Partnering with a good tax accountant is critical to helping a small business owner maximize profitability by minimizing taxes. An experienced tax professional will help ensure you take advantage of every business tax deduction and claim every business tax credit you are entitled to.
What is a Tax Credit?
Let’s define the beauty of a tax credit by comparing it to a tax deduction. These are quite often believed to be the same thing. While the goal of each is very similar, the impact to your bottom line is quite different. Both tax deductions and tax credits reduce a taxpayer’s tax liability, however, a tax credit is much more “powerful” than a tax deduction.
Many business expenses are tax deductible. This means that a taxpayer can use deductible business expenses to reduce its taxable income. With enough deductions, your taxable income may be lowered enough to push you back into a lower tax bracket which will save you money when filing your taxes.
Let’s consider a simple example:
Your taxable income may start in the 24% tax bracket.
Each deductible business expense reduces that taxable income ultimately pushing you down into the 22% tax bracket.
Now your remaining taxable income will be taxed at 22% instead of 24%.
As you can see, deductions reduce taxes paid but not dollar for dollar.
A tax credit, on the other hand, is a dollar-for-dollar reduction in taxes owed to the IRS.
Let’s consider another example:
Assume your final tax owed to the IRS is $10,000 and your tax professional helps you find $5,000 in tax credits.
This entire $5,000 reduces your taxes owed to the IRS so instead of owing $10,000 to Uncle Sam, you only owe half that amount.
Let’s explore some of the most common tax credits for small businesses.
1. Work Opportunity Credit (Form 5884)
The work opportunity tax credit incentivizes businesses to hire people from certain targeted groups who have experienced barriers to employment.
These targeted groups include unemployed veterans, ex-felons and people who have received government assistance such as food stamps. The total credit is based on the wages paid to these employees.
2. Credit for Small Employer Pension Plan Startup Costs (Form 8881)
Small business owners who start a pension for their employees are rewarded with this tax credit to offset some of the costs.
To be eligible for this credit you must have fewer than 100 employees with a minimum compensation of $5,000 and you must not have had a qualifying retirement plan in place for the past three years.
3. Credit for Small Employer Health Insurance Premiums (Form 8941)
Small business owners who provide health insurance to their employees can take advantage of this credit. This is available to businesses with less than 25 full-time employees who receive an average wage of less than $55,000.
4. New Markets Tax Credit (Form 8874)
The IRS provides a credit to businesses that make qualified equity investments in organizations that assist low-income areas. These organizations are called community development enterprises (CDEs).
5. Disabled Access Tax Credit (Form 8826)
Under the Americans with Disabilities Act, businesses with 15 or more employees are required to provide reasonable accommodations to disabled employees in order to make the building more accessible. A common example of an accommodation is a wheelchair ramp. This business credit is meant to offset some of the costs associated with these accommodations.
6. Credit for Employer-Provided Child Care Facilities and Services (Form 8882)
Businesses recognize the difficulty families face when trying to juggle work and childcare. For this reason, many businesses will help families by offering childcare benefits to their employees or helping them pay for childcare resources and referrals. A small business owner can take advantage of this credit to help offset some of the expenses.
7. Credit for Increasing Research Activities (Form 6765)
This credit is available to businesses that have research and development costs. Offering businesses a tax credit toward these costs incentivizes them to continue to innovate and explore better products and processes which in turn advances industries and improves the lives of consumers.
Each of these tax credits has unique criteria and requirements. A tax professional can help you determine which credits you are entitled to and help you explore others. Schedule a free consultation at the button below to work with a ProAdvisor CPA tax professional.