At their core, tax credits are a very particular type of benefit designed to offset the actual tax liability associated with SMBs around the country. This isn't the same thing as a tax deduction, which lowers that business's actual income. Tax credits are typically offered to incentivize everything from hiring more workers in order to stimulate the economy to make meaningful contributions to specific industries.
While certain tax credits are obvious, others are decidedly less so. This is why proper tax planning is essential as a small business owner — you need to be proactive about getting every last penny that is owed to you. There are a number of essential small business tax credits in particular that you'll definitely want to take advantage of when tax season rolls around.
The General Business Tax Credit
As the name suggests, this is something of a "kitchen sink" tax credit made up of a number of smaller, individual credits. Collectively, they are designed to act as a way to motivate savvy business owners such as yourself to participate in certain activities. If you purchased a qualified electric vehicle for your business, branched out into a new market, or retained a certain number of employees, you may very well be qualified.
To find out more information, see the General Business Tax Credit Form 3800.
Paid Family and Medical Leave
This particular tax credit is relatively new, having only just been authorized in 2017. Again, it's intended to act as motivation — this time, so that small business owners will provide paid leave to all employees who themselves are covered by the Family and Medical Leave Act. Employees that qualify are entitled to up to 12 weeks of totally unpaid, job-projected leave — all while still retaining access to their group health benefits as well. Note that this is something that happens every year.
The credit itself is equal to a percentage of the wages that an employer pays to those qualified employees while they're on leave for things like unexpected medical emergencies or even giving birth. To find out more information, view IRS Form 8994.
The Alternative Motor Vehicle Credit
This credit is a sizable one of up to $8,000, so it is absolutely in your own best interest to claim it if you qualify. As the name suggests, it's a way to incentivize small business owners to purchase an "alternative fuel source" vehicle. Note that the cars that fall into this category would be those that use hydrogen fuel-cell technology, not hybrids or electric vehicles since those are still considered to be "traditional" types of fuel.
Yes, the list of qualified vehicles is currently small — but that doesn't mean it won't expand in the future, and the credit itself is still worth keeping an eye on. To find out more information, be sure to view Form 8910.
Credits for Qualified Research Expenses
Depending on the specific type of small business you're running, you may have to engage in a significant amount of research and development in order to better serve your own customers. The United States government would like to encourage you to do as much of that as possible, which is how the qualified research expenses credit (otherwise known as the "Increasing Research Activities Credit") came into being.
In order to qualify for this credit, you need to engage in domestic research and development for the purposes of things like certification testing, environmental testing, developing or applying for patents, prototype and model development, and more. Research associated with the development of new or even improved products, processes, and formulas would also qualify.
This credit can cover up to 20% of all of your related expenses that fall under this umbrella, so be sure to view Form 6765 for more information.
The New Markets Credit
Last but not least, we have the New Markets Credit — one designed to encourage investment in Community Development Enterprises and Community Development Financial Institutions, otherwise known as CDEs and CDFIs, respectively. These are the types of organizations that assist lower income communities around the country and, obviously, they need all the help they can get.
The vast majority of all qualified projects involve either purchasing, renovating or constructing real estate in areas that have a 20% poverty rate or with median family incomes that don't exceed 80% of that of the larger area. This means building or renovating hospitals, for example, or industrial buildings that go on to create jobs. To find out more information, consult Form 8874.
Note that while all of these small business tax credits are critical, they represent just a small fraction of those that may be available to you. For the complete list, be sure to review the IRS' official website devoted to that very topic. As always, you should also enlist the help of a qualified tax professional to prepare your business taxes as well. Not only can we help ensure you're taking full advantage of these and other critical credits, but we can also help you avoid the types of costly mistakes that small business owners and the self-employed often make when they attempt to do everything themselves. Contact our office for more information today.
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