(This column originally appeared in the Philadelphia Inquirer)
Deductions are great, but tax credits are way better. Why? Because a tax deduction reduces the income that is subject to tax, but a tax credit reduces the taxes owed and, in the case of a “refundable” credit, you can get cash back from the government if the credit is greater than the amount owed (a “non-refundable” credit applies only to the amounts you owe).
If you run a small business you want to maximize your tax credits where you can, and you want to use those credits to help drive your investment and spending plans. There are a number of federal business tax credits available, but here are some of the best ones that you may not know about.
This refundable credit is for employers that were either partially or fully shutdown during COVID from the second quarter of 2020 through the third quarter of 2021 or suffered a revenue losses during those periods between 20–50% compared to prior periods. If eligible, companies can file an amended payroll tax return (Form 941) for that quarter to claim the credit against their payroll taxes paid. The credit began to expire this month and will be fully expired by October 31, 2024.
If you hire someone who has been unemployed more than six months, out of prison, off of welfare, or meets a few other eligibility requirements, you can receive a non-refundable tax credit of up to $9,600 for that employee. You have to make sure you submit a pre-screening application (Form 8850) in advance of hiring the employee and meet certain minimums for work hours employed to fully realize the credit. Both for- and nonprofits can apply for this credit on Form 5884 as the offset can be applied to either income or payroll taxes owed. This credit expires at the end of 2025.
Thanks to retirement plan legislation passed in 2019 and 2022, both for-profit and non-profit businesses with less than 100 employees who start a retirement plan can receive a refundable tax credit for up to 50% of the qualified startup costs incurred — such as the costs of setting up and administering the plan — limited to a total of $5,000 each year for three years. You would use Form 8881 to apply for this credit.
If your business employs less than 30 full-time people and has less than $1 million in earnings you may be eligible to use the non-refundable Disabled Access Credit to offset the costs associated with providing access to people with disabilities and complying with the American Disabilities Act (i.e. ramps, equipment, materials for visually or hearing-impaired). The credit can be as much as $5,125 annually and is available for both for- and nonprofit businesses. The credit is received by submitting Form 8826.
Thanks to the 2022 Inflation Reduction Act, tax credits are available for individuals that buy electric vehicles (Qualified Plug-In Electric Drive Motor Vehicle Credit) or make their homes more energy efficient (Energy Efficient Home Credit). For example you may qualify for a credit up to $7,500 for purchasing a new or used electric vehicle as well as various credit amounts for installing energy efficient windows, doors, stoves, and boilers. Although these credits don’t specifically apply to businesses, they’re available for business owners, freelancers, independent contractors, and other entrepreneurs to claim on their individual tax returns using Forms 8936 and 8908.
Would you like to offer your employees paid leave but are concerned about the costs? The Employer Credit for Paid Family and Medical Leave can be a big help for both for- and nonprofit companies. The non-refundable credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. The minimum percentage is 12.5% with a maximum of 25% depending on the wages paid, which are required to be half of what the employee would normally earn. Employers are also required to have a written paid leave policy and provide at least two weeks of paid vacation for full-time employees annually. This credit expires at the end of 2025 and is claimed on Form 8994.
For businesses in any industry conducting research on new products and services, this non-refundable credit can be used to help offset around 5–10% of the costs of materials, samples, internal and external labor and contractor hours, and other overhead expenses. Eligible small businesses can now also opt to apply the credit towards their payroll taxes. The credit can be claimed on Form 6765.
There are other tax credits available for businesses and — like all things taxes — there are requirements and rules and other complexities that I’m not including above. So it’s always best to consult with a tax professional. But don’t leave your money on the table: By taking advantage of these credits you can make your investments more affordable by letting the government help pay for them.
