Few small business owners understand the full range of tax credits and deductions that are available to them, so they forfeit additional savings. For instance, for every 10 small businesses that qualify for the Research & Development (R&D) Tax Credit, fewer than three claim it. Let's look at nine credits your business may be eligible to claim on its 2024 tax return.
[Read more: What Is Tax Form 941, and Who Needs to File It?]
What's the difference between a tax credit and a tax deduction?
Too often, business owners focus exclusively on deductions and ignore the potential to claim lucrative tax credits. A tax deduction reduces how much of your business income is subject to taxes by potentially putting you into a lower tax bracket.
In comparison, a tax credit is a dollar-for-dollar amount you can subtract from any taxes you owe. So a tax credit valued at $500 will lower your tax bill by $500. Business owners can claim both credits and deductions as long as they meet the necessary qualifications.
[Read more: Is Your Business Tax-Exempt? How to Find Out]
Tax credits commonly missed by small businesses
Here are the nine most commonly overlooked tax credits by small businesses.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) can be claimed by employers who hire individuals facing barriers to employment. Those categories include the following:
- Qualified temporary assistance for needy families recipients
- Ex-felons hired before reaching one year past their conviction date or prison release
- Qualified supplemental nutrition assistance program recipients
- Veterans
- Individuals dealing with long-term unemployment
The WOTC is based on the wages paid to those employees during their first year of employment who worked at least 400 hours. Small businesses can receive a credit of up to $2,400 for every new full-time hire meeting this tax credit's specifications.
R&D tax credit
The research and development (R&D) tax credit offers a tax liability reduction opportunity to businesses innovating a process or product. The tax credit is available to businesses of all sizes for qualifying research activities, including software development, architectural design, and product enhancements.
Too often, business owners focus exclusively on deductions and ignore the potential to claim lucrative tax credits.
SECURE 2.0 Act
The SECURE 2.0 Act offers credits for implementing a 401(k) plan or adding an auto-enrollment feature to a plan. SECURE 2.0 has various provisions, including increasing the required minimum distribution age for individual retirement accounts (IRAs) and 401(k) accounts and altering the catch-up contribution limit for older workers with workplace plans.
The legislation also aims to assist younger individuals with saving while repaying student loans. Accounts can be transferred from one employer to another, allowing people to save for emergencies using their retirement accounts.
Retirement plans startup cost tax credit
Eligible employers can qualify for this credit to cover the initial costs of establishing retirement plans like a SIMPLE IRA, a 401(k), or a simplified employee pension plan. Meeting the specific eligibility requirements related to employee count, compensation, and plan history can reduce the taxes owed by the business.
Clean vehicle credit
If your business purchased a new plug-in electric vehicle or a fuel cell vehicle after 2023, you may qualify for a credit of up to $7,500. The vehicle must have a gross weight of less than 14,000 pounds, an external charging source, and a battery capacity of at least 7 kilowatt-hours.
Alternative motor vehicle credit
Individuals who qualify for this tax credit must be the original buyers of eligible vehicles powered by alternative energy sources for business or investment use. The tax credit is available to those who use the vehicle primarily in the United States.
Empowerment Zone Employment Credit
With this tax credit, businesses that hire and retain employees in empowerment zones can claim up to $3,000 per employee. The credit can be renewed annually and doesn't limit the number of eligible employees.
New Markets Tax Credit
This tax credit helps revitalize struggling economies by offering a 39% tax credit over seven years to private investors who fund community development entities in low-income communities.
Natural disaster tax relief
Tax relief in disaster situations is available to businesses impacted by natural disasters and severe storms. Once an area is declared a qualified disaster zone, businesses in the area may be granted extensions for tax filing, payment deadlines, and additional tax relief measures. Disaster-related deductions due to lost or damaged property may also be available to qualifying businesses and individuals, leading to larger refunds.
How to qualify for small business tax credits
Once you understand the different tax credits you may qualify for, it's important to keep detailed records. Document any expenses, employee information, and other activities needed to qualify for the tax credit. Accounting software makes this easier since you can track your income, expenses, and payroll information in one place.
Most small business owners don't have time to stay up to date with the constant changes in the tax law, so it's a good idea to work with a certified public accountant (CPA). Your CPA can help you come up with tax-saving strategies and help you stay compliant.
How to claim multiple tax credits without penalties
Small businesses can claim multiple tax credits without incurring penalties, but you cannot claim the same expense for multiple tax credits or deductions. This usually happens by accident, so keeping thorough records of which expenses are applied to which credit helps you avoid this problem.
You can also claim the General Business Credit (GBC), which allows you to combine multiple tax credits during a single tax year. Combining several tax credits under the GBC helps you avoid penalties and take advantage of unused credits from a prior year.
This article was originally written by Kaytlyn Smith.
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