Tuesday, September 26, 2023

What Is a Small Business Tax Credit? An Overview

Did you know that 99.9% of all US companies are considered to be small businesses? In a country full of small business owners, you’d think that would mean that business taxes would be easy to understand. That’s not always the case, however. 

If you’re a small business owner currently working on your tax return, it’s imperative that you know what a small business tax credit is and what it means for your company. 

Continue reading this brief guide to learn the ins and outs of these tax credits. 

What a Small Business Tax Credit Is (and Isn’t)

Oftentimes, small business owners confuse tax credits with tax deductions. But, it’s important to understand the difference. Tax deductions lower your taxable income. Tax credits, on the other hand, reduce your tax bill by a dollar amount. 

With a deduction, you can deduct set amounts from your taxable income, putting you in a lower tax bracket. This means the percentage you’ll pay in taxes is based on a lower number. 

With a tax credit, your total tax bill changes, not the calculation. So, if your tax bill is $10,000 and you get a $2,000 tax credit, you’ll now owe $8,000 in taxes. 

How to Claim Small Business Tax Credits

When filing your taxes, you’ll need to submit the General Business Credit Form, which is Form 3800. This document lists all of the available tax credits for which your small business may qualify. Of course, there is a limit you can claim for each year. 

To help you determine exactly which credits you should claim and what your limit is this year, work with a company like Tri-Merit Specialty Tax Professionals.

The good news is that if you are eligible for a credit and you fail to claim it, you might be able to carry forward the credit to a future year. 

Examples of Different Types of Small Business Tax Credits

Interested to see what kinds of credits might be available for your business? Here’s a closer look at some of the most common available tax credits. 

Form 8994: Employer Credit for Paid Family and Medical Leave

This gives tax incentives to employers to provide paid family and medical leave to their employees. If you pay employees at least 50% of their wages while they’re on leave, you may qualify for the credit. If you pay more than 50%, then the credit increases accordingly. 

Form 6765: Credit for Increasing Research Activities

Your small business may qualify for a credit if you prioritize research and development. If you do qualify, you can subtract up to 10% of your research costs from your tax bill to help encourage innovation. 

Form 8882: Credit for Employer-Provided Childcare Facilities and Services

To help incentivize key employee benefits, this credit is available to businesses that help cover the costs of childcare for employees. If your business qualifies, you may be able to claim up to $150,000 every tax year. 

Take Advantage of Business Tax Credits

Now that you know more about what a small business tax credit is, work with your tax professional to learn more about your eligibility. As many tax credits have an expiration, take action now before they’re gone!

Want to read more business finance content? Check out our other articles before you go.