6 Tax Credits to Reduce Your Business Taxes
Tax Credits for Disability Access, Research, Hiring Workers, and More
For most business owners, the term "tax credit" signifies something good, but they are not sure what the term means, and tax credits are often confused with tax deductions. As you will see, tax credits are better than deductions. Also explained in this article are some of the most common tax credits that businesses can use to lower taxes.
The Purpose of Tax Credits
Tax credits are given to businesses and individuals as incentives for certain kinds of activities. For example, businesses can get tax credits for purchasing energy-efficient vehicles and building with "green" products. Usually, a tax credit is offered for a specific time period, ending after that time has ended.
Tax Credits for Purchases
For tax credits for business purchases, you must have purchased and put into service (started using) the equipment, vehicle, or facility in the year when you claim the tax credit.
Check With Your Tax Professional
As you read through the list, be aware that all of these credits come with limits and qualifications that you must meet to receive the credit. Read carefully, and discuss possible tax credits with your tax preparer or tax advisor.
2017 Tax Law and Tax Credits
The 2017 Tax Cuts and Jobs Act included a new family leave tax credit (described below) was added.
The Difference Between Tax Credits and Tax Deductions
Tax credits are superior, in terms of tax savings, to deductions. Tax credits are deducted from income before gross before-tax income is determined. Tax deductions are taken in the next step of the tax process, reducing the net taxable income.
The purpose of a tax credit is to give a business an incentive to act (or not to act). In the cases below, these actions benefit the economy, the environment, business development, or other positive business purposes.
The 2017 Tax Cuts and Jobs Act included a new tax credit that's an incentive for small businesses to offer paid leave to employees.
To receive this credit, your business must create a policy and procedures and offer at least two weeks of paid family leave each year to "qualifying employees." This leave must be in addition to vacation, sick time, or other paid time off.
This tax credit is only being offered for the 2018 and 2019 tax years.
Making changes to your business with equipment to make it more energy efficient or more environmentally "friendly" can benefit you through tax credits. In addition to the tax credits, you may also be eligible for tax deductions for changes made to your business facilities.
For example, the Business Energy Tax Investment Credit gives businesses credit for purchasing or implementing energy-saving activities, like fuel cells, wind, and solar energy.
Research and Development tax credits have been available for many years, but small businesses often don't realize they can qualify for these credits. The PATH Act of 2015 includes some increased incentives—in the form of tax credits—for small businesses who use the R&D (Research and Development) tax credit.
Even if your business doesn't do traditional scientific research, you may be eligible for this tax credit for other kinds of research, including:
- product development,
- improving product quality, reliability, or function,
- improving business performance,
- and payments to outside researchers or employees who do research.
It's worth looking into this possible tax credit.
If you make changes to your business location to accommodate employees and customers with disabilities, you may be eligible for disabled access tax credits. Removing barriers and updating facilities serves the dual purpose of increasing access and decreasing your business taxes.
Alternative/Hybrid Vehicle Tax Credit
Individuals and businesses who buy a brand new hybrid, electric or diesel fuel vehicle can take advantage of the "Alternative Motor Vehicle Credit." This tax credit applies to new cars and trucks that are certified for the credit by the IRS. The IRS alternative motor vehicle tax credit has more information.
To qualify, the vehicle must be new (not used), and it must meet certain fuel efficiency and mileage guidelines. If you think you just bought a vehicle that might qualify, check with your tax professional.
The Patient Protection and Affordable Care Act (Obamacare) includes a tax credit to encourage small employers to offer health insurance for the first time or maintain coverage they already have.
The credit is available to small businesses that pay at least half the cost of single coverage for their employees. If your business and your plan meet the qualifications, you can get a credit of up to 50& of the health insurance premiums you paid for employees. Note also that the credit if for small employers with fewer than 25 full-time equivalent employees.
The Work Opportunity Tax Credit allows employers to get a business tax credit for hiring new employees in certain categories:
- TANF Recipients (Long-Term Temporary Assistance for Needy Families)
- SNAP (Food Stamp) Recipients
- Designated Community Residents (living in Empowerment Zones or Rural Renewal Counties). Empowerment Zones are defined areas
- Vocational Rehabilitation Referral
- Supplemental Security Income Recipients
- Summer Youth Employee (living in Empowerment Zones)
Of course, there are limitations and restrictions for these tax credits. The process requires that you hire the employees and document the category, then complete IRS and DOL forms. Then you can add the credit to your business tax return.
Discuss with Your Tax Professional
All tax credits come with restrictions and qualifications that must be met. You must first do the thing that will get you the tax credit, then you apply on your tax return for the year. You can't apply until you have spent the money, so make sure you comply with all requirements.