Businesses of all shapes and sizes face a wide range of challenges, and if you are a business owner, you know that any possibility of saving money strengthens your security. Whether you are working on taxes for the year or looking for ways to improve your tax strategies for next year, there are some credits you may want to consider.
Tax credits aren’t deductions; tax deductions work to decrease the amount of income that is taxed. Tax credits reduce the amount of taxes you pay. In other words, the deductions reduce the amount of your tax bill, and credits are used to pay off part of that bill. As a business owner, you want to benefit from both.
The IRS Form 3800 is a helpful resource for determining which credits can benefit your business. Page three of the form contains a list of all the available small business credits, including credits for increasing research activities, using energy-efficient appliances, employee retention, and the production of biofuel. In fact, there are 29 possible credits that could benefit your business.
It is important to understand that you can’t claim every credit. You can determine the specific limit for your business by adding up your net income tax and your alternative minimum tax, then subtracting either the tentative minimum tax or 25 percent of your determined tax liability. At this point, you should pay close attention to the instruction manual specific to this credit or talk with your tax accountant.
As you work on this tax credit, you may find that you could have qualified in past years but missed out on the opportunity. If you don’t claim an eligible credit this year, you may be able to carry forward the tax credit. This is described in more detail on Form 3800.
In addition to the General Business Credit and the credits that fall under this header, there are several other options to consider:
- The Family and Medical Leave Credit is currently applicable through 2025 and can be claimed by employers based on qualifying employees.
- The Work Opportunity Tax Credit can be up to $6000 for each newly hired employee. Those new recruits must be from underserved populations, including ex-felons, veterans, and food stamp recipients.
- Depreciation of Equipment is a credit that is under-utilized by business owners.
- The R&D Tax Credit is awarded based on internal innovation and advances in technical design.
Each of these credits requires a lot of documentation and various forms of proof. Carefully review the requirements and reach out to a tax specialist for help.
Some tax credits are available for a limited time or in very limited circumstances. The Work Opportunity Credit is a good example of a credit only useful in specific situations. The Employee Retention Credit is another good example. This one is only available to certain businesses as specified by the CARES Act. If you don’t know how to apply for ERC, reach out to an experienced tax accountant.
Employee Training Grants aren’t tax credits, but they do work in a similar way. These are generally funded by the state and must be approved by your state. Other grants to consider are the Small Business Innovation Research and Small Business Technology Transfer programs. Put your best grant-writing employee to work on this financial benefit.
Many business owners successfully complete their own taxes, but the more complicated the tax process is, the more important it becomes to hire an accountant. If you are spending more than a few hours gathering records, and if you are itemizing more than standard deductions, you may benefit from hiring a professional. This is especially important as you look for more ways to reduce your taxable income and increase the number of credits for which you qualify.
There are many opportunities to improve your tax situation. Don’t put off learning more about tax credits that apply to your business.