remove barriers for customers with disabilities by increasing accessibility. This can often require expensive upgrades, like building ramps, properly spacing shelving, or providing all text in braille, but this credit can lower the financial impact of improving access.
If your revenues are less than $1 million and you have 30 or fewer employees, you are eligible. Using Form 8826, you can claim a maximum of $5,000 in one tax year.
5. Credit for Paid Family and Medical Leave
It’s well documented that the U.S falls behind most developed nations in terms of providing maternity and paternity leave, or leave for other family circumstances that fall under FMLA. If your small business provides paid leave to employees for these reasons, you may be eligible for this credit.
You’ll also need to meet the following stipulations:
- Have a policy, in writing, that allows full-time employees to take two or more paid weeks of family and medical leave annually
- Pay your employees at least 50% of their wages during leave time
For this credit, you’ll need to file Form 8994.
Want to Take Advantage of These Small Business Tax Credits?
The five federal tax credits mentioned above are often overlooked and can be advantageous for your business, but they aren’t the only ones. Talk with a tax professional to determine all the small business tax credits you’re eligible for – including any at the state and local levels – and ensure you’re filing the appropriate paperwork. Oftentimes, credits are offered just for a few years before they expire, so it’s important to maximize them while you can.
At Paces Ferry, we believe that having the right financial planner in your corner to help you plan and implement your financial strategy is key to financial success. If you’d like to talk with one of our professionals about how you can incorporate an HSA into your retirement plan, please contact us today.
Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.