As a small business owner, you want to ensure you’re taking advantage of all the tax credits available. In 2023, there are several tax credits that small businesses should be aware of to maximize their savings. Essential tax credits such as health care, energy, research, and investment tax credits can significantly affect your bottom line. In this article, we’ll cover the top small business tax credits for 2023 and provide insights on how to qualify for them.
What are Small Business Tax Credits?
Small business tax credits are incentives the government provides to eligible small businesses to help reduce their tax burden. These credits can help offset some of the costs associated with running a business, such as offering health insurance to employees, investing in research and development, purchasing energy-efficient equipment, and hiring new employees. By taking advantage of these tax credits, small businesses can save money and reinvest those savings into their operations to fuel growth and success.
Tax Credits vs. Tax Deductions
Tax credits and tax deductions are two tax incentives that can help reduce a taxpayer’s overall tax liability. While both can save you money on your taxes, they work differently. Tax deductions reduce the amount of your taxable income, while tax credits directly reduce the amount of taxes you owe. So if you have a tax deduction of $1,000 and a tax credit of $1,000, the tax deduction would reduce your taxable income by $1,000, while the tax credit would reduce your tax liability by $1,000.
Are There Tax Credits Specifically for Small Businesses?
Yes, there are tax credits designed explicitly for small businesses. The government offers a variety of tax credits to help small businesses offset the costs of doing business, such as providing health care to employees, investing in research and development, hiring new employees, and purchasing energy-efficient equipment. These tax credits can significantly affect a small business’s bottom line, especially for businesses with limited resources. Some of the most popular tax credits for small businesses include the small business health care tax credit, the work opportunity tax credit, the research and development tax credit, and the energy-efficient tax credit, among others.
Top Small Business Tax Credits
Small businesses can use various tax credits to help reduce their tax burden and save money. Here are some of the top small business tax credits to know for 2023:
1. Research and Development Tax Credit
The Research and Development (R&D) Tax Credit is a tax incentive encouraging businesses to invest in research and development activities. This tax credit is available to businesses of all sizes, including small businesses, and can significantly benefit companies that invest in developing new products, processes, or software.
To qualify for the R&D Tax Credit, a business must engage in activities that meet the following criteria: the activity must be to discover technological information, and the information must be intended to be helpful in the development of a new or improved business component. This can include various activities such as developing new products, improving existing products, or testing new materials or technologies.
The R&D Tax Credit can credit up to 20% of qualified research expenses, including wages, supplies, and contracted research expenses. The R&D Tax Credit can also offset payroll taxes for small businesses, providing an additional benefit.
2. Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is a tax credit designed to encourage employers to hire individuals from certain targeted groups, such as veterans, individuals with disabilities, and individuals who have been unemployed for an extended period.
To qualify for the WOTC, an employer must hire an individual from one of the targeted groups and obtain certification from the state workforce agency or the Department of Veterans Affairs. The credit can range from $1,200 to $9,600 per employee, depending on the individual’s target group and hours worked.
The WOTC can significantly benefit businesses that hire individuals from targeted groups, helping reduce their overall tax liability and offset the costs associated with hiring and training new employees. Small businesses can also benefit from the WOTC, as there is no limit on the number of employees who qualify for the credit.
3. Health Care Tax Credit
The Small Business Health Care Tax Credit is designed to help small businesses and tax-exempt organizations provide health insurance coverage to their employees. To qualify for the credit, a business must have fewer than 25 full-time equivalent employees, pay average annual wages of less than $56,000, and pay at least 50% of their employees’ health insurance premiums.
The credit can be up to 50% of the premiums paid by the employer, making it a significant benefit for small businesses that provide health insurance coverage to their employees. In 2023, the maximum credit is available to businesses with 10 or fewer full-time equivalent employees and average annual wages of $28,600 or less.
To claim the credit, businesses must use Form 8941, Credit for Small Employer Health Insurance Premiums, when they file their tax returns. You can apply for credit against income and alternative minimum taxes.
4. Disabled Access Credit
The Disabled Access Credit is a tax credit designed to help small businesses make their facilities more accessible to individuals with disabilities. This credit is available to businesses with gross receipts of $1 million or less and no more than 30 full-time employees.
To qualify for the credit, a business must improve its facilities that comply with the Americans with Disabilities Act (ADA) Accessibility Guidelines. These improvements can include installing ramps, widening doorways, and making restrooms accessible.
