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Every small business owner should take advantage of tax credits. Tax credits are a powerful tool that can help you reduce your taxable income and have a direct impact on your annual tax bill.
But you might not be aware of the wide range of tax credits available to you. This oversight means you could be leaving thousands of dollars on the table. Here, I’ll review some of the most overlooked tax credits, and how you can take advantage of them.
Tax Credit Vs. tax deduction
There are two primary ways you can save on your small-business taxes this year: claim your tax deductions and take advantage of tax credits. Assuming you meet the requirements, you can claim deductions and credits on your tax return.
Tax deductions reduce your tax liability by reducing your taxable income. These deductions are typically expenses that your business incurs throughout the year.
Inventory, insurance and startup costs are all examples of small-business deductions. At the end of the year, you’ll subtract your deductions from your adjusted gross income to figure out how much you owe in taxes.
In comparison, a tax credit is a dollar-for-dollar deduction on your tax bill. If you receive a $500 tax credit, that means you’ll pay $500 less in taxes. Tax credits have a far greater impact on your tax bill and can help you save more money.
Here are seven commonly overlooked small-business tax credits you may qualify for. you can even get one Full list of tax credits On the IRS website.
• General Business Tax Credit
The general business tax credit is not a single tax credit, but a set of tax credits designed to promote certain business activities. This includes tax credits for providing health insurance to employees, research and development, and purchasing an eligible electric vehicle.
To qualify, you’ll need to fill out a separate form for each tax credit you’re claiming and add them to Form 3800,
• Paid family and medical leave
If you provide your employees with paid medical leave, you are eligible for this tax credit. Under the Family and Medical Leave Act, some workers can take up to 12 weeks of unpaid leave. For example, the birth of a child or a family medical emergency are eligible reasons.
If you claim this tax credit, you will receive a percentage of the salary you paid to your employees while they were on medical leave. To qualify for this tax credit, you must have a written policy and provide at least two weeks of paid family and medical leave to full-time employees each year.
• alternative fuel
If your business is involved in the production of alternative fuels such as methanol and ethanol, you may be eligible for this tax credit. The IRS offers this tax credit to business owners who help reduce America’s dependence on oil. However, this only applies if you are involved in the production of alternative fuels, not consumption.
• Employer-provided child care facilities and services
If you provide child care for your employees on site or through a contract with an outside facility, you are eligible for this tax credit. The credit is available for 25% of child care expenses, 10% of qualified resources and referred expenses. The credit limit is $150,000 per year, and you’ll claim it by completing Form 8882,
• R&D Tax Credit. The federal research and development (R&D) tax credit is another great way to reduce your tax liability. It is available to companies developing new business products, software, technologies or processes. Many business owners mistakenly think that their company will not qualify for the R&D tax credit, but it is much broader than you may realize. Your company may be eligible for this tax credit if you spend time developing new products, improving existing products, or developing patents or prototypes. And since the credit is retroactive, you can claim it for up to three previous tax years. You will fill out Form 6765 to document any eligible R&D expenses.
• Small Business Health Insurance Premium
If you are a small business owner that provides health insurance for your employees, you may qualify for this tax credit. But first, you must meet the following criteria:
• You have less than 25 full-time employees.
• Your annual salary for the year was less than $56,000 per full-time employee.
• You pay at least half of your employees’ health insurance premiums under a qualifying arrangement.
If you qualify, you can receive up to 50% of the amount paid in health insurance premiums. However, you can claim this credit only for two consecutive years.
• Work Opportunities
Credit is based on three primary criteria:
• Category of employees.
• Amount paid to those employees during their first year.
• How many hours did he work in total?
Before you can apply for and receive credit, you must make sure a new hire is a member of the target group. After a new hire is certified, you can claim the Work Opportunity Tax Credit against your income tax.
Both tax credits and deductions can save you money in tax season. But unlike deductions, which take a percentage off the top, tax credits remove the entire dollar amount and can help you save more on your tax bill.
The best way to make sure you’re not overlooking these deductions is to work with a small-business accountant. The right accountant can help you identify any tax credits your business may qualify for. And tax credits often come with a lot of rules, so an accountant can help you navigate these complexities.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice related to your specific situation.