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Business Tax

5 Often-Overlooked Tax Credits for Your Small Business

February 10, 2025 by admin

Notebook with tax credit sign on a table. Business concept.As a small business owner, tax time can be stressful. That’s why ensuring you’re garnering every benefit possible is essential. Many small businesses overlook some huge benefits when it comes to tax credits. This article reveals five of the most overlooked tax credits for small businesses. Read on to determine if any of these apply to your business.

Tax Credit vs. Tax Deduction

Before jumping to five tax credits often overlooked by small businesses, let’s clarify the difference between a tax credit and a tax deduction.

While tax deductions reduce your taxable income resulting in you paying a lower tax amount, tax credits are a dollar amount deducted from the taxes you owe. So, if you receive a tax credit of $500, you subtract $500 from taxes due.

Tax credits can be highly beneficial come tax time, so knowing which ones your small business is eligible to claim is good. Unfortunately, there are quite a few that many business owners aren’t aware of.

Here are five tax credits that are the most overlooked by small businesses. After you review the list, check with your accountant to see if your business is eligible for these or other tax credits to reduce the amount you owe to the IRS.

5 Tax Credits You May be Overlooking

1. Retirement Saver’s Credit

For small businesses that start a retirement plan for their employees, the IRS offers this credit to offset some of the startup costs they consider “ordinary and necessary.” Your business must employ fewer than 100 employees and not have had a retirement plan previously. The credit is for 50 percent of your startup costs, with a maximum credit of $500.

This tax credit can be claimed for three years, beginning the year before your plan becomes effective. If you do not currently offer a retirement savings plan for your employees, now may be the time to establish one.

2. Research & Development Tax Credit

The R&D tax credit is one of the most overlooked because small business owners not in a “research” field with a laboratory setting often blaze right past this one. But according to the IRS, “research” isn’t necessarily in a lab.

To qualify for this tax credit, a business must improve a product or process, often occurring in many companies as part of their everyday operations. For example, you may qualify if you own a software company and develop or improve an IT process.

Developing, designing, enhancing, or improving a product or process related to your business can qualify you for a credit of 13 cents on every dollar. Of course, you’ll want to confirm whether your business qualifies, identify qualifying activities, and keep copious records so that you can back up your claim to the credit.

3. Rehabilitation Credit (Historic Preservation)

If your business spent money to rehabilitate or renovate a historic structure, this credit likely applies to you. A 20 percent tax credit is available for rehabilitating historic, income-producing buildings determined by the Secretary of the Interior to be “certified historic structures.”

This does not apply to residential structures; however, many businesses purchase historic properties to house their office, restaurant, or other business. Historic structures are certified by the National Park Service, which reports to the IRS. If that applies to the structure where your business is housed, it is worth reviewing this credit with your accountant.

4. Empowerment Zone Employment Credit

Empowerment Zones (EZ) are distressed urban and rural areas needing revitalization. The purpose of the EZ credit is to encourage business owners to operate in these areas and employ EZ residents.

The credit is 20 percent of qualified wages paid during a calendar year. Businesses are eligible for a wage credit of up to $3,000 annually for each eligible employee.

5. Plug-In Electric Vehicle Credit

Suppose you purchase a new plug-in electric vehicle (EV) for your business between 2023 and 2032. In that case, you may qualify for a tax credit of $7,500. To be eligible for the credit, your adjusted gross income (AGI) must not exceed $150,000 in the year you take delivery of the vehicle or the year before (whichever is less).

The EV must meet qualifications regarding battery capacity, retail price, and weight. Speak to your tax accountant for the guidelines and qualifications if you purchased a plug-in EV for your business.

Ensuring you claim every tax credit your small business is entitled to is the key to paying the lowest tax possible. There are dozens of tax credits that small businesses are eligible for. Be sure to have your accountant or CPA review your eligibility for maximum savings come tax time.Notebook with tax credit sign on a table. Business concept.

Filed Under: Business Tax

What are Tax Credits?

