Small businesses can benefit more directly from cost-saving measures than larger businesses, due to the limited resources available to smaller organizations. One of the cost-saving options available to small businesses is called a tax credit. Tax credits are tax incentives. They enable taxpayers who qualify to subtract certain amounts from the money they owe the government. Here are six tax credits every small business owner should know about.
1. The Employee Retention Credit
The Employee Retention Credit, also known as the ERC credit, was established in 2020 to provide small businesses with an incentive to retain more employees. It made it easier for businesses to retain their employees during pandemic-related shutdowns. The ERC is available whether your business received money through the PPP loan program or not. It was terminated at the end of 2021, with some exceptions. However, you may still be eligible for it retroactively. Also, There is an initiative called the ERC Affiliate Program, which offers an opportunity to leverage the expertise of professionals while contributing to a broader understanding of the Employee Retention Credit (ERC) and its potential retroactive eligibility for the years 2020 and 2021.
2. Energy Efficiency Credits
Energy efficiency credits are some of the least well-known tax credits. These tax credits provide businesses of all sizes with monetary incentives to invest in environmentally friendly policies, processes, and equipment. There are many different tax credits available for energy efficiency investment. Your business may be eligible based on its size, the types of eco-friendly investments made, or how large or expensive those investments are. Common energy efficiency investments for businesses include solar panel installation and making the switch to green energy sources.
3. The Work Opportunity Tax Credit
This tax credit has a cap of $6,000 per new hire. The final amount of the credit for each employee depends on minimum hour requirements, the size of the employee’s first-year salary, and other factors. The Work Opportunity Tax Credit, or WOTC, is applicable to employees from certain populations, including ex-felons, veterans, and people who receive qualifying types of financial aid, such as food stamps. This tax credit is meant to provide businesses with an incentive to hire people who might have difficulty finding work.
4. The Research And Development Tax Credit
The Research and Development (R&D) tax credit is meant for businesses involved in technological design, manufacturing, and innovation. It is meant to encourage and incentivize increased technical development. Most businesses are only eligible for this tax credit if they are already involved in research and development. To successfully qualify, you need to provide adequate documentation of your business’s research and development activities. If you haven’t yet begun a research and development program or aren’t sure whether your program qualifies, talk to a professional.
5. SECURE Act Tax Credits
Like energy efficiency tax credits, there are multiple SECURE Act tax credits. These credits relate to the development of new retirement plans. They incentivize business owners and managers to develop new plans by offsetting costs related to setting them up and managing them. Because these tax credits are related to the SECURE Act, there are specific requirements a new retirement plan must meet.
6. Health Insurance Credits
One of the most useful small business tax credits related to health insurance is the Credit for Small Employer Health Insurance Premiums. It’s relatively easy for businesses to qualify. Most businesses utilize this tax credit in tandem with others, such as the R&D credit or the ERC credit. It’s important to remember that this credit cannot be claimed every year. Small businesses can qualify for this credit for only two consecutive years. Make sure you understand the required qualifications and how much you would benefit from this tax credit before applying it.
If you’re a small business owner, talk to a tax expert about tax credits. He or she can help you determine which ones you qualify for, which ones you should take advantage of, and how to apply them to your tax returns. Tax credits can help many small business owners save money to put toward other expenses.
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