Tax time can be stressful for small businesses. You must ensure you’re garnering every tax credit possible. Many overlook the huge advantages of tax credits. This article will reveal five of small businesses’ most overlooked tax credits. Read on to determine if any of them applies to you.
Tax Credit vs. Tax Deduction
Before we discuss the five tax credits often overlooked by small businesses, let’s differentiate tax credits from tax deductions.
Tax deductions reduce your taxable income, making you pay less tax. Tax credits, on the other hand, are amounts deducted from the taxes you owe. Suppose you receive a tax credit of $500. If so, you get to subtract $500 from taxes due.
Tax credits are highly beneficial during tax time. Knowing which ones your small business is eligible for can save you money. Sadly, many small business owners aren’t aware of some of them.
So, without further ado, here are five tax credits most overlooked by small business owners. Feel free to check with your accountant to see if you’re eligible for these or other tax credits after you review this list.
5 Tax Credits You May Be Overlooking
1. Retirement Saver’s Credit
The IRS offers this credit to small businesses that start retirement plans for their employees to offset some startup costs they deem “ordinary and necessary.” You must employ fewer than 100 employees and not have had a previous retirement plan. The credit is for 50% of your startup costs, with a maximum of $500 credit.
You can claim this tax credit for three years, starting in the year before your plan becomes effective. If you currently don’t offer a retirement savings plan for your employees, this is another reason to establish one.
2. Research & Development Tax Credit
The Research and Development tax credit is often overlooked. Small business owners who don’t conduct “research” in a laboratory setting often blaze right past this tax credit. According to the IRS, however, “research” doesn’t necessarily have to be in a lab.
A business that improves a product or process, often as part of everyday operations, can qualify for this tax credit. For example, you may be eligible if you have a software company that develops or improves IT processes.
Furthermore, designing, developing, or enhancing a business product or process can get you a 13-cent credit for every dollar. Naturally, you need to confirm whether your business qualifies, determine qualifying activities, and keep copious records to back up your claim.
3. Rehabilitation Credit (Historic Preservation)
This credit would likely apply if your business spent money renovating or rehabilitating a historic structure. You can avail yourself of a 20% tax credit for rehabilitating historic, income-producing buildings. The Secretary of the Interior determines certified historic structures.
However, this does not apply to residential structures. So, businesses that bought historic properties to house their offices, restaurants, or other businesses can not qualify. Historic structures are also certified by the National Park Service. Consider reviewing this credit with your accountant if it applies to the structure where your business is housed.
4. Empowerment Zone Employment Credit
Empowerment Zones (EZ) refer to distressed urban and rural areas in need of revitalization. The EZ credit encourages business owners to operate and employ EZ residents in these areas. The credit is 20% of qualified wages paid in a calendar year. Businesses are qualified for a wage credit of up to $3,000 every year for each eligible employee.
5. Plug-In Electric Vehicle Credit
Suppose you buy a new plug-in electric vehicle (EV) for your business operations between 2023 and 2032. In that case, you can qualify for a $7,500 tax credit. To be eligible, your adjusted gross income (AGI) must not surpass $150,000 in the year you deliver the vehicle or the year before (whichever is less).
The EV must meet battery capacity, retail price, and weight qualifications. If you bought a plug-in EV for your business, speak to your tax accountant for the guidelines and qualifications.
Ensure you claim every tax credit your small business is entitled to to keep paying the lowest possible tax. Small businesses are eligible for dozens of tax credits. Also, ensure your accountant or CPA reviews your eligibility for maximum savings during tax time.
