Every business owner wants to save money on taxes, which means that you should know if you qualify for a tax credit and how to claim it.
Use this guide to quickly and accurately identify the small business tax credits that will keep more money in your pocket at tax time.
What is a tax credit?
First thing’s first. Before diving into which tax credits you may be able to claim, you should understand what a tax credit is:
- Tax credit: A tax credit is a dollar amount that can be subtracted from the amount you owe in taxes. In other words, if a tax credit is $400, that means you will pay $400 less in taxes.
- Refundable tax credit: A refundable tax credit means that the taxpayer will actually receive a check in the mail if the tax credit amount exceeds the amount you owed in taxes. So if you receive a $600 refundable tax credit, but you owe $400 in taxes, the government will send you a check for the difference: $150. Not too bad!
Tax credits that are not refundable will simply cover the amount owed in taxes, but no check will be issued for the difference.
What’s the difference between a tax credit and a tax deduction or a tax exemption?
Got it? OK. Let’s get into specific business tax credits below.
Tax credits for small business owners
Below you’ll find the most common tax credits used by small business owners like yourself.
1. Earned Income Tax Credit (EITC)
Who qualifies: The Earned Income Tax Credit provides a tax break to people who are employed but still earn low to moderate income.
Whether or not you’re eligible for the EITC tax credit will depend on several factors, but it starts with identifying if you earn a low to moderate income in the eyes of the government. What they consider to be a qualifying number will also depend upon your marital status and the number of children in your household.
The IRS has provided this handy document to help you figure out whether or not you qualify.
How much the EITC is worth: This credit amount will vary widely depending upon the factors listed in the qualifications above. As a general guideline, the credit can range from $500 for those without children to over $6,000 for parents with three or more kids.
2. Work Opportunity Tax Credit
Who qualifies: If any of your employees belong to a targeted group that has historically faced barriers to employment, then you can qualify for the WOTC. Some examples of these targeted groups include veterans, those with disabilities, and ex-felons.
How much the WOTC is worth: The exact amount of this credit will depend upon your worker’s salary, time working, and to which targeted group the employee belongs. The maximum credit for most eligible employers is typically $2,400 per worker.
How to claim the Work Opportunity Tax Credit: This one requires a little more legwork on your part.
- First, within 28 days of when the employee starts working at your business, you must file Form 8850 with your state agency to verify that the employee belongs to a targeted group.
- Then, you will file this credit on your Form 1040 and file a Form 3800 or Form 5884, depending on your sources of income.
3. Credit for Employer-Provided Childcare Facilities and Services
Who qualifies for the credit: If you are an employer and you provide childcare facilities for your employees either on-site or through a contract or referral program with an outside childcare facility, then you can qualify for this childcare tax credit.
How much the credit is worth: The credit is for 25% of the amount paid for childcare expenditures (for such things as constructing and maintaining the property) and 10% for the amount paid to provide childcare resources or referral services to employees. The total limit for this credit is $150,000 per year.
How to claim the credit for Employer-Provided Childcare Facilities and Services: File Form 8882.
Questions for your CPA? There are several limitations and qualifications to meet for this credit. Make sure your CPA verifies that you have calculated your credit correctly.
4. Child and Dependent Care Credit
Who qualifies: This is a credit that you will file on your individual taxes, but it’s one you definitely don’t want to forget. If you pay for childcare or dependent care (for a spouse or other dependent who can’t care for him/herself) while working or looking for work, then you qualify for the Child and Dependent Care Credit.
The IRS has provided an extensive list of qualifications, flowcharts, and questions to help you understand whether or not you qualify for this childcare tax credit.
How much the credit is worth: This credit is worth 20-35% of your childcare expenses up to $3,000 per child with a maximum credit of $6,000 per family.
How to claim the Child and Dependent Care credit: File Form 2441.
5. Credit for Small Employer Health Insurance Premiums
Who qualifies: To qualify for the Small Employer Health Insurance Premiums Credit, you must meet these criteria:
- You’re a business owner with fewer than 25 full-time employees.
- You pay an average wage of less than $51,600 per year.
- You pay at least half of the amount for all of your employees’ health insurance premiums.
- You’ve purchased your insurance plans through Small Business Health Options Marketplace.
How much the credit is worth: This credit is worth 50% of the amount you paid towards premiums (only 35% if your business is tax-exempt). Note: You can only qualify for this credit for two consecutive years.
How to claim the credit for Small Employer Health Insurance Premiums: File Form 8941.
What to ask your CPA: Since you can only receive this credit for two consecutive years, should you take this credit now or wait? This will depend upon your prospective growth and several other factors that your accountant can help you figure out.
6. The Premium Tax Credit
Who qualifies: The Premium Tax Credit is another individual credit that you do not want to overlook. You qualify for this credit if you purchased your own health insurance through the Health Insurance Marketplace.
How much the credit is worth: The amount of the credit varies greatly depending upon your income and location. This document from the Center on Budget and Policy Priorities provides specific examples and answers to commonly asked questions.
How to claim the Premium Tax Credit: File Form 8962.
7. Retirement Plan Startup Costs Tax Credit
Who qualifies: If you are a small business owner starting a retirement plan for your employees, then the IRS will reimburse some of what they term “ordinary and necessary” costs of that startup. If you have 100 or fewer employees, you can qualify for this credit by meeting these specific criteria.
You can claim this credit for the first 3 years in which you’re beginning a retirement plan for your company.
How much the credit is worth: This credit is worth 50% of your startup costs up to $500 per year.
How to claim the Retirement Plan Startup Costs tax credit: File Form 8881.
What to ask your CPA: Verify that you qualify. If you don’t qualify for the previous year, speak to your CPA about options for starting up a retirement plan next year.
Why? You can actually start claiming this credit in the tax year before the year your plan will become effective.
8. Plug-In Electric Drive Vehicle Credit
Who qualifies: If you’ve purchased an electric vehicle, including passenger vehicles and light trucks, for business use, then you can qualify for the Plug-in Electric Drive Vehicle Credit. This is also commonly referred to as the alternative motor vehicle credit.
How much the credit is worth: Depending upon which vehicle you’ve purchased, your credit could be worth between $2,500 and $7,500.
How to claim the Plug-in Electric Drive Vehicle credit: File Form 8936.
9. Research and Development Tax Credit
U.S. companies of all sizes, from small businesses and startups to large corporations that spend money developing new products, processes or software or enhancing existing ones may be eligible for the R&D tax credit. Eligibility depends largely on whether the work a company does meets the IRS’s four-part test, which ensures that activities qualify by:
- Having a qualified purpose
- Including a process of experimentation
- Being technological in nature
- Eliminating uncertainty
How to claim the Research and Development Tax Credit: File Form 6765.
Shouldn’t my accountant find these small business tax credits for me?
If you’re working with a small business accountant, you may expect that they will save you every penny they can—and good accountants definitely go out of the way to do this.
However, even great accountants don’t always find every tax credit or deduction that you may be entitled to take. While your accountant may point out common tax credits and deductions that they know you qualify for, it’s a good idea for you to do some of the leg work and look through the most common ones on your own.
If you want to go a step further and scour all of the general business credits available, you can find that list of tax credits on the IRS website. Chances are that you qualify for at least one of the commonly-used credits listed above, so that should certainly put a smile on your face this tax season.