Running a business can be costly, but did you know there are ways to make it more affordable? Tax credits are one of these ways. They’re like a gift from the government to help you reduce the amount of tax you owe. This guide will help you understand what tax credits are, how they differ from tax deductions, and which ones you might be eligible for as a small business owner.
So, what’s a tax credit? It’s a sum of money that you can subtract from your tax bill. The government uses these credits to encourage certain activities or businesses. The amount you get depends on what the credit is for. Some credits are refundable, meaning if the credit is more than what you owe in taxes, you get the difference back. Nonrefundable credits, on the other hand, can only bring your tax bill down to zero.
Now, you might be wondering how tax credits are different from tax deductions. Well, a tax deduction reduces the amount of your income that’s subject to tax, while a tax credit directly reduces the amount of tax you owe. Tax credits are usually more beneficial because they reduce your tax bill dollar-for-dollar, while deductions only reduce the amount of tax you owe based on the amount you’ve deducted. The best part? Many credits don’t have a minimum spending or income requirement, so if you qualify, you can claim them.
There are several tax credits that can help you reduce your tax bill and potentially increase your refund. Here are some you should know about:
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General Business Credit: This is a catchall credit that adds up all the individual credits and deductions you’ve earned. You can qualify for this credit by doing things like entering new markets, retaining employees, and buying electric vehicles. To claim this credit, you’ll need to fill out Form 3800.
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Employer Credit for Paid Family and Medical Leave: If you provide paid leave for employees covered by the Family and Medical Leave Act (FMLA), you might be eligible for this credit. To claim it, complete Form 8994.
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Credits for Alternative Fuels: If you produce alcohol-based fuels like methanol and ethanol, or other alternative fuels like biodiesel or renewable diesel, you could be eligible for tax credits. These credits are designed to encourage investments in alternative fuel sources. To claim these credits, use forms 8849, 8864, 8896, 6478, and 4136.
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Credit for Small Employer Health Insurance Premiums: If you provide healthcare coverage to your employees, you could qualify for a significant tax credit. To claim this credit, use Form 8941.
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Alternative Motor Vehicle Credit: If you bought an alternative fuel source vehicle in 2022, you could get up to $7,500 in tax credits. This credit doesn’t apply to hybrid or electric vehicles. To claim this credit, use Form 8910.
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Credit for Increasing Research Activities: If your business supports domestic research and development, you might qualify for a tax credit of up to 20% of your expenses. To claim this credit, use Form 6765.
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Credit for Employer-Provided Child Care Facilities and Services: If your business helps employees with childcare costs, you might be eligible for a tax credit. To claim this credit, use Form 8882.
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Work Opportunity Tax Credit: If your business hires individuals who have traditionally faced barriers to employment, you could benefit from a tax credit. To claim this credit, use Form 5884.
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Credit for Small Employer Pension Plan Startup Costs: If you’re a small business setting up a pension, you might be eligible for a tax credit. To claim this credit, use Form 8881.
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Disabled Access Credit: If your business makes its premises accessible to people with disabilities, you might be eligible for a tax credit. Claim this credit using Form 8826.
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New Markets Credit: If your business invests in qualified community development entities (CDEs) designed to assist low-income communities, you might be eligible for this tax credit. To claim it, use Form 8874.
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Empowerment Zone Employment Credit: If your business hires employees who live in an established empowerment zone, you might be eligible for a tax credit. Use Form 8844 to claim this credit.
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Investment Credit: If your business invests in reforestation, alternative energy property used in business, or building rehabilitation, you might be eligible for a tax credit. Claim this credit on Form 3468.
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Earned Income Tax Credit (EITC): Low to moderate-income workers and families can take advantage of the EITC for a tax break.
To claim a small business tax credit, you’ll need to gather all the necessary documents and information, like income statements and receipts from qualifying purchases. Do some research to figure out which credits you’re eligible for, calculate your potential savings, and then fill out and submit the required forms.
Remember, most tax credits are non-taxable and don’t need to be reported as additional income. There isn’t a specific tax credit for starting a new business or for an LLC, but there are many credits that an LLC can take advantage of. To claim tax credits, you’ll need to provide proof of expenses, like receipts. To get a large tax refund for your small business, make sure you’re taking advantage of all the deductions and credits you’re eligible for.
