Business Tax

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.

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.

It’s not just self-employed individuals who must pay estimated taxes. Here’s what you need to know.

W-2 income tax withholding isn’t perfect. You’ve probably had years when you owed more than you expected to on April 15. Or you were pleasantly surprised to receive a sizable refund. The idea, of course, is to try to come out as even as possible. You can usually do this by adjusting your withholding when you experience a life change like taking on a mortgage or having a baby.

Income taxes are also pay-as-you-go for self-employed individuals – or at least they should be. If you’re striking out on your own by starting your own small business in 2022 or you’re simply taking on a side gig to improve your finances, your tax obligation will change dramatically. Your income will not be subject to employer withholding every week or two. In most cases, you’ll get it all. But the IRS expects you to pay estimated taxes on that income four times a year.

Who Else Must Pay?

There are other situations where you’ll be expected to make quarterly payments. In fact, the only individuals who aren’t required to pay estimated taxes (besides W-2 employees whose withholding is on target) are those who meet all three of these conditions:

• You owed no taxes the previous tax year (line 24 on your 2021 1040—total tax—is zero, or you weren’t required to file a return).
• You were a resident alien or U.S. citizen for all of 2021.
• Your 2021 tax year covered a 12-month period.

You’ll find your total tax for 2021 on line 24 of the Form 1040. Notice, too, that line 26 asks for 2021 estimated tax payments.

There are numerous situations where individuals who have payroll taxes regularly withheld on their income may still be required to submit quarterly estimated taxes. For example, did you receive income from rents or royalties? Dividends or interest? Income from selling an asset? Gambling?

If you have an employer who withholds taxes, but you don’t think you’ll be paying enough given the deductions and credits you might receive, you need to plan for estimated taxes. Self-employed individuals are almost always required to submit them.

Special Rules for Some

As with all things IRS, there are many exceptions to the rules regarding estimated taxes. For example, there are special rules for:

• Fishermen and farmers.
• Some household employers.
• Certain high-income taxpayers.
• Nonresident aliens.

How Do You Estimate Your Quarterly Taxes?

That’s the hard part, especially if you’re new to the world of estimated taxes. There is no magic formula, no way to calculate to the penny what you’ll owe. You’re basically making an educated guess. Since you won’t know for sure what changes to the tax code will be put in place until the end of the year, you can’t be absolutely certain that you might get a particular credit or deduction.

But you know roughly what your income will be for a given quarter once you’re nearing the end of it. Do you have a lot of business-related expenses? Keeping track of those is critical, as they’ll offset your income. If you don’t, you’ll have to budget for a heftier quarterly payment. And you must keep in mind that you’ll be paying self-employment tax – that portion of your income taxes that your employer used to pay.

Once you’ve been self-employed for a full tax year and have seen what your tax obligation was, it will be easier to estimate in subsequent years. But you may have a difficult time your first year.

How Do You Pay Estimated Taxes?

Individuals and business that had to pay estimated taxes in 2021 submitted the Form 1040-ES four times. If you’re self-employed in 2022, you’ll need to submit similar vouchers with your payments, unless you’re paying online.

If you’re self-employed and you anticipate owing $1,000 or more in taxes on your 2022 income, you’ll need to file quarterlies using IRS Form 1040-ES vouchers (available on the IRS website) along with a check or money order. There are also ways to pay online using a credit or debit card or direct bank withdrawal. Corporations would file the Form 1120-W if they expect to owe $500 or more.

Estimated taxes for the 2022 tax year are due:

April 18, 2022 (January 1-March 31, 2022)

June 15, 2022 (April 1-May 31, 2022)

September 15, 2022 (June 1- August 31, 2022)

January 16, 2023 (September 1-December 31, 2022)

A Challenging Task

Estimated taxes are not precise. And it may be difficult to set aside money for them if your income is not where you’d like it to be. But as you might expect, the IRS will levy penalties on you if you don’t.

Year-round tax planning can help you in this critical area. We’ll be happy to set aside time to consult with you about estimated taxes. We’re also available to do tax preparation and to look at how your taxes fit into your overall financial situation. Contact us soon to get a jump on the 2022 tax season — or to finish up 2021.