Businesses reduce the tax they owe by the dollar amount of tax credits they claim. This contrasts with deductions, which merely reduce taxable income. Companies that actively seek out the many available tax credits sometimes discover an unexpected windfall.
What Is a Tax Credit?
All tax credits offset tax liabilities dollar for dollar. Even businesses that owe no tax can benefit from refundable tax credits. Any refundable excess tax credit over tax liability gets paid to the company.
Nonrefundable business credits can only offset actual tax. Companies may generally carry nonrefundable business credits back one year and forward up to twenty years, offsetting tax in those years. Some exceptions apply.
Which Tax Credits Might Apply to Your Business
Businesses enjoy access to a wide variety of tax credits. The following brief overviews mention some of the most popular credits:
Research and Development (R&D)
The R&D tax credit rewards companies for developing or improving products, processes, and other inventions. Despite the name, companies without a traditional R&D focus can often qualify. Among other requirements, qualifying activities must technologically experiment to eliminate uncertainty.
The employee retention tax credit differs from many other business credits because it offsets payroll taxes, not income taxes. This COVID-relief credit applies to qualified wages paid between March 12, 2020, and December 31, 2021. Eligible employers can receive a refundable payroll tax credit of up to $28,000 per employee in 2021.
Extended Paid Leave Benefits
The Emergency Paid Sick Leave Act (EPSLA) required most employers to provide paid leave to employees for COVID-related reasons. Businesses could claim a payroll tax credit for paid leave provided. The EPSLA requirement to provide leave phased out at the end of 2020, but the credit remains available for paid leave voluntarily provided through September 30, 2021.
Small Business Health Care
Employers with less than 25 full-time equivalent employees can receive a tax credit for up to 50% of the costs they pay for employees' premiums. Among other rules, the company must offer coverage to all full-time employees through a Small Business Health Options Program (SHOP) plan. Self-employed individuals without other full-time employees cannot qualify.
Paid Family and Medical Leave
The paid family and medical leave tax credit offers an income tax credit not dependent on COVID. The credit varies from 12.5% to 25% of qualifying family and medical leave wages for up to 12 weeks.
Employers hiring members of a targeted group under Section 51 of the IRC may claim the work opportunity tax credit (WOTC). Targeted groups include former felons, SNAP recipients, veterans, the long-term unemployed, and others. Businesses must file a certification request using Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, no later than 28 days after the employee's start date.
Companies may claim a solar tax credit for solar panels, batteries, and other related equipment used to generate electricity, regulate a building's temperature, or provide hot water to a building.
FICA Tip for Restaurants
Restaurants receive an income tax credit for the 7.65% employer FICA tax on employee tips for food service. Tips used to meet federal minimum wage don't qualify.
Small Employer Pension Plan Startup Costs
Certain small employers can claim a tax credit of up to $5,000 per year for three years. The tax credit applies to the costs to set up a SEP, SIMPLE IRA, 401(k), or other qualified plans.
Eligible small businesses may earn a disabled access tax credit of up to $5,000 for 50% of expenses to provide disabled access.
How to Claim Business Tax Credits
Companies file different tax forms for each of the above tax credits. The credit amounts determined on each form eventually reach the general business tax credit on Form 3800, General Business Credit, often after flowing through other forms. For passthrough entities, the general business credit then goes to each owner via schedule K-1.
Businesses enjoy access to many potentially lucrative tax credits. A certified tax professional can help your business claim every dollar permitted by tax law.