5 Tax Credits That Small Businesses Should Know
Tax time can be one of the most stressful periods of the year for small businesses. That’s not just because of the time involved in gathering and organizing documents, and if you DIY, prepping taxes. It’s also because that’s when small businesses get an idea about whether they could take a significant tax hit.
Naturally, then, small businesses should be on the lookout for any way to reduce that hit.
We’ve recently talked about various deductible expenses your company might be eligible for. Today, we’re going to go over another way to save via small business tax credits. Unlike deductions, which merely reduces the amount of income that’s subject to tax, credits are dollar-to-dollar reductions in the taxes you owe.
The following are seven tax credits you should be on the watch for, not just so you can claim them on this year’s return, but so you can also plan for them in the tax years ahead.
Retirement Plans Startup Costs Tax Credit
The Retirement Plans Startup Costs Tax Credit allows eligible employers to claim a tax credit of up to $5,000, for three years, for various costs related to setting up a SEP IRA, SIMPLE IRA or other qualified workplace retirement plans.
Specifically, the credit covers 50% of your eligible startup costs, up to whichever is greater:
- $500
- the lesser of …
- $250 times the number of non-highly compensated employees (NHCEs) eligible to participate in the plan
- or $5,000
To be eligible, you must have:
- 100 or fewer employees who received at least $5,000 in compensation from you in the preceding year
- At least one plan participant who was an NHCE
- In the three tax years before the first year they’re eligible, employees who weren’t substantially the same employees who received contributions or accrued benefits in another plan that you sponsored, a member of a controlled group that includes you, or a predecessor of either
Employer-Provided Childcare Credit
The Employer-Provided Childcare Credit allows employers to claim tax credits for expenses incurred for providing childcare to employees.
The credit previously equalled 25% of qualified childcare facility expenditures plus 10% of qualified childcare resources and referral expenditures (per year), up to a cap of $150,000 annually. However, starting in 2026, following the passage of the One Big Beautiful Bill Act (OBBBA):
- The 25% figure increased to 40% (and 50% for certain eligible small businesses)
- The maximum credit jumped to $500,000 (and $600,000 for certain eligible small businesses)
Credit for Increasing Research Activities (R&D)
The Credit for Increasing Research Activities (aka the R&D Payroll Tax Credit) is a reduction in income tax liability for businesses that conduct qualifying research activities. The credit is equal to the sum of 20% of the excess of a taxpayer’s qualified research expenses (QREs) for the taxable year over the base amount. The maximum annual credit is $500,000.
The payroll tax credit is first used to reduce the employers’ share of Social Security tax, up to $250,000 per quarter, with any remaining credit reducing the employer’s share of Medicare tax for the quarter. Any remaining credits after that are carried forward to the next quarter.
Disabled Access Credit
The Disabled Access Credit can be claimed by small businesses that incur access expenditures to accommodate people with disabilities. To be eligible, a small business must have earned $1 million or less or had no more than 30 FTEs in the previous year. The credit is good for 50% of eligible access expenditures of more than $250 but less than $10,250, for a maximum credit of $5,000. You can earn the credit every year.
Advanced Manufacturing Production Credit
The Advanced Manufacturing Production Credit, established by the Inflation Reduction Act of 2022, is a variable tax credit meant to incentivize domestic production of clean-energy components, including solar and wind energy components, inverters, certain battery components, electrode active materials, and certain critical minerals.
The credit is equal to a specific credit rate based on the component and year of sale. The credit will begin phasing out in 2030 and be eliminated completely in 2033.
Don’t Miss Out on Lucrative Tax Credits
Looking for other small business tax credits you can use to your advantage? We’re here to help.
McManamon & Co. offers expert tax services to small and midsize businesses, from basic filings to payroll taxes to compliance services and more. And one way we can put your company in the driver’s seat is by building a tax strategy that you can follow year-round to maximize your savings.
Let us get you through the tax season. Call McManamon at 440.892.8900 or contact us online.
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