8 Important Small Business Tax Credits

Tax credits, as opposed to tax deductions, reduce your actual tax bill dollar for dollar—not just your taxable income. This makes tax credits extremely valuable to businesses of all sizes, but especially small businesses that may need every last dollar.

If you’re a small business and are looking for ways to effectively reduce your next tax bill, here are eight of the most important tax credits you should know about.

1. Work Opportunity Tax Credits

The Work Opportunity Tax Credit (WOTC) is often available to businesses that hire ex-felons, food stamp recipients, social security income (SSI) recipients, veterans, and employees from other people groups.

The amount of your tax credit ultimately depends on which category your employee falls under, but typically, it amounts to at least $2,400.

It’s worth noting that, while the Work Opportunity Tax Credit is a federal tax credit, there are similar tax incentives at the state level as well. The Point-of-Hire tax credit is currently available in eight different states and amounts range from a few hundred dollars to $35,000 per employee.

2. Credit for Small Employer Health Insurance Premiums

If your small business has fewer than 25 full-time employees, pays an average wage of less than $55,000 per year, has purchased a qualified health plan, and pays at least half of your employees’ premiums, you might be eligible for a small-business health insurance credit under the Affordable Care Act.

For eligible small businesses, this credit is worth 50% of employer-paid insurance premiums. Keep in mind, however, that this particular credit can only be claimed for two consecutive years.

3. Credit for Paid Family and Medical Leave

According to the U.S. Bureau of Labor Statistics, only 12% of employees at businesses with 1–49 employees have access to paid leave.

To help incentivize paid leave, Congress approved the Family Leave Act Tax Credit in 2017. This credit is worth between 12.5% and 25% of the wages paid to qualifying employees for family or medical leave.

Small businesses may be eligible for this credit if a qualifying employee has been working for the business for at least a year, has earned less than $78,000 the previous year, and if the business has a written policy that allows for at least two weeks of paid leave for full-time employees.

4. Alternative Motor Vehicle Credit

If your small business needs to purchase a new vehicle, it could be worth your while to purchase one that uses an alternative fuel source. Doing so could make your small business eligible to receive a tax credit worth up to $8,000.

It’s important to note that qualifying vehicles do not include hybrid or electric cars, but rather, a small selection of vehicles that use hydrogen fuel-cell technology. Before purchasing a new motor vehicle, be sure to check the IRS’s requirements for qualifying vehicles.

5. Disabled Access Credit

By installing ramps, upgrading restrooms, and making other updates to your building to accommodate people with disabilities, your small business might be eligible for the Disabled Access Credit—a tax credit that covers up to 50% of the cost of these expenditures for a maximum credit of $5,000.

Qualifying businesses must have total revenue equal to or less than $1 million, or have no more than 30 full-time employees.

6. Credit for Increasing Research Activities

One way in which small businesses are encouraged to invest in domestic research and development (R&D) is through tax credits for these activities.

Qualifying research activities include developing products, prototypes, and models; certification or environmental testing; and developing and applying for patents. Be sure to check the IRS’s full list of qualified research before completing form 6765.

This tax credit covers up to 20% of related expenses and is made available to individuals, small businesses, and corporations alike.

7. New Markets Credit

Small businesses that invest in Community Development Enterprises (CDEs)—organizations that assist low-income communities—may also be eligible for the New Markets Credit.

Qualifying projects include educational facilities, community centers, hospitals, healthcare facilities, job-creating industrial buildings, and facilities that assist women and minorities.

Additionally, these projects must be located in communities that either have a 20% poverty rate or a median family income that is no more than 80% of the area’s median income.

8. Employee Retention Credit

The COVID-19 pandemic left many small businesses with very little choice other than to temporarily close their doors or make cuts to staff.

To incentivize employee retention during this time, a tax credit was included in the CARES Act—one that offers a break to businesses that continued to keep employees on payroll after closure or a decline in revenue.

The Employee Retention Credit is worth up to $5,000 for the year 2020 and up to $7,000 for the year 2021.