Starting and running a small business can be rewarding, but it also comes with its share of financial responsibilities. Among these are taxes, which often represent a significant portion of many small business's expenses. 

One way to help reduce tax obligations for your small business is to fully utilize available tax credits. If you are not aware of which tax credits you may be eligible for as a small business owner, you could potentially be leaving money on the table. 

Understanding and leveraging small business tax credits can provide significant savings and financial relief, so let’s dig into this topic so you can benefit from potential tax savings.

What are small business tax credits?

Tax credits are incentives provided by the government to encourage certain activities or behaviors deemed beneficial for the economy, environment or society. 

Unlike tax deductions, which reduce taxable income, tax credits directly reduce the amount of tax owed. This makes them particularly valuable for small business owners looking to minimize their tax liability.

7 small business tax credits you should know about

Several tax credits are available to small businesses, each designed to promote specific goals or activities. 

Here are some of the most common ones:

1. Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit is designed to encourage businesses to hire individuals from certain target groups who face significant barriers to employment.

These groups include:

• Veterans

• Ex-felons

• Long-term unemployed individuals

• Recipients of government assistance programs (Supplemental Nutrition Assistance Program (SNAP) or Temporary Assistance for Needy Families (TANF)

By hiring eligible employees, small businesses can receive a tax credit ranging from $1,200 to $9,600 per employee, depending on the individual's qualifications and length of employment.

2. Research and Development (R&D) Tax Credit

The R&D Tax Credit rewards businesses that invest in research and development activities. 

Qualifying activities may include developing new products, processes, or technologies, as well as improving existing ones. 

Small businesses engaged in innovative activities can benefit significantly from this credit, as it can offset a portion of their R&D expenses. 

It's important to note that the credit is not limited to high-tech or pharmaceutical companies; many businesses in various industries, including manufacturing and agriculture, can qualify.

3. Small Employer Health Insurance Premiums Credit

The Small Employer Health Insurance Premiums Credit is aimed at helping small businesses provide health insurance coverage to their employees. 

To qualify, a business must:

• Have fewer than 25 full-time equivalent employees.

• Pay average annual wages below a certain threshold.

• Contribute at least 50% of the employees' health insurance premiums. 

The credit can cover up to 50% of the premiums paid, providing significant savings for eligible employers.

4. Disabled Access Credit

The Disabled Access Credit helps small businesses improve accessibility for individuals with disabilities. Qualifying expenses may include the cost of removing architectural barriers, providing auxiliary aids and services, or modifying equipment and facilities to make them more accessible. The credit covers 50% of eligible expenses, up to a maximum of $10,250 per year.

5. Energy Efficient Commercial Buildings Deduction 

Certain properties, such as Energy-Efficient Commercial Building Properties (EECBP) or Energy-Efficient Commercial Building Retrofit Properties (EEBRP), may allow their owners to claim certain tax deductions. 

EECBP must be installed as part of the interior lighting systems, heating and cooling, ventilation and hot water systems, or the building envelope. It must also be part of a plan to reduce the total energy requirements of the listed systems by 25% or more annually.

6. Employer-Provided Childcare Credit

If you provide childcare services to your employees, you may be eligible for a general business credit. The Employer-Provided Childcare Credit offers a tax credit of up to $150,000 per year to offset 25% of the qualified childcare facility expenditures. 

A qualified childcare facility must meet the requirements of applicable laws where it is located, be primarily used to provide childcare assistance, have at least 30% of the enrollees be dependents of company employees, and not discriminate in favor of highly compensated employees.

7. Opportunity Zones

Opportunity Zones are an economic development tool that allows people to invest in distressed areas in the United States, to spur economic growth and job creation, and provide tax benefits to investors. 

A list of Qualified Opportunity Zones can be found on the IRS website. 

How to claim small business tax credits

Given the complexity of tax credits and the ever-changing tax laws, it is advisable to consult a tax professional who can provide expert guidance and ensure you are maximizing your tax savings.

1. Identify eligible credits: Begin by researching and identifying the tax credits for which your business may be eligible. Consult with a tax professional or utilize resources from the Internal Revenue Service (IRS) to determine which credits apply to your situation.

2. Gather documentation: Keep thorough records and documentation for all eligible expenses and activities. This includes maintaining detailed records of employee hiring, wages, and hours worked, as well as receipts and invoices for qualifying expenses.

3. Complete required forms: Each tax credit has specific forms and requirements for claiming it. Ensure that all forms are accurately completed and submitted along with your business's tax return.

4. File on time: Be mindful of deadlines for claiming tax credits. Some credits may have specific timeframes or deadlines that must be met, so plan accordingly to avoid missing out on potential savings.

Maximizing savings with tax credits

To make the most of small business tax credits, consider implementing the following strategies:

1. Stay informed: Tax laws and credits can change frequently, so staying informed about the latest updates and new opportunities is crucial. Consult with a tax professional regularly who can help you understand which credits are available and how you can use them to your advantage. 

2. Plan ahead: Incorporate tax planning into your overall business strategy. By anticipating potential tax credits and planning for eligible activities and expenses, you can optimize your tax savings and improve your financial outlook. This should be part of your annual tax planning with your tax advisor.

3. Collaborate with employees: Encourage employees to participate in activities that may qualify for tax credits, such as training programs or wellness initiatives. By fostering a culture of collaboration and engagement, you can maximize the benefits of available credits.

4. Monitor results: Regularly review your tax savings and assess the impact of claimed credits on your business's financial performance. This will help you identify areas for improvement and ensure you are making the most of available opportunities.

Make the most of tax credits with the knowledge of a trusted tax advisor

Small business tax credits are valuable tools that can provide significant financial relief and support for your business. By understanding and leveraging these credits, you can reduce your tax liability, invest in growth and innovation, and improve your overall financial health. 

Don't leave money on the table—take the time to explore and claim the tax credits available to your small business. With careful planning and strategic implementation, you can maximize your savings and set your business on a path to success.