Small business owners often complain about slow or non-existent growth. Yet, they fail to realize the reasons behind it. One mistake is ignoring tax credits.
While basic Tax Deductions reduce your taxable income bracket, tax Credits can trim tax liability dollar for dollar.
Tax credits can be a practical tool for success in any small business owner’s arsenal. This article will cover six of the most overlooked tax credits for small business owners.
Six Overlooked Tax Credits for Small Businesses
Cutting down on a few hundred or thousand dollars of tax can mean gains for small business owners. Here are the six simple tax credits a small business may qualify for.
Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit helps businesses that hire employees from certain groups. These individuals face employment barriers due to various reasons, such as:
- Past Criminal Record (ex-felons)
- Using Temporary Assistance (TANF) Benefits
- Being Supplemental Nutrition Assistance Program (SNAP) Recipients
- Having Certain Army Veteran or Disability Benefits
Hiring from these groups allows employers to claim a maximum of USD 2,400 for new full-time hires. However, the employees must meet the eligibility criteria.
The amount of credit depends on the wages paid to eligible employees in the first year of hiring. Eligible employees must have a minimum of four hundred work hours.
Research And Development (R&D) Tax Credits
Research and development tax credits help businesses with new product development or research. However, they are mostly ignored due to misconceptions about eligibility.
Businesses in software development, architectural design, and other research-based fields can use this form of tax credit.
Any innovative business can use the R&D tax credit to reduce its liability. Recently, the IRS made changes to Form 6765 to prevent fraud. The new form has more detailed wage expense reporting for easy eligibility.
SECURE 2.0 Act Tax Credits
Businesses that offer employees 401(K) and other retirement benefits can get tax credits. This type of tax credit rewards companies that value their employees.
The SECURE 2.0 Act has been effective since January 2020. Recent updates have further enhanced its availability since December 29, 2022.
The Required Minimum Distribution age was raised. Adjustments were made to catch up on benefits for older employees. The ability to offer emergency savings through retirement accounts was also approved.
Retirement Plans Startup Costs (RPSC) Tax Credit
RPSC tax credits simplify giving retirement benefits to employees while reducing tax liability.
Small businesses need to meet some criteria related to:
- The number of employees
- The compensation provided to employees
- The business’ retirement plan history
Companies without a retirement plan in the last three years or with certain low-salaried employees can be eligible. These tax credits cover up to half of the costs involved in retirement plans.
Starting a retirement plan like a SIMPLE IRA, 401(k), or SEP can be tough, but retirement plans can also help attract and keep good talent while saving on taxes.
Getting up to USD 5000 per year benefits for the next three years can greatly help any business.
Plug-In Electric Drive Vehicle Credit
Businesses buying electric vehicles can use this tax credit to save money. The credit’s value can be as high as $7,500 per vehicle.
The purpose is to motivate businesses to be eco-friendly while helping them save on costs. The notable tax relief makes it a great way to upgrade company vehicles without spending much.
The Plug-In Electric Drive Vehicle Credit requires certain eligibility to qualify:
- The business must purchase certain types of vehicles.
- The vehicle weight should not exceed 14,000 pounds.
- An external charging source should power the vehicle
- This vehicle should be assembled in North America after August 16, 2022.
Alternative Motor Vehicle Credit
The Alternative Motor Vehicle Credit rewards businesses using vehicles powered by alternative energy. The credit amount varies depending on the type of vehicle and its energy source.
The vehicle should have been originally purchased by the business and used for business purposes to be eligible. The tax credits can range to a few thousand dollars depending on the vehicle.
It helps companies support the use of sustainable transportation with tax reductions. Companies using eco-friendly practices also get a good PR boost while saving on costs.
Conclusion
Using these tax credits will benefit small business owners. Whether through the Plug-In Electric Drive Vehicle Credit, which encourages the use of environmentally friendly vehicles, or the Alternative Motor Vehicle Credit.
Tax credits may be used to offset taxes while encouraging sustainable business practices. Thus, regular updates and favorable use of the above-discussed opportunities will help boost small businesses and lead to a more sustainable future.
FAQs
Tax credits are exemptions that decrease the portion of the income tax you must pay to the federal and state governments. Credits, in general, are largely incentive-based or granted to promote specific behavior that the government believes will benefit the economy, the environment, or any other relevant interest.
Credit means any amount you would like to apply or to take off the tax you must pay. This can help reduce your taxable income, which may reduce the tax amount you must pay or even get a bigger refund. However, there are special refundable credits, which means they can pay you money even when not obliged to by the tax.
Yes, there are many tax credits available for small businesses. Small businesses can grow more using the tax credits and relief they provide.
Yes, several tax credits are available for purchasing EVs for business use. The most common tax credits for EVs include the Plug-In Electric Drive Vehicle Credit and Alternative Motor Vehicle Credit,