April 10, 2024 by admin

Notebook with tax credit  sign on a table. Business concept.Taxes are an integral part of running a business, and they often represent a substantial portion of your expenses. However, there’s good news for businesses looking to reduce their tax burden and stimulate growth – business tax credits. These credits provide financial incentives for companies to invest in various activities, from research and development to promoting renewable energy. In this article, we’ll explore what business tax credits are, how they work, and how they can benefit your company.

What Are Business Tax Credits?

Business tax credits are financial incentives offered by governments at the federal, state, or local level to encourage businesses to engage in certain activities that benefit society, the environment, or the economy. These credits work by reducing a company’s tax liability, effectively lowering the amount of taxes they owe. They serve as a reward for businesses that invest in activities that align with the government’s policy objectives.

Types of Business Tax Credits

There are various types of business tax credits available, each with its own set of eligibility criteria and benefits. Here are some common types:

1. Research and Development (R&D) Tax Credit: This credit is designed to encourage businesses to invest in innovation and research activities. It can help offset the costs associated with developing new products, processes, or technologies.

2. Renewable Energy Tax Credits: These credits are intended to promote the use of renewable energy sources, such as solar, wind, and geothermal energy. They can significantly reduce the cost of investing in clean energy initiatives.

3. Investment Tax Credits: These credits reward businesses for investing in specific projects or assets that promote economic growth or job creation. They are often used to stimulate investment in economically distressed areas.

4. Low-Income Housing Tax Credit: Aimed at promoting the development of affordable housing, this credit provides incentives for businesses to invest in housing projects for low-income individuals and families.

5. Work Opportunity Tax Credit: This credit encourages the hiring of individuals from specific target groups, such as veterans and individuals with disabilities. It can offset a portion of the costs associated with employing these individuals.

Benefits of Business Tax Credits

Business tax credits offer numerous advantages for companies:

1. Reduced Tax Liability: The most apparent benefit is the reduction of your company’s tax liability. This translates into cost savings that can be reinvested in your business, used for expansion, or allocated to other vital activities.

2. Encouragement for Investment: Tax credits provide a financial incentive to invest in areas such as research and development, clean energy, or affordable housing. This encourages businesses to participate in activities that contribute positively to society and the economy.

3. Competitive Advantage: By taking advantage of available tax credits, your business can gain a competitive edge. This is especially relevant in industries where innovation, sustainability, and social responsibility play a significant role.

4. Stimulated Growth: Many tax credits are designed to spur economic growth, create jobs, and improve local communities. By participating in these initiatives, your business can be a catalyst for positive change.

How to Access Business Tax Credits

To access business tax credits, follow these steps:

1. Identify Eligibility: Determine which tax credits your business may be eligible for. Consult with a tax professional to assess your eligibility accurately.

2. Document Activities: Keep meticulous records of the activities that make you eligible for the tax credits. Proper documentation is essential to substantiate your claims.

3. File Accurate Tax Returns: Ensure your tax returns accurately reflect the credits you are claiming. Mistakes can lead to delays and audits.

4. Consult with Professionals: Tax professionals, accountants, and legal experts can help you navigate the complex world of tax credits, ensuring you maximize your benefits while staying compliant with tax laws.

Business tax credits offer a valuable opportunity for businesses to reduce their tax liabilities and invest in activities that promote growth, innovation, and social responsibility. By understanding the available credits and working with professionals to access them, your business can not only thrive financially but also contribute to positive change in your community and beyond.

Filed Under: Business Tax

Beneficial Ownership Information Reporting Under the Corporate Transparency Act

January 5, 2024 by admin

Serious millennial man using laptop sitting at the table in a home office, focused guy in casual clothing looking at the paper, communicating online, writing emails, distantly working or studying on computer at home.What is Beneficial Ownership Information Reporting?

Beneficial Ownership Information (BOI) reporting is a federal requirement by the Corporate Transparency Act (CTA). BOI reports include information about all the company’s beneficial owners.

Who is considered a Beneficial Owner?

A beneficial owner is any individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25 percent of the company’s ownership interests.

What is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) is a United States federal law that aims to increase transparency in corporate ownership. The law requires that individuals considered beneficial company owners in the U.S. provide the Financial Crimes Enforcement Network (FinCEN) with specific information.

