Taxes. You love them, and you hate them. When they’re making the world a better place by improving roads and paying teachers, they’re not so bad. But when they’re eating into your business’s profits and making accounting a living nightmare, they’re hellacious—yes, hellacious.
Nevertheless, it is what it is, and taxes are just part of owning a business.
However, your small business can save big bucks on your tax bill by claiming available tax credits. And before you get confused—no, tax credits and tax deductions aren’t the same things.
Tax deductions lower your tax bill by decreasing your taxable income. Tax credits reduce your tax bill by directly decreasing the amount of taxes you owe.
For example, a $500 tax deduction will subtract $500 from your taxable income—you’ll then pay taxes on the remaining balance. But with a $500 tax credit, you’ll subtract $500 from your taxes owed.
In the end, deductions and credits are both great because they reduce your tax obligation, but tax credits have a slight edge since they can earn you nice refunds.
Staying on top of all the available small business tax credits is challenging, especially since you have other important things to do—like running your business. To make things simple, let’s just focus on the 5 most important types of tax credits.
1. Work Opportunity Tax Credit
Sometimes, it pays to do good. The Work Opportunity Tax Credit (WOTC) is available if your company hires employees who face barriers to employment.
The IRS has defined 10 categories of WOTC-eligible workers:
- Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
- Unemployed veterans, including disabled veterans
- Designated community residents living in Empowerment Zones or Rural Renewal Counties
- Vocational rehabilitation referrals
- Summer youth employees living in Empowerment Zones
- Food stamp (SNAP) recipients
- Supplemental Security Income (SSI) recipients
- Long-term family assistance recipients
- Qualified long-term unemployment recipients (for people who begin work after 2015)
Your WOTC amount is determined by the wages you pay qualified employees, but you could save up to $9,000 over 2 years.
2. Retirement Plan Startup Costs Tax Credit
The government wants individuals to plan for retirement, and that’s why they’re willing to help your business start a retirement program.
The Retirement Plan Startup Costs Tax Credit can help you recoup 50% of the “ordinary and necessary eligible startup costs” (up to a maximum of $500 per year) of starting a company-sponsored retirement plan. These ordinary and necessary costs include setup and administration fees, plus any money used to educate employees about the program.
This credit can only be claimed if you have 100 or fewer employees who received more than $5,000 in compensation from your business—and it’s only available for the first 3 years of your plan.
3. Credit for Small Employer Health Insurance Premiums
55% of full-time employees say health insurance is the most significant benefit they receive. However, health insurance can be complicated and expensive for small businesses.
The Credit for Small Employer Health Insurance Premiums seeks to alleviate some of that pain with a tax credit that’ll cover up to 50% of the amount you paid toward premiums for 2 consecutive years. To qualify, you’ll need:
- Employ fewer than 25 full-time employees
- Pay average wages less than $51,600 per year
- Fund at least half of all your employee’s health insurance premiums
- Purchase your health insurance plan through Small Business Health Options Marketplace
4. Disabled Access Credit
If you’ve invested money to make your business more accessible, then you likely qualify for a Disabled Access Credit. The IRS gives a broad list of eligible access expenses, but here are a few practical examples:
- Construct ramps for wheelchair access
- Provide text in braille
- Create accessible rooms, restrooms, and workspaces with wider doors
- Remove barriers and obstacles
- Install automatic doors
The Disabled Access Credit covers 50% of your expenses with a maximum credit of $5,000.
5. Family and Medical Leave Credit
Businesses who provided paid family and medical leave for employees can qualify for a Family and Medical Leave Credit. This credit can cover 12.5% to 25% of what you paid your employees (which must be at least 50% of the regular pre-leave wages) for up to 12 weeks.
Change the World and Save a Few Bucks, Too
Tax credits make it just a little bit easier to invest business money into making the world a better place. With all the rules, qualifications, forms, accounting, and whatnot, tax credits can still be a real headache—but they’re worth it, especially since they reward your business for doing good.
Staying organized goes a long way in helping you claim your available tax credits. Keep all your business financials squeaky clean and perfectly organized with a cloud solution. Try Sunrise Tax Assist (for free) and store all your important tax documents in one easy-to-access place for a smoother tax-filing season.