What Are Tax Credits? What Small Businesses Need to Know

What are tax credits? Find out here and make sure you aren't leaving money on the table.

Taxes

Tax credits vary widely and reduce taxes owed dollar for dollar. But what are tax credits, exactly? Tax credits differ from tax deductions, which most small businesses claim for expenses like office supplies and employee wages, in that deductions serve to reduce taxable income, resulting in lower taxes. Tax credits, on the other hand, reduce the actual tax amount owed, explains Meredith Tucker, CPA and manager of entrepreneurial services at Kaufman Rossin.

Types of Tax Credits You're probably still wondering: What are tax credits for? There are several types of tax credits available to businesses that are all designed to encourage business growth and expansion.
  • Qualified Research Expense Credit: This tax credit provides up to 20 percent of the cost of R&D for new product development. It's also recurring, so if you anticipate several years of preliminary work researching new opportunities, designing new processes, testing potential solutions or attending research meetings, this credit could be worth a lot of money. But it's not just for product manufacturers. If you're updating some aspect of your business, such as designing a new workflow or improving a technique specific to the product or service you provide customers, you may qualify.
  • Work Opportunity Tax Credit: Hiring certain workers, such as veterans or individuals with disabilities, can qualify employers for a work opportunity tax credit of 25 percent to 40 percent of the employee's wages. This is subject to various annual maximums and can provide as much as $9,600 per year in tax credits for a qualified employee. The amount of credit depends largely on the targeted group that the employee falls into. According to the Department of Labor, these target groups include, but are not limited to, unemployed and disabled veterans, recipients of food stamps or temporary assistance, and qualified long-term unemployment recipients.
  • Disabled Access Credit: Companies that invest in equipment, resources or other improvements that increase accessibility for individuals with disabilities, per the Americans with Disabilities Act (ADA), can apply for this tax credit. This could include, for example, adding ramps, elevators, braille signs or other enhancements that make it possible for employees with disabilities to move throughout a building more easily.
  • Credit for Employer-Provided Child Care Facilities and Services: Businesses that provide on-site or off-site child care for their employees may qualify for this tax credit. The credit, which cannot exceed $150,000 per year, is equal to 25 percent of the qualified child care facility expenses, plus 10 percent of the qualified child care resources and referral expenditures.
  • Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips: Businesses in the hospitality industry, such as restaurants, hotels and salons, can claim this tax credit for Social Security and Medicare taxes paid on tips employees received.
Be Proactive Most tax forms are not complicated to fill out, so why don't more small businesses apply for them? Some business owners hold the misconception that only large companies qualify for tax credits, so smaller businesses may not be aware that these funds are available to them. Spending a little time to investigate tax credits could have a positive impact on your bottom line. Tax credits change so much that it can be hard for small businesses to keep up. The best approach is to meet regularly with an accountant to discuss plans for growth that dovetail with an available tax credit. This information is only provided for general informational purposes, and should not be considered as offering individualized tax advice. Tax laws are complex; please consult your tax advisor on specific issues related to your tax situation.