Everything You Need To Know About Small Business Tax Credits
For every entrepreneur wishing to start a lucrative venture, it’s important to know what small business tax credits are and how they can help you save money.
As a small business, you pay a certain amount of tax to the government. In turn, you’re entitled to claim federal corporate tax credits that decrease the tax amount you pay to the government. Think of tax credits as federal government tax incentives for small business owners.
This guide will explain how business tax credits are different from tax deductions. Plus, you’ll discover common tax credits that might be relevant to your company.
What Are Small Business Tax Credits and Why Are They Important?
Small business tax credits are incentives provided to companies for activities that benefit workers, particular industries, and society at large. For instance, tax credits for new business owners might include a small business investment credit for procuring energy-efficient automobiles, fighting climate change, improving lives of employees, and incorporating ‘green’ technologies for a more sustainable environment.
You may be wondering, “What date do tax credits get paid?” In short, it depends on the type of business tax credits you are entitled to. Generally, every small business tax credit is offered for a definite time period, terminating after that time has lapsed.
Business tax credits have the power to dramatically change your bottom line. And that’s because small business tax credits reduce the actual tax you pay for your startup.
In fact, every dollar you pay for tax is compensated by a dollar of credit. For a small business owner that means a lot. You can easily recover some of your operating expenses while saving indispensable capital to develop your business and allow it to thrive.
Business Tax Credits vs. Tax Deduction
A business tax credit offers you a dollar-for-dollar reduction of your tax obligation, directly decreasing the amount of tax you have to pay. For instance, a tax credit valued at $2,000 reduces your tax liability by the corresponding $2,000.
On the other hand, tax deduction decreases the amount of your income that is subjected to taxes. It reduces your taxable income by the percentage of your highest federal income tax bracket. This means if you lie in the 24% tax bracket, you can save $480 on a $2,000 deduction.
Common Tax Credits
Some common existing and new small business tax credits that start to work in 2020 are:
- General Business Tax Credit
This includes several individual tax credits intended to encourage small business activities, such as procurement of qualified electric vehicles, entrance into new markets, and workforce retention.
- Credit for Small Employer Health Insurance Premiums
This offers tax credits to small business owners for providing health insurance coverage to their employees. You can receive a credit of up to 50% of the health insurance premiums you pay under a qualifying arrangement. An eligible tax-exempt employer can expect receiving up to 35% of the paid premiums.
- Alternative Motor Vehicle Credit
This tax credit allows you to receive up to $8,000 of credit to encourage the procurement of an alternative fuel source vehicle. However, it is not applicable for hybrid or electric vehicles as they use conventional fuel sources.
- Rehabilitation, Energy, and Reforestation Investments Credit
If your small business is investing in activities such as reforestation, developing rehabilitation, and alternative energy property, then you are eligible for this tax credit. It’s usually 10% of expenses and is limited to $10,000 annually.
- Disabled Access Credit
You can claim this tax credit if your workplace is fully accessible to disabled individuals. For example, there are ramps installed, display units and lavatories are improved, etc. However, you must have a total revenue of $1 million or less, or have less than 30 full-time workers to be eligible for this tax credit. It covers up to 50% of disabled access expenses ranging from $250 to $10,000.
Small Business Tax Credit Made Easier
Claiming a tax credit can be overwhelming. This is why many small business owners overlook countless tax credit opportunities that could help them save money. As your eligibility for certain tax credits changes over time, you’ll need to conduct a careful review every year.
For instance, if you’re applying for a tax credit for a business procurement or activity, you can only claim for the year you started using the purchase (such as an electric vehicle), or carrying out the activity (such as employee retention strategies). You can’t claim the same credit every year.
On the other hand, the growth of your company allows you to claim tax credits that you weren’t previously eligible for.
Analyzing and keeping track of tax credits can be tough and perplexing, but it’s completely worth your time and efforts. Otherwise, you may consider hiring an expert tax professional to evaluate the tax credits your small business is eligible for.
Claiming small business tax credits is not the only way to make your business profitable. At L3 Funding, we offer merchant funding to help small businesses grow at their own pace. Call us today at (877) 9-FUNDIN or apply online to learn more about our services.