9 Big Tax Credits for Small Businesses

Most entrepreneurs are unaware of small business tax credits that are available to them.

Each year, thousands qualify but fail to claim them. Instead, they pay more money in taxes.

To avoid overpaying taxes, you should make it a priority to understand all available tax credits for your small business.

To help you, this post examines the 9 most valuable tax credits available for small business owners.

These are under-the-radar opportunities that could end up saving you thousands if you qualify.

So whether you’re just starting out or you’ve been in business for years, this article is for you.

What is a Small Business Tax Credit?

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A tax credit is like a coupon that reduces the amount of tax you have to pay. It’s a dollar-for-dollar discount on your tax bill.

For example, if you qualify for a $1,000 tax credit, your taxes will be reduced by $1,000.

Now there are two main types of tax credits you need to know:

• Refundable credits are the best kind. With these, if the credit ends up being more than the tax you owe, you actually get that extra money refunded to you.
• Non-refundable credits can reduce your tax bill to zero, but they don’t allow you to get any remaining amount refunded back to you. Though, some nonrefundable credits may be carried forward to the future.

The amount and types of credits available can change every year. But in general, tax credits provide a way for small businesses to directly reduce their total tax burden, sometimes even getting money refunded.

What’s the Difference Between a Tax Credit and a Tax Deduction?

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Tax deductions and tax credits are both ways to reduce what you owe in taxes, but they work differently.

A tax deduction lowers the amount of your income that is subject to taxes. Then, your tax is calculated based on the remaining income.

A tax credit, on the other hand, is a direct reduction of the tax you owe dollar-for-dollar. 

Tax credits are often seen as more valuable because they directly reduce your taxes, rather than your taxable income like deductions. 

Every dollar you receive in tax credits is one dollar less you have to pay in taxes.

Surprisingly, many business owners choose to focus on tax deductions even though tax credits may be more beneficial.

Our general advice is to take advantage of both opportunities to minimize your taxes.

Tax Credits for Small Businesses

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1) Research and Development Tax Credit  

The Research and Development (R&D) Tax Credit rewards small businesses who spend money to create new or improve new products, services, or processes.

This tax credit incentivizes small companies to innovate and develop new technologies. The credit is worth up to $500,000 as of 2024.

For a company to qualify for the R&D Tax Credit, the work they do must:

• Have the goal of creating something new or improving an existing product/process
• Involve experimenting and testing different options
• Use hard science, mathematics, engineering or computer technologies
• Must seek to overcome technical uncertainties or challenges

The types of activities that may qualify include developing new software, designing new products, creating innovative manufacturing processes, and more.

To claim the R&D Tax Credit, a company needs to file Form 6765 when they do their taxes. This allows them to get money back based on how much they spent on qualified research and development activities.

2) Work Opportunity Tax Credit

The Work Opportunity Tax Credit rewards small businesses who hire individuals from certain targeted groups. These groups include:

• Qualified Veterans
• Qualified Ex-Felons
• Qualified Summer Youth Employees
• Qualified IV-A Recipients
• Designated Community Residents (DCR)
• Vocational Rehabilitation Referrals
• Qualified SNAP Benefits Recipients
• Qualified Long-Term Family Assistance Recipients
• Qualified Long-Term Unemployment Recipients

If you hire from any one of these groups, you may qualify for this tax credit.

The exact amount depends on the worker’s pay, how long they worked, and which group they belong to. The maximum credit for most employers is usually $2,400 per worker.

There are a few steps on how to claim this credit:

• Within 28 days of when the employee starts, you must file Form 8850 with your state agency to confirm the employee qualifies for the credit.
• Then, you will claim the credit on your tax return Form 1040, and file either Form 3800 or Form 5884, depending on your income sources.

3) Retirement Plan Startup Costs Tax Credit

The Retirement Plan Startup Credit rewards small businesses who set up a retirement plan for their employees. It reimburses for some of the costs involved in starting a new pension or retirement plan.

To qualify as a “eligible employer” for this credit, the business must have:

• 100 or fewer employees who were paid at least $5,000 the previous year
• Not had a retirement plan for the same employees for the past 3 years
• At least one plan participant who was a non-highly compensated employee (NHCE)

The types of retirement plans that are eligible for this startup cost credit include:

• Traditional pensions 
• 401(k) plans
• 403(b) plans
• Profit-sharing plans
• Simplified plans like SEP or SIMPLE IRAs

The credit can be claimed for costs related to establishing the new plan, such as:

• Administrative fees to set it up
• Educating employees about the new retirement plan options

So in simple terms, it’s a tax credit intended to offset some of the upfront costs for small businesses that want to provide retirement benefits by starting a new pension or retirement savings plan for their workers.

The maximum credit available is $5,000. The exact amount depends on the amount of employees who participate in the plan.

4) Small Employer Health Insurance Premiums 

The Small Employer Health Insurance Premiums Credit rewards small businesses who provide health insurance coverage for their employees. Eligible small employers can claim a credit for part of the health insurance premiums they pay.

To qualify as a “small employer” for this credit, the business must meet these rules:

• Have 24 or fewer full-time equivalent employees
• Pay average annual wages below $62,000  per full-time employee  
• Cover at least 50% of each enrolled employee’s health insurance premiums

The maximum credit is 50% of the premiums paid by the small business employer. For tax-exempt employers, the maximum is 35% of premiums.

