Most entrepreneurs look forward to tax season with the same amount of enthusiasm that kids usually have for a trip to the dentist. Not that you can blame either party. Dentists are so widely dreaded that there’s a term for it: dentophobia. And taxes can seem like a curse, adding pressure to the already-slim margins of a small business.
Taking this comparison a step further, which is worse? Is the impact of taxes on the bottom line as painful as a root canal? While the answer to these questions is debatable, research shows that the average effective tax rate hovers around 20%.
“Small businesses of all types pay an estimated average effective tax rate of 19.8%,” says tax expert Jean Murray. “The effective tax rate is the average rate of tax for a business or an individual taxpayer. The effective tax rate is calculated by dividing the total tax paid by the taxable income.”
The good news is that the federal government offers dozens of tax credits to small business owners. These incentives are intended to reward businesses that take actions throughout the year that align with objectives outlined by the IRS. Sort of an “I’ll scratch your back if you scratch the economy’s back” arrangement.
It’s important to note that these tax credits differ from tax deductions in how and when they’re applied. A deduction is tied to specific expenses, such as supplies and travel, related to your business. Every relevant deduction reduces your taxable income so you will owe less.
Tax credits, on the other hand, are applied after you’ve calculated your taxes. This distinction means any credit you qualify for will reduce the final amount you owe. While deductions impact your taxable income in smaller percentages, credits are dollar-for-dollar. A $1,000 credit will take exactly $1,000 off your tax bill.
Obtaining tax credits requires a proactive approach. It’s not like an IRS agent is going to tap you on the shoulder while you’re filing your taxes and say, “Wait! Let me show you a couple of quick ways to save thousands of dollars.”
Awareness is key. With that in mind, you should know about these 27 small business tax credits. Even if you qualify for just one or two of them, these credits could save you crucial money at tax time, leaving you with more cash on hand to run your business. To see if you qualify, click the links below to view the individual form page on IRS.gov, where you can get additional details and submission instructions.
- General Business Credit (Form 3800)
- Investment Credit (Form 3468)
- American Samoa Economic Development Credit (Form 5735)
- Work Opportunity Credit (Form 5884)
- Alcohol and Cellulosic Biofuel Fuels Credit (Form 6478)
- Credit for Increasing Research Activities (Form 6765)
- Low-Income Housing Credit (Form 8586)
- Recapture of Low-Income Housing Credit (Form 8611)
- Orphan Drug Credit (Form 8820)
- Disabled Access Credit (Form 8826)
- Qualified Plug-in Electric and Electric Vehicle Credit (Form 8834)
- Renewable Electricity, Refined Coal, and Indian Coal Production Credit (Form 8835)
- Empowerment Zone and Renewal Community Employment Credit (Form 8844)
- Indian Employment Credit (Form 8845)
- Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips (Form 8846)
- Credit for Contributions to Selected Community Development Corporations (Form 8847)
- Biodiesel and Renewable Diesel Fuels Credit (Form 8864)
- New Markets Credit (Form 8874)
- Credit for Small Employer Pension Plan Startup Costs (Form 8881)
- Credit for Employer-Provided Childcare Facilities and Services (Form 8882)
- Low Sulfur Diesel Fuel Production Credit (Form 8896)
- Qualified Railroad Track Maintenance Credit (Form 8900)
- Distilled Spirits Credit (Form 8906)
- Energy Efficient Home Credit (Form 8908)
- Alternative Motor Vehicle Credit (Form 8910)
- Alternative Fuel Vehicle Refueling Property Credit (Form 8911)
- Mine Rescue Team Training Credit (Form 8923)
To qualify for any of these credits, you’ll need to have your finances in order. It’s possible to do everything on your own, but enlisting the help of a tax expert is an excellent way to streamline the process and confidently identify credits that can benefit your business. When done right, the money you pay your adviser will be returned many times over.
In addition to the 27 tax credits mentioned earlier, here’s a bonus entry. If you file a Form 1040 Schedule C, you may qualify for the Earned Income Tax Credit (EITC). It has been created for small business owners, farmers, and other individuals with financial burdens. Check out the convenient EITC Assistant to find out if you can use this credit to lower the taxes you owe.
Whether you’re seeking credits and deductions or just want to survive tax season without an emotional breakdown, remember to set aside enough time to make it all possible. Due diligence allows you to consider all your options thoughtfully. Time is money for entrepreneurs, but the ROI on that time is excellent whenever you score a new tax credit.