Tax credits are a beautiful thing that can help your small business save money. At Tax Alli, we frequently run into business owners who haven’t been taking advantage of credits they are eligible for, or could benefit from. So, today, I’m going to show you eight small business credits available in the US that have helped many of our small business clients keep more of the precious dollars they work hard for.
But first, let’s get a handle on the difference between tax credits and tax deductions—one of the most misunderstood topics in the world of small business taxes.
Turbocharged Tax Deductions
To sum it up, tax credits are like turbocharged tax deductions, only better. Deductions cut your taxable income, so every dollar of deductions will cut your total tax by a percentage of that deduction depending on your tax bracket. Tax credits are actually dollar for dollar. Credits cut your actual tax, so every dollar of credit cuts your tax by a full dollar.
Tax deductions become more valuable as your taxable income rises. If you’re in the 15% bracket, every dollar you deduct cuts your tax by 15 cents. If you’re in the 35% bracket, that same dollar deduction cuts your tax by 35 cents. But tax credits are more valuable for taxpayers in lower brackets. If you’re in the 35% bracket, you need $2,857 in deductions to equal a $1,000 credit. In the 15% bracket, you’d need a whopping $6,667 in deductions to equal that $1,000 credit.
The key to capitalizing on these benefits is knowing what you can claim. So to help you get a jump start, here’s my list of eight small business tax credits every small business should know about:
1. Alcohol Fuels Credit
A credit that is calculated from the costs associated with the production of alcohol based fuels such as methanol and ethanol. This will only apply if you happen to be involved in the production of fuels, not the consumption of them.
2. Alternative Motor Vehicle Credit
A credit of up to $8,000 to encourage the purchase of an alternative fuel source vehicle. This does not apply to hybrids or electric vehicles since they use conventional fuel sources. Currently the IRS only recognizes one vehicle as eligible for the credit, the Honda FCX Clarity, which uses hydrogen fuel-cell technology.
So when it comes time to purchase your next company vehicle you may want to skip past the gas-guzzlers and put $8,000 greenbacks in your pocket, thanks to Uncle Sam!
3. Disabled Access Credit
If you have expenses related to providing access to your business for people with disabilities, you could be eligible for this credit. The maximum credit available is $5,000 on $10,000 of expenditures.
4. Employer-Provided Child Care Credit
A credit for businesses who directly pay the child care expenses for its employees. The credit is for 25% of expenses up to $150,000 a year.
As a quick example, employees can actually realize a greater benefit from the Employer-provided Child Care Tax Credit than they would from the Child and Dependent Care Tax Credit they could claim on their own personal tax return. Let’s say an employee pays $3,000 for childcare, the maximum credit they can take on their return is $1,050 ($3,000 x 35%). The employee effectively paid $1,950 for child-care services ($3,000 – $1,050 = $1,950). If the employer pays $3,000 to a child-care facility for an employee’s child, the employee saves the $1,950. It is important to note that the employer is not subject to the $3,000 limitation per child when calculating the credit. On average the full-time care for a child is $5,973. Thus, savings for most employees would be substantial, although child-care payments made in excess of $5,000 are added to the employee’s gross wages.
Keep in mind if you are incorporated and an employee of the corporation you could also be eligible for the same benefits that you offer to the rest of your employees.
5. Rehabilitation, Energy and Reforestation Investments Credit
Credits for investments in reforestation, building rehabilitation and alternative energy property used in business. The credit is generally 10% of expenditures and is limited to $10,000 per year
6. Qualified Research Expenses Credit
A credit to encourage domestic research and development. The calculation of the credit can be very complex, but can also provide substantial tax savings. This definition is relatively broad but encompasses such activities as:
- Developing new or improved products, processes or formulas
- Developing prototypes or models
- Developing or applying for patents
- Certification testing
- Developing new technology
- Environmental testing
- Developing or improving software technologies
- Building or improving manufacturing facilities
- Streamlining internal processes
7. Small Employer Pension Plan Startup Costs Credit
A credit for small businesses to offset the costs of starting a pension. The credit is limited to $500.
8. Work Opportunity and Welfare-to-Work Expenses Credit
Credits available to businesses that hire employees who have traditionally faced significant barriers to employment. Many job seekers experience one or more barriers to employment during their careers. Although this makes finding or keeping a job more difficult, it’s not impossible. Some barriers, such as lack of transportation, are temporary and easier to address than others like education, child-care or disabilities. The credits are calculated based on wages paid to the employees and can provide up to a $9,000 savings over two years.
Beyond business tax credits there is no shortage of potential tax deductions, so the point is to take the time to implement a tax plan and strategy to make the most out of your small business. Knowing what you can or can’t do for tax credits, whether they are for your business or personal life, is crucial to keeping as much of your money as legally possible. This is especially true if you operate as a Sole Proprietorship, LLC or S Corporation. The key point is to take the time to educate yourself on all the juicy tax credits you may be missing out on. These tax credits, along with all the tax deductions you are eligible for, will help keep your business as profitable as possible.
These are general tips and should never take the place of personalized advice from a tax accountant or CPA.
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