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March 2, 2023
A small business tax credit is a type of incentive offered by the government that’s designed to encourage businesses to invest in certain activities, like innovating their products, entering new markets, caring for their employees, or protecting the environment.
Unlike a deduction, which reduces your taxes owed, a tax credit is money credited back to your account, after all other calculations and deductions have been completed. That makes these incentives and opportunities even more valuable for business owners.
Unfortunately, many businesses don’t take advantage of all the available tax credits because they either don’t know about them or don’t understand how to qualify for them. Businesses that operate without a dedicated tax professional or knowledgeable Certified Public Accountant are especially likely to leave these valuable credits on the table.
But knowledge isn’t the only barrier to maximizing your tax credits. The process of claiming a tax credit can be complicated and time-consuming, which can lead to businesses not taking the time to apply for them. Each credit requires a special form, additional information, and particular documentation. Unless you plan ahead, it’s difficult to take advantage of tax credits retroactively.
The investment credit for businesses is a tax credit available to companies that invest in certain energy-efficient or eco-friendly activities, such as forest rehabilitation, clean energy production, and qualifying advanced coal, gas, and energy projects.
This credit allows businesses to deduct up to 10% of the cost of certain investments from their total taxable income, as long as these investments were made with the intention of increasing energy efficiency and productivity. The credit is available on a sliding scale depending on the type of investment. Additionally, businesses may be able to apply for this credit multiple times over the course of a year.
The credit for small employer pension plan startup costs is a tax credit designed to encourage small businesses to offer retirement plans to their employees. This credit allows businesses with less than 100 employees to get a tax credit of up to 50% of the costs associated with setting up and administering a qualified retirement plan, including employee education expenses.
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This valuable credit can be claimed for up to three years, and can be worth as much as $500 per year for each eligible employee. And it’s a significant benefit to small businesses that need help covering the costs associated with offering a pension plan. This tax credit both reduces your small business expenses and empowers your business to attract and retain better quality talent.
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to businesses who hire new employees from certain target groups, such as veterans, family assistance recipients, ex-felons, and others.
The credit is available for up to 40% of the first year’s wages of the employee, up to a maximum of $6,000. This credit helps offset the cost of hiring and training new employees, and incentivizes businesses to hire individuals from these target groups. This provides an opportunity for those who may otherwise have difficulty finding employment, while also benefiting the small businesses that make an effort to provide a healthy work environment to these target groups.
The credit for small employer health insurance premiums is a tax credit available to small businesses with less than 25 full-time equivalent employees. The credit covers up to 50% of the premiums paid by the employer for health insurance coverage for its employees.
To qualify, the business must have average wages of no more than $56,000 per employee and must contribute at least 50% of the total premium cost for its employees. The credit is available on a sliding scale depending on how much the employer contributes.
This health-conscious tax credit is a great benefit for small businesses because it helps offset some of the rising costs associated with providing quality health insurance to the employees. For micro-businesses (those with under 10 employees), who have a particularly difficult time affording healthcare, it’s a benefit that makes attracting and caring for top talent attainable.
Additionally, this tax credit helps expand healthcare access to a wider range of individuals, ensuring that workers at both large corporations and small neighborhood businesses get the affordable insurance they need to stay healthy.
There are dozens of tax credits available to small businesses every year — if you know where to look. These credits can offset the costs associated with attracting and retaining employees, innovating, and expanding green energy. And they can boost your business’ bottom line without adding extra work to your plate or products on your shelves.
Before you file your 2022 taxes, take the time to explore and apply for these credits. You could save your small business a significant amount of money each year!
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.
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