Small business tax credits: What is your business entitled to?

One of the benefits of being a small business owner in the US is the number of tax breaks you are potentially entitled to. These breaks can help you reduce operating costs, improve cash flow, and invest more in growth, strengthening your competitiveness and sustainability.

But for new business owners especially, how do you know which tax breaks exist — and which ones you’re entitled to?

In this article, we’ll go through the primary tax breaks for small businesses, and explain how they work. So let’s jump straight in.

What are tax breaks — and how do they work?

Tax breaks are a reduction in the amount of taxes your business owes, usually through deductions, credits, or exemptions. They are designed to incentivize and stimulate economic activity, and help small businesses grow.

Deductions reduce income before your tax is calculated, while credits directly cut the taxes you owe. This enables you to save money and potentially frees up funds for things like hiring, equipment, or business expansion.

What is a refundable tax credit?

A refundable tax credit allows businesses to reduce their tax liability to below zero, meaning you can receive a refund if the credit amount exceeds your tax owed.

What tax breaks are available for small businesses?

In the US, there are numerous tax breaks available for small businesses, depending on your circumstances. They include:

General business tax credit

The general business tax credit is a collection of various tax credits that the Internal Revenue Service (IRS) offers to incentivize specific business activities, such as hiring from certain groups, investing in research and development, and adopting energy-efficient practices.

It’s available to businesses of all sizes, but eligibility for each component credit within the general credit varies. Generally, if your business engages in qualifying activities — like providing employee training, increasing accessibility for disabled individuals, or investing in clean energy — you may be eligible to claim the relevant portions of this credit.

How to apply: Fill out and file IRS Form 3800.

Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers that hire individuals from certain target groups that face employment challenges, such as veterans, individuals receiving government assistance (like SNAP), ex-felons, and long-term unemployed individuals.

The credit is designed to encourage workforce diversity and provide job opportunities to those who may traditionally face barriers to employment. To be eligible to claim the WOTC, you must hire individuals from these designated groups and obtain certification from their state workforce agency to verify the employee's eligibility. The credit amount varies based on the employee's target group and hours worked.

How to apply: Fill out and file IRS Form 8850.

Research and development (R&D) tax credit

The research and development (R&D) tax credit is a federal incentive that rewards businesses for investing in innovation, product development, and improvement of processes. It's intended to offset costs associated with activities like designing new products, improving existing products, or enhancing production processes.

The credit can be claimed by businesses of all sizes and industries, as long as you perform qualifying R&D activities in the US.

To be eligible, your business must engage in activities that meet the IRS's "Four-Part Test":

1. Permitted purpose: Your research must aim to create or improve a product, process, technique, formula, or software.

2. Technological in nature: The activity should be grounded in hard sciences, such as engineering, computer science, biology, or physical sciences.

3. Elimination of uncertainty: The research must address technical uncertainty about the product or process development or improvement.

4. Process of experimentation: There must be a process of testing and experimentation, such as modeling, simulation, or other systematic evaluation methods.

How to apply: Fill out and file IRS Form 6765.

Disabled Access Credit

If your business incurs expenses to make your facilities more accessible to individuals with disabilities, you can claim this credit. Eligible expenditures include the removal of barriers, the provision of interpreters, and the acquisition of accessible equipment.

How to apply: Fill out and file IRS Form 8826.

Credit for small employer pension plan startup costs

The credit for small employer pension plan startup costs is a federal tax credit designed to help you cover the cost of starting a retirement plan (such as a 401(k) or SIMPLE IRA) for your employees. The credit specifically encourages small employers to offer retirement benefits by covering part of the initial setup costs.

To be eligible for this credit, your business should:

1. Have 100 or fewer employees who earned at least $5,000 in the preceding year.

2. Have at least one plan participant who is a “non-highly compensated” employee.

3. Not have had a retirement plan for the same employees in the previous three years.

The credit covers 50% of eligible startup costs up to a maximum of $5,000 per year (for the first three years). An additional $500 per year is available for plans that include an automatic enrollment feature.

How to apply: Fill out and file IRS Form 8881.

Employer-Provided Childcare Facilities and Services Credit

The Employer-Provided Childcare Facilities and Services Credit is a federal tax credit designed to encourage businesses to offer childcare facilities or services for their employees. This credit helps offset the costs of providing childcare, making it easier for your employees to balance work and family responsibilities.

It’s available if your business:

1. Provides or contracts childcare facilities directly for your employees, or;

2. Offers childcare resources and referral services to help your employees find childcare.

The credit covers 25% of qualified childcare facility expenditures and 10% of qualified childcare resource and referral expenditures, up to a maximum credit of $150,000 per year.

How to apply: Fill out and file IRS Form 8882.

Alternative Fuel Vehicle Refueling Property Credit

The Alternative Fuel Vehicle Refueling Property Credit is designed to encourage businesses to install alternative fuel refueling stations, such as electric vehicle (EV) chargers, on their property. The credit helps offset the costs of installation and promotes the use of environmentally friendly transportation.

You can claim it if your business installs a qualifying alternative fuel refueling property, such as an electric, hydrogen, or natural gas refueling station, on your property.

The credit is generally for 30% of the cost of installing the refueling property (up to a maximum of $30,000). Note that this tax credit is also available for individuals.

How to apply: Fill out and file IRS Form 8911

Small Business Health Care Tax Credit

The Small Business Health Care Tax Credit is designed to help small businesses and tax-exempt organizations provide health insurance to their employees.

You can claim this credit if you:

1. Have fewer than 25 full-time equivalent (FTE) employees, with average annual wages of less than $55,000 per employee (adjusted annually for inflation).

2. Contribute at least 50% of the premium cost for each employee enrolled in the health insurance plan.

3. Purchase the health insurance plan through the Small Business Health Options Program (SHOP) Marketplace (with some exceptions for certain state plans).

The maximum credit is 50% of premiums paid for for-profit employers (and 35% for tax-exempt organizations). It’s available for up to two consecutive tax years.

How to apply: Fill out and file IRS Form 8941

Credit for Employer-Provided Family and Medical Leave

The Credit for Employer-Provided Family and Medical Leave is another federal tax credit that incentivizes employers to offer paid family and medical leave, such as for the birth of a child or a serious health condition.

You can claim this credit if you:

1. Have a written policy that provides at least two weeks of paid family and medical leave annually to qualifying employees, at a rate of at least 50% of the employee’s regular wages.

2. Offer the leave to both full-time and part-time employees who have been employed for at least one year.

3. Provide leave in compliance with the Family and Medical Leave Act (FMLA).

The credit ranges from 12.5% to 25% of wages paid during the leave, depending on the percentage of wages you pay to your employees.

How can Remote help?

These are just some of the tax breaks potentially available to your business; it's important to note that eligibility criteria and credit amounts can change due to new legislation or IRS regulations.

As a result, it’s always advisable to work with a trusted partner that can help you maximize your tax breaks and save your business as much money as possible. When you pay your people through Remote Payroll, for instance, our in-house experts ensure that you’re fully aware of everything you’re entitled to apply for, and that you’re fully compliant with all relevant federal and state payroll taxes and requirements.

To learn more about how we can simplify your payroll and potentially save you money, speak to one of our friendly experts today.

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