If you’re like most taxpayers, you look for every possible deduction when filing your tax return for business. One way to lower your tax liability is to claim business tax credits.
What is a tax credit?
A tax credit is a dollar-for-dollar amount of money individuals and business owners can use to reduce their tax liability. Tax credits directly lower what you owe in taxes by the amount of the credit. You can receive business tax credits for offering small employer health insurance, paid family and medical leave, reasonable accommodation, and more.
Tax credits incentivize business owners to take actions that benefit employees, the environment, and the greater good.
There are both refundable and nonrefundable tax credits.
A nonrefundable tax credit means you can only lower your tax liability to zero—you cannot receive a refund off of a nonrefundable tax credit. For example, if your tax liability is $3,000 and you receive a nonrefundable tax credit of $3,500, you will not receive a $500 refund.
Some nonrefundable tax credits can be carried over. You can apply unused nonrefundable tax credit amounts to future tax years.
Refundable tax credits lower your tax liability and can result in a refund. If your tax liability is $3,000 and you receive a refundable tax credit of $3,500, you will receive a $500 refund.
If your business is eligible for both refundable and nonrefundable tax credits, apply the nonrefundable tax credits first.
Small business tax credit vs. deduction
Both tax credits and deductions are tax incentives for businesses that can reduce your tax liability. But, credits and deductions are not interchangeable.
Small business tax deductions reduce your total taxable income. On the other hand, business tax credits reduce your tax bill. So, what exactly does that mean?
Let’s say you have $100,000 of taxable business income. A tax deduction of $2,000 would drop your taxable income to $98,000 while a tax credit would directly lower your tax bill by $2,000.
Tax credits for small business owners are more substantial tax reductions than deductions. Because credits lower your tax bill and not your taxable income, a tax credit would offer greater savings than a deduction of the same value.
Business tax credits
Aside from the electric vehicle credit (which will be phased out soon), all business tax credits are part of the general business credit.
Here is a list of common small business tax credits you might be eligible to take:
- Small employer health insurance tax credit
- FMLA tax credit
- Disabled access credit
- Work opportunity credit
- Qualified electric vehicle credit
Keep in mind that many business tax credits have expiration dates. Congress can choose to extend, renew, phase out, eliminate, or create tax credits.
There are other types of business tax credits you may qualify for. Other credits include the Indian employment, employee retention (credits for affected disaster area employers), investment, and research activities credits.
Small employer health insurance tax credit
Small employers with fewer than 50 full-time equivalent employees may choose to provide health insurance by enrolling in the Small Business Health Options Program (SHOP).
Some employers who enroll in a SHOP plan are eligible for the Small Business Health Care Tax Credit.
This health insurance credit for small business applies to employers with fewer than 25 full-time equivalent employees. Your employees’ average salaries must also be $50,000 per year or less. And, you must pay at least 50% of your full-time employees’ premium costs and offer coverage to all full-time employees.
The Small Business Health Care Tax Credit is worth up to 50% of your premium costs. And, this tax credit is refundable.
FMLA tax credit
Employers who voluntarily offer paid family and medical leave before 2020 might be eligible for the FMLA tax credit.
To qualify for the FMLA tax credit, you must choose to offer paid FMLA to all eligible employees, pay at least 50% of the employee’s wages, provide at least two weeks of paid FMLA to full-time employees, and have a written policy in place.
The FMLA tax credit amount depends on the percentage of wages you give to employees while they are on leave. The minimum tax credit is 12.5%, and the maximum tax credit is 25%.
This tax credit is nonrefundable.
Disabled access credit
If you incur expenses to provide access to employees or customers with disabilities, you may be eligible for the disabled access credit.
To qualify, you must earn annual revenues below $1 million and have 30 or fewer full-time employees. Eligible expenses include removing barriers and acquiring equipment for individuals with disabilities.
You can receive a nonrefundable tax credit of up to $5,000.
Work opportunity credit
If you hire individuals from qualifying groups who have faced employment barriers, you might be eligible for the work opportunity credit. Veterans, individuals with disabilities, ex-felons, and certain long-term unemployment recipients are examples of qualifying employees.
The work opportunity tax credit ranges from $1,200-$9,600. The amount you can claim depends on the employee you hire and the length of their employment. This tax credit is nonrefundable.
Qualified electric vehicle credit
Eligible individuals and businesses can claim the EV credit for purchasing certain alternative-fuel vehicles. The vehicle cannot be used or a lease. And, the vehicle must be charged from an external source and have a battery pack.
The amount of the tax credit can vary from $2,500-$7,500, depending on the vehicle’s size and battery capacity.
Before purchasing a plug-in hybrid or battery-electric car, keep in mind that the credit will be phased out after each manufacturer (e.g., General Motors, Tesla, Toyota, etc.) sells 200,000 qualifying vehicles.
The qualified electric plug-in vehicles tax credit is nonrefundable.
How to apply for tax credits
To apply for business tax credits, complete Form 3800, General Business Credit.
You must attach additional forms for each type of credit you claim. Part III of Form 3800 identifies which additional forms you need to include.
Here are the forms you must attach to Form 3800 for the above list of tax credits discussed:
|Business Tax Credit||Forms to Attach to Form 3800|
|Small Employer Health Insurance Tax Credit||Form 8941|
|FMLA Tax Credit||Form 8994|
|Disabled Access Credit||Form 8826|
|Work Opportunity Credit||Form 5884|
|Qualified Electric Vehicle Credit||Form 8834|
For a full list of business tax credits, check out the IRS’s website.
If you want to claim business tax credits, you need supporting documents. Track your expenses with Patriot’s online accounting software. View summaries of your business expenses, vendor payment details, and more. Get your free trial now!
This is not intended as legal advice; for more information, please click here.