For individuals, that includes:

  • their full name
  • date of birth
  • current residential address
  • a federally issued identification number from a driver’s license or passport

For companies, that includes:

  • legal entity name or DBA name
  • business address
  • state jurisdiction of formation of registration
  • IRS TIN

Any changes to the above reporting information must be updated with the FinCEN within 30 days of the change.

What is considered a Reporting Company?

Companies required to report a BOI are referred to as reporting companies. There are two types of reporting companies: domestic and foreign. They are defined as follows:

  1. Domestic reporting companies are corporations, limited liability companies (LLC), and other entities created by filing a document with a secretary of state or similar office in the U.S.
  2. Foreign reporting companies are entities (including corporations and LLCs) formed under a foreign country’s law and registered to do business in the U.S. by filing a document with a secretary of state or similar office.

There are 23 types of entities that are exempt from the reporting requirements. Those entities can be found on the FinCEN website.

What is the Reporting Process?

The reporting process takes place via an online portal on the FinCEN’s website. Filing begins January 1, 2024, with an initial filing window of one year (i.e., initial BOI reporting can be done from January 1, 2024, through January 1, 2025). The FinCEN will not accept BOI reporting before January 1, 2024. There is no fee for submitting this information.

New entities established after December 31, 2023, must report within 90 days of establishment.

Hefty civil ($500/day) and criminal penalties (up to $10,000) can be imposed on companies that fail to file a complete report.

To be sure that you and your firm comply with BOI reporting requirements, check with your trusted tax accountant or CPA.

Filed Under: Business Tax

Tax Tips for Businesses

December 22, 2023 by admin

Tax Form, Tax, Income Tax, Savings, VectorAs a business owner, you should familiarize yourself with your federal, state, and local tax requirements. Understanding what your obligations are will assist you in filing returns and paying taxes accurately and on time. Whatever taxes you are required to pay, you have to be very aware that there are deadlines for remitting them and any delays on your part could result in penalties. Here are some tips that can help you avoid tax trouble with the IRS.

Employment Taxes

The IRS requires employers to withhold federal income tax and FICA (Social Security and Medicare) taxes from their employees’ wages. The IRS also wants you to remit these employment taxes, along with your company’s FICA contributions, to them in a timely manner. Failing to remit these taxes can lead to serious penalties for noncompliance. This is one issue you absolutely must stay on top of.

Remember, sole proprietors, general partners, and, usually, members of limited liability companies do not have Social Security and Medicare taxes withheld like employees do. Instead, they must pay self-employment taxes, which typically cover Social Security and Medicare.

Estimated Taxes

You must generally make quarterly estimated tax payments to cover self-employment taxes and income tax on income that is not subject to withholding. If you do not make required estimated payments on time, you may owe the IRS an underpayment penalty.

Misclassifying Workers

Employees and independent contractors are treated differently for income tax withholding and employment tax purposes. Generally, the more control you have over a worker’s tasks and hours of work, the more likely that individual is an employee. In the case of employees, you must withhold federal income tax and FICA taxes, pay your share of FICA taxes, and pay unemployment taxes. You are not required to withhold income or FICA taxes from an independent contractor. Independent contractors pay income taxes and self-employment taxes on their own. If the IRS determines that your business has misclassified employees as independent contractors, it could prove to be costly.

Keep Business and Personal Transactions Separate

Personal bank and credit card accounts should always be kept separate from business accounts. Doing so makes it easier to identify all appropriate business expenses at tax time. That, in turn, simplifies things when it comes to claiming business tax deductions.

Substantiating Business Expenses

Like every business, your company will incur various expenses that are simply the cost of doing business. Many of these business expenses will be deductible. You should have proof of purchase for those expenses that you intend to deduct. Proof can be a cancelled check (or a legible image of the check), or a credit card, debit card, or electronic funds transfer (EFT) statement that shows the payee, amount of purchase or transfer, and the date of the transaction.

It’s also important that you can provide an invoice or receipt that identifies the purchase. If it’s not clear what the business purpose for the purchase is, then you should attach a note of explanation or write directly on the invoice or receipt. This can be helpful if the deductibility of the purchase is ever questioned by the IRS. Deductions for business travel expenses have very specific substantiation requirements, so be sure you are familiar with them before claiming these expenses.

