4 Key Tax Credits for Small Business Owners

By September 1, 2020Tax Credits
small business tax credits

As a small business owner, it is important that you take advantage of all the tax credits available to your company in order to reduce your tax burden. Yet, you may find yourself asking a lot of questions about small business tax credits if you are not familiar with them and the plethora of tax credits that may be available to your business. To help you save money on your taxes this year, here is a look at what you need to know about tax credits including how you can find tax credits your business may qualify for.

What Is a Tax Credit?

While you likely already know that tax credits and deductions can be helpful in reducing the taxes you owe, you are not alone if you are unsure what the difference between the two is. A tax credit is a dollar amount that can be subtracted from the amount of taxes you owe. For instance, a $400 tax credit would reduce your owed taxes by $400. Alternatively, tax deductions reduce your business’s taxable income, which indirectly lowers your taxes owed. In other words, a $400 deduction would reduce your taxable income by $400, slightly reducing your taxes. Tax credits are then often seen as the superior tax break, as they can significantly reduce your tax burden. The great thing about tax credits is that you can use as many of these credits as you qualify for. Yet, how can you find relevant tax credits for you and your business? Keep reading for a look at 4 of the most common tax credits available to business owners. 

Earned Income Tax Credit

Has this been a bad year for your business? If so, you may qualify for the Earned Income Tax Credit (EITC). This tax credit provides a tax break to people who are employed but earn a low to moderate-income. Just because you are a business owner, this does not mean that you can’t qualify for the EITC, as you are also self-employed. Many business owners who may be eligible for the EITC do not claim it because they believe that it only applies to their employees. However, depending on your financial situation, you may qualify for this tax credit, which can help to ease your overall tax burden. 

Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to businesses that hire employees from certain target groups who have historically faced barriers to employment. Former veterans and long-term unemployment recipients are primary targets of the WOTC. Depending on the employee’s salary and the target group they come from, employers can claim up to $9,600 per employee they hire under the Work Opportunity Tax Credit. 

Credit for Small Employer Health Insurance Premiums

One of the many provisions in The Affordable Care Act (Obamacare) includes a small employer health insurance tax credit aimed at helping small businesses who provide their employees with health insurance. The credit is available to small businesses that pay at least half of the cost of their employees’ health insurance premiums. If you qualify, this tax credit is worth 50% of the amount you paid towards insurance premiums (however, it is reduced to 35% for tax-exempt businesses). In order to qualify for this premium, your business has to have fewer than 25 full-time employees, you must pay an average wage of less than $51,600 per year, and you must have purchased your company’s insurance plans through the Small Business Health Options (SHOP) program. 

Research and Development Tax Credit

In order to encourage domestic research and development, the Research and Development Tax Credit can help to significantly offset your company’s R&D costs. If you spent money developing a patent, building new software, working on a prototype for a new product, or on any other kind of research, you may qualify for this tax credit which can cover up to 20% of your R%D expenses. However, only certain kinds of research qualify, and determining your eligibility can be complicated, which makes it important that you work with a qualified tax professional who can help you make the most of this tax credit. 

Taking advantage of tax credits can be a great way to significantly reduce your company’s tax burden. However, with a multitude of tax credits available, it can be difficult to determine which ones your business qualifies for. Contact us to learn how Incentax’s streamlined process can help you to identify and maximize all the tax credits available to your business.