Claiming this credit on Form 8941 can provide substantial tax savings to help offset the costs of providing health benefits for small employers who meet the strict eligibility criteria.

However, you can only claim the credit for health plans purchased through the Small Business Health Options Program Marketplace created by the Affordable Care Act. And the credit can only be taken for two consecutive tax years.

5) Employer Credit for Paid Family and Medical Leave

The Employer Credit for Paid Family and Medical Leave rewards small businesses who offer qualifying paid leave to their employees.

This tax credit incentivizes small employers to offer generous paid time off policies without being overly burdened by the costs. It allows you to take care of your workforce while getting reimbursed for a portion of the leave wages.

To qualify, you must have a written policy giving full-time employees at least 2 weeks of annual paid leave for situations like childbirth, caring for a sick family member, or the employee’s own serious illness. Additionally, the leave pay needs to be at least 50% of their normal wages.

If you qualify, the available credit ranges from 12.5% to 25% of the wages paid during the employee’s paid leave period, up to 12 weeks per employee per year.

To claim the credit, you’ll need to complete Form 8994 when filing your business taxes. The credit was recently extended through 2025, giving small businesses several more years to take advantage of this valuable benefit.

6) Low-Income Housing Credit 

The Low-Income Housing Tax Credit rewards real estate investors who build or rent affordable rental housing units. The purpose is to encourage building and fixing up affordable places for rent.

To qualify for the low-income housing credit, you must build or own rental property that is classified as a low-income rental building.

To obtain classification, you must apply for certification from a state or local housing agency using Form 8609. If approved, the credit amount is calculated on Form 8586 or Form 3800. The credit is taken over a 10-year period.

Building owners must file Form 8609-A annually for 15 years to show they still meet the requirements. If they fail to meet the low-income housing rules at any point, some of the credit may need to be “recaptured” (paid back) to the IRS using Form 8611.

Basically, Form 8586 enables small businesses to claim valuable tax credits for providing affordable rental housing, as long as they maintain the qualified low-income housing status annually.

7) Qualified Plug-in Credit

The Qualified Plug-in Credit rewards small businesses and individals who purchase electric vehicles. Vehicles that may qualify include electric cars, trucks, and even two-wheeled vehicles like motorcycles and scooters.

To qualify, the vehicle must be:

• Purchased new for your own use, not for resale
• Primarily driven in the United States
• From a manufacturer that has sold less than 200,000 electric vehicles so far

If you bought a brand new plug-in electric vehicle in 2022 or before, you may be able to get a tax credit of up to $7,500. This credit helps make electric cars more affordable.

Additionally, this tax credit is nonrefundable and it does not carried forward. Therefore, you can only get this credit up to the amount you owe in taxes for that year. You cannot get a refund if the credit exceeds your tax bill, nor can you carry over any unused portion to future years.

Form 8936 is used to claim the Qualified Plug-In Electric Drive Motor Vehicle Credit on your tax return. But your new electric vehicle has to meet certain requirements to qualify for this credit.

For more information on whether your model meets assembly requirements, check the Department of Energy’s page on Electric Vehicles with Final Assembly in North America. 

You can find the following information on that page:

• Confirm the assembly location for your specific vehicle using the VIN Decoder tool under “Specific Assembly Location Based on VIN.”
• Check a list of qualifying Model Year 2022 and early Model Year 2023 electric vehicles under “For Vehicles Purchased before January 1, 2023.”

8) Employer SS and Medicare for Employee Tips

The Employer SS and Medicare for Employee Tips credit rewards small business owners that report employees’ tip income. In return for reporting tips, the IRS will offset your share of social security and medicare taxes on tip income.

In order to claim this credit, the business must operate an establishment where tipping customers for food/beverage service is customary and common.

So restaurants, bars, coffee shops, and similar businesses can get a tax credit to offset some of the payroll taxes they pay just on the tips their staff receives from customers. 

However, this credit does not apply to the payroll taxes paid on the employees’ regular wages.

This credit is reported on Form 8846.

9) Employer-Provided Childcare Facilities

The Employer-Provided Childcare Credit provides a tax incentive for businesses to offer quality childcare assistance as an employee benefit.

If your business provides childcare benefits, services, or facilities for your employees, you may be able to claim the credit.

This tax credit can be worth up to $150,000 per year to offset costs related to providing certain childcare benefits to your employees.

The credit covers:

• 10% of qualified costs for providing childcare resource and referral services to your employees under contract with an outside facility.
• 25% of qualified expenses for acquiring, constructing, rehabilitating or expanding an eligible childcare facility used by your employees

To qualify, the childcare facility must meet all relevant state/local licensing requirements and other criteria outlined in Internal Revenue Code Section 121. 

You claim this credit using Form 8882. Any qualified expenses exceeding the $150,000 credit limit can potentially be deducted as business expenses.

Bottom Line

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Whether you currently qualify for these tax credits or not, it is important to stay aware of available tax credits. As your business evolves, you may find yourself considering one of the tax credits covered.

Too many small businesses leave money on the table every year because they don’t take the time to understand the full range of tax credits. Don’t make that same mistake!

Also, please be aware that there may be more tax credits available to you in your state or city. The small business credits in this post only covers federal tax credits.

If you need help, be sure to go through this list with your tax planner and have them verify if you qualify.