Determining what taxes your business is subject to and when those taxes must be remitted is complex. Unfortunately, errors can be costly to your business. A professional who specializes in small business tax and accounting matters can help your business put systems and procedures in place so that it can claim all the deductions it is entitled to and meet its tax obligations in a timely and accurate manner.

Filed Under: Business Tax

7 Tax Credits for Your Small Business

August 23, 2023 by admin

Project cost estimation, calculate budget or resources to finish work, financial plan, invoice or tax, expense or loan concept, businesswoman with calculator estimate cost from project document.Let’s talk about tax credits – what they are, how they differ from deductions, and which can benefit your small business.

What are tax credits?

A tax credit is a dollar-for-dollar reduction of one’s tax liability, reducing the amount of tax owed. So, a tax credit of $300 lowers your bill by $300.

Tax deductions work differently. Let’s see how tax credits and tax deductions differ.

How do tax credits differ from tax deductions?

Unlike tax credits, which are dollar-for-dollar reductions in taxes, tax deductions decrease one’s taxable income. That means only a percentage of each dollar deducted is taken off your income tax. The percentage depends on your tax bracket and the rate at which your income is taxed.

How do you know which tax credits apply to your business?

General business tax credits are calculated individually from a list of tax credits published by the IRS. Each one requires its own form. Once those are filled out, they are tallied. Once the general business tax credit for the year is determined, it is filed on Form 3800 with your tax return.

Now let’s discuss some tax credits that benefit small businesses.

What are some tax credits that benefit small businesses?

1. Family and Medical Leave Credit (FMLC)

Family and medical leave is taken when an employee must be away from work due to an event such as:

  • the birth of a baby
  • a severe illness of an immediate family member
  • a serious health condition that prevents the employee from working

The tax credit for this type of leave is applicable when the employer:

  • has a written policy in place stating they will provide family and medical leave.
  • provides paid leave to employees for family or health-related reasons for at least two weeks in a given year.
  • pays a minimum of half the employee’s earnings

The employee must have been on the payroll for at least one year for an employer to claim the credit, which is between 12.5 and 25 percent of the employee’s pay.

You will use IRS Form 8994, the Employer Credit for Paid Family and Medical Leave to claim this credit.

2. Child Care Credit

This credit is part of the general business credit. It may be claimed any time within three years from the due date of your return on either an original or amended return. The credit is 25 percent of the qualified childcare facility expenditures plus 10 percent of the qualified childcare resource and referral expenditures paid or incurred during the tax year, limited to $150,000 per tax year.

Qualified expenditures are:

  • The cost of acquiring, building, or expanding a property to be used as part of a qualified childcare facility, is the depreciable (or amortizable) property and is not part of the principal residence of the business owner or any employee.
  • Operating expenses of a qualified childcare facility of the taxpayer
  • The expense paid to a qualified childcare facility that provides childcare to employees.

For this tax credit, fill out IRS Form 8882, Credit for Employer-Provided Child Care Facilities and Services.

3. Health Insurance Credit

Employers who pay health insurance premiums for employees can redeem a tax credit for up to 50 percent of those expenses. However, specific criteria must be met. For example, this credit only applies to companies with less than 25 full-time employees. The employer must pay at least half the employees’ health insurance premiums. Further, the average payroll cannot be more than $56,000 (as of 2022). Also, remember that your business must purchase health coverage through the Small Business Health Options (SHOP) program.

If your business meets these criteria (and all others required by the IRS), use Form 8941, Credit for Small Employer Health Insurance Premiums.

4. Employee Pension Plan Credit

The Employee Pension Plan Credit is worth up to $500, or 50 percent of your business startup costs. It can be claimed for the first three years of your plan. To qualify for this credit, your company must have fewer than 100 employees, each receiving a minimum of $5,000 in compensation. You can’t have had a 401(k) or other qualifying retirement plan for the previous three years. Lastly, you must plan to start a pension plan for your employees.

