Tax Credits & Incentives for Small Businesses
Every year [MARKETAREA] small business owners like you miss out on claiming tax credits and incentives that could help you lower your tax bill.
Running a business isn’t easy or cheap. And your IRS burden can carve out a good chunk of your profits. But there are ways to reduce what you owe and put some cash back in your pocket. It just means knowing what tax credits and incentives are available and claiming them for your business.
According to the U.S. Government Accountability Office, the Federal R&D credit saved businesses an estimated $13.4 billion in federal taxes in 2021. That could mean potentially big savings for you if your company is developing new products, processes, or software.
Traditional Credit: 20% of the current year’s qualified research expenditures over a base amount, which is linked to historical spending.
Alternative Simplified Credit (ASC): 14% of qualified research expenses over a base amount calculated as a percentage of the revenues for the prior three years.
Jobs Tax Credits
Hiring new employees is an investment in your future. Jobs tax credits incentivize this by offering tax breaks for bringing on new staff. These credits can vary depending on the type of employee you hire and their qualifications. Some common ones include:
Work Opportunity Tax Credit (WOTC): Employers can receive a credit ranging from $1,200 to $9,600 per eligible employee, depending on the employee’s target group (e.g., veterans, SNAP recipients).
Empowerment Zone Employment Credit: Businesses can claim up to $3,000 per eligible employee if they operate in designated empowerment zones.
Federal Tax Credits
Other notable federal tax credits include:
Employee Retention Tax Credit: *The IRS is currently not receiving any new ERTC claims and is aggressively investigating false claims to the credit.* Businesses impacted by COVID-19 could claim up to 50% of qualified wages paid to employees in 2020 and up to 70% in 2021, with caps at $10,000 per employee per year and quarter, respectively. There are nuances and specific parameters to this credit, so it’s one we’d want to carefully consider before claiming.
Energy Investment Tax Credit (ITC): Offers up to 30% credit for businesses that install solar energy systems, fuel cells, small wind turbines, or invest in geothermal heat pumps.
New Markets Tax Credit: Encourages investments in low-income communities, offering a credit of about 39% over seven years for qualified equity investments.
California State Tax Credits
California offers tax credits for specific industries, hiring practices, and green initiatives. These include:
California Competes Tax Credit: Negotiable credit for businesses that create jobs and make significant investments within California.
Research & Development Tax Credit: Offers 15% of qualified in-house research expenses and 24% for basic research payments.
Partial Sales and Use Tax Exemption: Reduces state sales tax to 3.3125% on purchases and leases of qualifying manufacturing and R&D equipment.
New Employment Credit (NEC): Available to businesses hiring in designated geographic areas, focusing on veterans, ex-offenders, or long-term unemployed.
California Film & Television Tax Credit: Provides credits for eligible productions to promote job creation and economic activity in the state’s film industry.
California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA): Offers a full sales and use tax exclusion for businesses investing in advanced manufacturing, alternative energy, and advanced transportation.
Determining eligibility is the first step. Let’s sit down for a consultation to see which tax credits you can already claim and if any of them are ones you can claim in your business this year.