Small businesses benefit from various tax credits that reduce the amount of tax they pay to the government. Here, we discuss tax credits, why they exist and provide a list of the top tax credits that small business owners should know.

Small Business Tax Credits

A small business tax credit is an amount of money subtracted from the taxes the business owes. Tax credits differ from tax deductions. For example, deductions cut a business’ total tax by a percentage of the deduction, depending on the tax bracket. Alternatively, tax credits reduce the tax due, not the amount of taxable income. In other words, a small business tax credit is a dollar for dollar deal – every dollar of credit cuts the business’ tax by a whole dollar. This credit is a significant benefit for small business owners because it helps recover some operating costs and retains the precious capital needed for growth.

As a practical example, if your business owes $20,000 in taxes, but you can claim a $5,000 tax credit, that amount is subtracted from your total tax bill making the new tax bill $15,000.

The Purpose of Small Business Tax Credits

The U.S. government grants tax credits to promote behaviors it finds favorable. For example, tax credits are offered to businesses as incentives for activities that benefit employees, promote specific industries, or aid or benefit society. One example is the government offering tax credits to businesses that purchase electric vehicles. The government encourages this to fight climate change and global warming. Because tax credits can have such a dramatic impact on a small business’s bottom line, it is crucial to stay apprised of tax credits for which your business is eligible.

7 Small Business Tax Credits for 2021

In the wake of the COVID-19 pandemic, related tax credits for small businesses top the list.

1. Employee Retention Credit

Under the American Rescue Plan, the Employee Retention Credit (ERC) is extended for small businesses through December 2021 and is available for all four quarters of the year. This tax credit allows small businesses to offset payroll tax liabilities by up to $7,000 per employee per quarter. That means a credit of up to $28,000 per employee is available for small businesses whose revenue declined due to the COVID-19 pandemic. A 20 percent decline in gross receipts during a single quarter makes a business eligible for this tax credit.

2. Paid Leave Credit

Another tax credit that falls under the American Rescue Plan is the Paid Leave Credit. This credit is extended through September 30, 2021, and offers credits for small and midsize businesses that offer paid leave to employees for COVID-related illness, quarantine, or family caregiving. The allowable credit is equal to wages up to $5,000 of paid leave for sick or quarantining employees.

Note: Small businesses are no longer required by law to offer paid leave related to COVID; however, if they do, the credit still applies.

Other tax credits of which small businesses should be aware are:

3. Health Care Tax Credit

With the Health Care Tax Credit, the smaller the business, the bigger the credit. The credit is highest for businesses with fewer than ten employees. Generally, the way to qualify for the credit is by enrolling in a Small Business Health Options Program (SHOP).

A business must meet the following requirements to qualify:

• (a) have fewer than 25 full-time employees,
• (b) have an average employee salary of approximately $50,000 per year or less,
• (c) pay at least 50 percent of full-time employees’ healthcare premiums, and
• (d) offer SHOP coverage to all full-time employees.

This credit can be claimed for two consecutive years, applicable from 2017 forward.

4. Work Opportunity Credit

This credit is available to employers who hire from specific groups that face barriers to employment. For example:

• Qualified IV-A Recipient – receiving TANF assistance
• Qualified Veteran – the IRS provides details of what “qualified” entails on their site under Tax Credits
• Ex-Felon
• Designated Community Resident (DCR) – between 18 and 40 years old and living in an empowerment zone, an enterprise community, or a renewal community
• Vocational Rehabilitation Referral – a person who has a physical or mental disability and has been referred to the employer while receiving or upon completion of rehabilitative services
• Summer Youth Employee
• Supplemental Nutrition Assistance Program (SNAP) Recipient
• Supplemental Security Income (SSI) Recipient
• Long-Term Family Assistance Recipient
• Qualified Long-Term Unemployment Recipient

Under the Consolidated Appropriation Act, 2021, this credit was extended until December 31, 2025.

5. Disabled Access Credit

Eligible small businesses that earn $1 million or less and have a maximum of 30 full-time employees in a year can claim this credit each year in which expenditures are incurred to make their business accessible to persons with disabilities under the Americans with Disabilities Act (ADA).

Expenditures include, but are not limited to, installing wheelchair ramps, upgrading restrooms, and providing Braille text materials.

6. Employer-Provided Childcare Facilities and Services

While few businesses these days seem to provide in-house child care for their employees’ children, a tax credit can make this an attractive option. This credit is a general business tax credit for 25 percent of qualified employer-provided child care expenditures plus 10 percent of qualified child care resources and referral expenditures. The credit is capped at $150,000 per tax year.