To claim this credit, use IRS Form 8881, Credit for Small Employer Pension Plan Startup Costs.

5. New Clean Vehicle Credit

This tax credit applies to plug-in electric vehicles (EV) or fuel cell vehicles (FCV). You could receive a credit of up to $7,500 for either of these types of cars. The Inflation Reduction Act of 2022 changed the rules for this credit for vehicles purchased from 2023 to 2032.

To qualify, the vehicle must be for your own use and not for resale and must be used in the United States. Further, your modified adjusted gross income (AGI) may not exceed $150,000. The type of vehicle the credit applies to can be found on the IRS website. (Note: battery and vehicle weight specifics and other qualifying criteria exist.)

To claim the credit, file Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit (Including Qualified Two-Wheeled Plug-in Electric Vehicles), with your tax return. You will need to provide your vehicle’s VIN.

6. Disabled Access Credit

You might be eligible for this credit if you spent money making your business more accessible to people with disabilities. To determine the official IRS definition of “accessible” which is broad, consult the instructions for IRS Form 8826. That is where you will find qualifying expenses.

The credit covers 50 percent of expenses up to $10,250 after the first $250. The maximum tax credit is $5,000. To claim this credit, use IRS Form 8826, Disabled Access Credit.

7. Work Opportunity Tax Credit (WOTC)

This credit is targeted at employers who hire individuals from specific groups, including (but not limited to):

  • Veterans
  • Ex-felons
  • Summer youth employees
  • SNAP recipients
  • SSI recipients
  • Long-term unemployment recipients

The WOTC is a one-time tax credit for newly hired individuals. To claim this credit, fill out IRS Form 8850, Pre-screening Notice, and Certification Request.

Of course, you can discuss these and many other tax credits that may benefit your small business with your qualified accountant or CPA.

Filed Under: Business Tax

What’s Taxable to an S Corporation Shareholder?

June 22, 2022 by admin

Group of people having meeting and disscusingS corporation shareholders have an added reason to worry about their company’s annual performance: It has a direct impact on their own income taxes.

How It Works

Unlike a regular C corporation, an S corporation usually doesn’t pay federal income taxes itself. Instead, each shareholder is allocated a portion of the corporate income, loss, deductions, and credits on a special “K-1” tax form. The shareholder then must report the items listed on the K-1 on his or her personal tax return.

The K-1 allocations are based on stock ownership percentages. So, for example, if an S corporation has $100,000 of taxable business income for the year, a person who owns 75% of the stock in the corporation would be allocated 75% of that income, or $75,000.

This scheme can get complicated. Case in point: The K-1 may show more income than the shareholder actually received from the company during the year. That’s because the K-1 figure is based on the corporation’s actual taxable income — not on the distributions made to the shareholder.

Here’s an example: Tom starts a new corporation, electing S status. In the first year, Tom draws a $30,000 salary and receives no other distributions from the company. The company’s ordinary business income (after deducting his salary) is $10,000. Since Tom is the only shareholder, all the company’s $10,000 of income is allocated to him on his K-1. Tom must include both the $30,000 of salary and the $10,000 on his personal income tax return, even though all he actually received from the corporation was his salary.

This result seems harsh, but it’s not the end of the story. Special rules in the tax law prevent the same income from being taxed again. Essentially, Tom will be credited with already having paid taxes on the $10,000 so that any future distribution of the funds will not be taxable.

Tracking Basis

To determine whether non-dividend distributions are tax free, S corporation shareholders must keep track of their stock basis.1 The computation generally starts with a shareholder’s initial capital contribution (or the stock’s cost if it was purchased) and changes from year to year as the shareholder is allocated corporate income, loss, etc. Non-dividend distributions that don’t exceed a shareholder’s stock basis are tax free.

Note that S corporation shareholders may be eligible to deduct up to 20% of their S corporation pass-through income.  Eligibility depends on taxable income and other factors. S shareholders will want to consult their tax professional to see if they can take advantage of the deduction to lower the taxes on their business income.

1Most distributions made from an S corporation are non-dividend distributions. Dividend distributions can occur if the company was previously a regular C corporation (or in other limited situations).

Filed Under: Business Tax

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