For small business owners, it helps to keep track of the tax credits unique to your business and industry. Some tax credits have the potential to lower tax liability significantly.
What is a Tax Credit?
A quick primer: Tax credits directly reduce your business’s tax liability. A $500 tax credit means you owe that much less in taxes.
Your accountant or tax planning professional may implement the tax credits, but , as a small business owner, you should know enough to ask good questions.
Like a doctor, your CPA doesn’t mind questions. He or she may save you some money if, in fact, your hard-earned growth has opened the door to less tax liability or an alternative tax strategy.
How Can a Small Business Reduce Taxes?
We love deductions but don’t rule out tax credits. There are many ways for a business to reduce taxes; we believe that tax credits are the most consistent and predictable method to save.
Why? Because a tax credit is, for lack of a better term, free money. Politicians use credits to incentivize behaviors and strengthen the economy. Take advantage.
Let’s look at four small business tax credits to know for the 2021 tax season. Some you’ve seen in the news. Others you may have never heard of.
1. Work Opportunity Tax Credit (WOTC)
You’re eligible for the WOTC if you employ anyone who belongs to a target group that has historically faced barriers to employment.
Which Groups are Eligible for the Work Opportunity Tax Credit?
Eligible groups include:
- Qualified veterans
- Long-term unemployment or family assistance recipients
- Vocational rehabilitation referrals (a person who has a physical or mental disability)
The value of the credit ranges from $1,200 to $9,600, so it’s possible the WOTC could give your business room to hire even if finances are tight.
2. Small Business Health Care Tax Credit
Small businesses that pay for their employees’ health insurance could qualify for a hefty tax credit.
Who Qualifies for Small Employer Insurance Credits?
To qualify, you must:
- Own a business with 25 or fewer employees;
- Purchase an insurance plan through the Small Business Health Options Marketplace; and
- Pay your employees less than $51,600 per year.
If you’re eligible, you could be credited for up to 50% of the premiums you paid this year. Note that for tax-exempt businesses, that number drops to 35%.
3. Credit for Increasing Research Activities
Commonly referred to as an R&D tax credit, the Credit for Increasing Research Activities is reserved for businesses with fewer than $5 million in gross receipts for the last five years.
The credit can be quite large — up to $250,000 a year — so we encourage small business owners to look into it.
“What is research and development?” You may be surprised.
The definition of research and development has been expanding, so your business may qualify.
For example, the R&D tax credit is not limited to businesses that conduct scientific or medical research.
If you perform research to improve product quality, performance, or manufacturing processes, you could be eligible. It could even be something as simple as product development.
4. Retirement Plans Startup Costs Tax Credit
Start a retirement plan for your business, and save up to $500 every year for three years.
What Qualifies Your Business for a Startup Costs Tax Credit?
To qualify, your business must:
- Have fewer than 100 employees, all of whom receive at least $5,000 in wages; and
- Not have had a qualifying retirement plan in the last three years
Several different retirement plans qualify, including 401(k)s, SEP IRAs, and SIMPLE IRA plans.
Individual Tax Credits Can Also Help You and Your Business
The following credits are for individuals, not small businesses, but they can help your business just the same.
- Plug-In Electric Drive Vehicle Credit – If you have purchased a passenger vehicle or light truck, you could be eligible for a tax credit of up to $7,500.
- Premium Tax Credit – Small business owners who signed up for their own health insurance through the marketplace can get a tax credit, which varies based on location and income.
- Child and Dependent Care Tax Credit – Have children or dependents? You could be eligible for up to $6,000 per family. Eligibility can get a bit complicated, but the key qualification is that you pay for your dependents’ care while you work or seek work.
To Qualify for Tax Credits Next Year, Adjust Your Business Strategy
Remember, every credit you’re not eligible for this year could be an opportunity for next year. If you’ve been thinking of offering health care or a retirement plan, now could be a great time to start.
CPAs Can Help You Save with Tax Credits
This stuff is complicated. An experienced CPA can break down which tax credits you can take advantage of this year and how to orient your business to use them in the coming years.
Jeremy A. Johnson, CPA will identify the tax credits and tax deductions you need to position your business to grow. We’re an experienced accounting firm that works to aggressively lower your tax liability.