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small business tax credits

7 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 different 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.

Small Business Health Care Credit

The Small Business Health Care Credit can deliver significant tax savings. To be eligible, a small business or nonprofit must:

  • Be enrolled in a Small Business Health Options Program (SHOP) plan
  • Offer SHOP coverage to all full-time equivalent (FTE) employees
  • Have fewer than 25 FTE employees
  • Pay an average employee salary of $56,000 per year or less
  • Pay at least 50% of your FTEs’ health care premiums

The credit is good for up to 50% of the cost of your employees’ premiums. So, if you paid $100,000 in health care premiums for your employees and earned the maximum credit, you could claim a $50,000 credit. In general, smaller businesses typically qualify for higher credits — those companies with fewer than 10 employees earning $27,000 or less on average will receive the greatest credit, according to HealthCare.gov.

Work Opportunity Tax Credit

Employers can claim the Work Opportunity Tax Credit if they hire people in “targeted groups,” including the formerly incarcerated or those previously convicted of a felony, individuals experiencing long-term unemployment, residents in areas designated as empowerment zones or rural renewal counties, and more. (You can see the full list of targeted groups at IRS.gov.)

Eligible employees must also be in their first year of employment and perform at least 400 hours of services for the employer. The credit is equal to 40% of up to $6,000 of wages, so the maximum possible credit is $2,400.

The credit is currently slated to expire as of Dec. 31, 2025.

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, or the lesser of $250 x 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.

Credit for Increasing Research Activities (R&D)

The Credit for Increasing Research Activities (aka the “R&D 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. Until the tax year beginning Jan. 1, 2026, the maximum annual credit is $500,000.

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.

Commercial Clean Vehicle Credit

Businesses that purchase a qualified commercial clean vehicle can earn up to $40,000 each year via the Commercial Clean Vehicle Credit. This nonrefundable credit is the lesser of 15% of your basis in the vehicle (30% if it’s not a gas or diesel vehicle) or the incremental cost of the vehicle. Qualified vehicles with gross vehicle weight ratings of under 14,000 pounds can earn a maximum credit of $7,500. All other vehicles can earn up to a $40,000 credit.

Employee Retention Credit

The ERC allows eligible employers to claim a refundable tax credit against its share of Social Security taxes. This credit is equal to 70% of qualified wages paid to employees between Jan. 1, 2021 and June 30, 2021.  Because the 2021 limit for qualified wages is $10,000 per employee per quarter, employers can receive a maximum credit of $7,000 per employee per quarter, or $14,000 through the first half of 2021.

Note that the ERC must be claimed by April 15, 2025. You can read more in our closer look at the Employee Retention Credit.

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 scam-free. Call McManamon at 440.892.8900 or contact us online today.

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