Qualifying expenditures:

• Include operating costs of a qualified child care facility
• Include costs for acquisition, construction, rehabilitation, or expansion of a property used as a care facility (but not land or any part of the principal residence of the taxpayer)
• May not exceed the fair market value of care provided

The employer-run facility must open enrollment to employees and must not discriminate in favor of highly compensated employees. At least 30 percent of the facility’s enrollment must consist of dependents of taxpayer employees.

7. Research and Development (R&D) Tax Credits

Several R&D tax credits exist for small businesses. These credits typically apply to science, medical and technology-based businesses; however, many businesses engage in qualified R&D activity.

The following activities qualify for an R&D tax credit:

• New prototype or model development
• Proprietary product on which you seek a patent
• Developing a new manufacturing process or business process
• Improving product efficiency or existing business processes
• Improving quality control processes
• Environmental or certification testing

Businesses that qualify for this credit can subtract up to 10 percent of R&D costs from their tax bill.

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Ask your tax professional about small business tax credits that apply to your business. There are additional federal small-business tax credits from state and local governments. Tax credits often expire after a few years, so act quickly to take advantage of those that apply to you.

Start planning your tax strategy today by calling 301-728-0808 now or request your free consultation online and we’ll contact you to discuss how we can reduce your tax burden.

…and tips on how to do it.

The IRS may have granted us a reprieve for filing our income taxes this year, but we hope you’re well into your preparation for 2020 income taxes – or finished with them. Tax planning shouldn’t be a task on your to-do list every April. It should start January 1.

You won’t know what legislation Congress will pass before December 31 that will affect your taxes, but the planning and recordkeeping you do throughout the year will help minimize last-minute panic and frustration. It can also reduce your total tax obligation.

There are other reasons why you should treat tax preparation as a part of your overall financial planning. As the year progresses and you monitor your income and expenses, you can make adjustments that will have impact on your tax bill.

If you’re filing an individual return, you need to learn how major life events like marriage, children, unexpected unemployment, a new side gig, or a change in home ownership will affect you, and how to adjust accordingly. If you have a small business, this attention to money in and money out is even more critical. You don’t want to come to the end of the year and discover that your income is significantly higher than the total of your expenses, and you haven’t paid nearly enough in estimated taxes.

If you’re starting a new side gig or sole proprietorship in 2021, you’ll be filing an IRS Schedule C along with your Form 1040 (above image from 2020 Schedule C).

Waiting until the last minute is unwise for other reasons. For example, you may learn that you’re missing critical documents like receipts and official tax forms from employers. Further, what happens if an emergency comes up in early April and you’re unable to finish? Yes, you can file for an extension, but that also requires that paperwork and possibly a payment be submitted by the deadline.

Year-round tax planning gives you the opportunity to control what you can while anticipating what could happen. Sometimes, tax legislation comes early in the year, like the American Rescue Plan did in 2021. You probably already know how that will affect your 2021 taxes. If you’re conscientious about your bookkeeping throughout the year, you’ll be in a better position to gauge how both tax law changes and your own unfolding financial situation might alter your tax obligation.

How Do You Plan for Taxes?

Here’s the best answer we can give you to that question: Treat every day like it’s April 14. You don’t have to scrutinize every single expense and determine its tax implications (though you should, for major purchases), but there are a number of ways you can prepare.

Consider using a financial software program or website, or at least Excel. If you’re filing individually, you can start tracking your income and expenses in a free service like Mint or pay to use, for example, Quicken or Simplifi. These applications allow you to import transactions from your financial institutions, categorize them so you know what is tax-related, and run reports that can help you in your tax preparation.

Develop a manual system for organizing your taxes. If you don’t want to go digital, visit an office supply store and invest in suitable paper or a ledger book, file folders, and anything else that you can dedicate to only tax-related documentation. Keep all receipts in one place.

Keep abreast of tax legislation. Tax law changes are reported in newspapers and magazines, on websites, and on television news. Pay close attention, especially to those that will affect you.

Change your withholding if necessary. If you’re a W-2 employee and you’re getting large refunds, talk to a benefits representative at your company about changing the number of allowances you claim. Refunds are nice, but you could be putting that money to use yourself during the year.

Look at IRS tax forms. If you’re taking on a side gig or starting your own small business as a sole proprietor in 2021, you’re going to want to acquaint yourself with the IRS Schedule C. You can look at the 2020 version now to see what information you’ll have to supply. Pay close attention to the types of expenses that are deductible and track them carefully. You might even look at the instructions.

Consult with a professional. This is an especially good idea if you’re starting a new business this year and/or you’ve experienced life changes that could affect your taxes. We can help you come up with a plan to prepare for tax filing throughout the year. With that in hand, we’d also be happy to do your tax preparation for you when the time comes. Contact us, and we’ll schedule some time to meet.

Start planning your tax strategy today by calling 301-728-0808 now or request your free consultation online and we’ll contact you to discuss how we can reduce your tax burden.