The credit equals 50% of eligible expenditures up to $10,250 for a maximum credit of $5,000 annually. Qualified expenditures can include the cost of making eligible improvements, such as materials, labor, and architectural and engineering fees.
5. Employee Retention Credit
The Employee Retention Credit (ERC) is a tax credit that encourages businesses to retain employees during difficult economic times, such as the COVID-19 pandemic. This credit is available to businesses of all sizes, including small businesses.
To qualify for the ERC, a business must have experienced either a full or partial suspension of operations due to a government order related to COVID-19 or a significant decline in gross receipts. The credit is equal to 70% of qualified wages paid to employees, up to a maximum of $10,000 per employee per quarter.
For small businesses with 500 or fewer employees, the credit is available for all wages paid during the eligible period, regardless of whether the employee was providing services. For larger businesses, the credit is only available for wages paid to employees not providing services.
6. Alternative Motor Vehicle Credit
The Alternative Motor Vehicle Credit is a tax credit designed to encourage businesses to purchase or lease vehicles that run on alternative fuels, such as electricity, hybrid gas-electric, and compressed natural gas. This credit is available to businesses of all sizes, including small businesses.
The credit amount depends on the vehicle type and battery capacity. For example, the credit can range from $2,500 to $7,500 for electric cars and $4,000 to $5,000 for plug-in hybrid vehicles. The credit is phased out once a manufacturer has sold 200,000 qualifying vehicles, so businesses should check to see if the credit is still available for the vehicle they are considering.
The Alternative Motor Vehicle Credit can significantly benefit businesses that invest in alternative fuel vehicles, helping reduce their overall tax liability and promote environmental sustainability. It is important for small businesses to consult with a tax professional to determine if they qualify for the credit and to ensure that they are properly documenting and reporting their qualifying vehicle purchases or leases.
7. Energy-Efficient Commercial Buildings Tax Deduction
The Energy-Efficient Commercial Buildings Tax Deduction is a tax deduction available to businesses that make energy-efficient improvements to their commercial buildings. This deduction is available to businesses of all sizes, including small businesses.
To qualify for the deduction, a business must make improvements to its commercial building that reduce energy consumption by at least 50% compared to a reference building. These improvements can include installing energy-efficient lighting, HVAC systems, and building envelope improvements.
You can claim a deduction of $1.80 per square foot of the building for eligible improvements made between January 1, 2006, and December 31, 2023. Partial deductions are available for improvements that meet a lesser energy savings threshold.
8. Small Business Health Options Program (SHOP) Tax Credit
Small businesses can receive assistance with providing health insurance coverage to their employees through the SHOP Marketplace with the Small Business Health Options Program (SHOP) Tax Credit. To qualify for the credit, a business must have fewer than 25 full-time equivalent employees, pay average annual wages of less than $56,000, and contribute at least 50% of their employees’ health insurance premiums.
The credit can be up to 50% of the employer’s premium contributions and is only available for two consecutive years. For tax-exempt organizations, the credit can be up to 35% of premium contributions.
To claim the credit, businesses must purchase health insurance coverage through the SHOP Marketplace and complete Form 8941, Credit for Small Employer Health Insurance Premiums, when filing their tax returns.
The SHOP Tax Credit can provide a significant benefit to small businesses that offer health insurance coverage to their employees through the SHOP Marketplace, helping to offset the costs associated with delivering this important benefit.
The Biggest Mistake Small Business Owners are Making with Tax Credits
One of small business owners’ biggest mistakes with tax credits is failing to research and understand which credits they may qualify for properly. Many small business owners are unaware of the tax credits available or do not understand the eligibility requirements and documentation needed to claim the credits. This can result in missed opportunities to reduce their overall tax liability and offset the costs associated with hiring, providing health insurance coverage, and making energy-efficient improvements, among other things. It is essential for small business owners to work with a tax professional or their state workforce agency to understand their options and maximize their benefits.
File Tax Credits Accurately with NumberSquad
Filing for tax credits can be daunting for small business owners, especially with the constantly changing tax laws and regulations. That’s where NumberSquad comes in. Our team of tax experts dedicates itself to helping small business owners accurately file for tax credits and maximize their benefits.
From the Research and Development Tax Credit to the Small Business Health Care Tax Credit, our experts know the various tax credits available to small businesses. They can guide you through the eligibility requirements and documentation to claim the credits.
Don’t let the complexities of tax credits overwhelm you. Let NumberSquad’s tax experts handle it for you, so you can focus on growing your business.