As a business owner, it’s good to be aware of federal, state, and local taxes. Not only does this keep you in compliance with legally mandated tax payments and reporting requirements, it can also save your company very significantly thanks to tax incentive programs. What are business tax incentives, and how do you find out about them?
Tax incentives are deductions, exclusions, and exemptions you can claim from tax money owed to the United States government. The government provides incentives to encourage people and businesses to undertake certain activities that promote U.S. economic growth. As an example, certain incentives can promote job creation through business tax breaks.
Small business owners can tap into these opportunities to retain more of their profits, nurture growth, and promote long term stability.
What are tax incentives?
Tax incentives, come in various forms, including:
–Tax exemptions, meaning you don’t have to pay specific taxes.
–Tax reductions, meaning your tax burden is decreased, and you don’t have to pay as much in taxes.
–Tax refunds and rebates, in which your business gets back a portion of taxes paid.
-Tax Credits, which are like “points” that can be accumulated and used when tax season rolls around.
All of these tax incentives have one thing in common; they reduce taxes on the business. Why would the government do this? Some reasons include:
-to promote environmentally friendly business practices. For example, take the Federal Investment Tax Credit for Commercial Solar Photovoltaics. This gives business owners a solar investment tax credit (ITC) for qualified expenditures on solar energy.
-To encourage businesses to invest back in the economy. These tax incentives can be state and local, as well as federal. For example, Rural Job Investment Tax Credits (RJTC) and enterprise zone credits.
-To support disadvantaged business owners or minorities. The Minority Business Development Agency (MBDA) is a federal initiative providing tax incentives for doing business with minority-owned businesses. According to Federal language, “minority” is defined as a business with a minority owning at least 51% of its operations. (The federal definition of minority includes women, Alaska Natives and Native Hawaiians, Asian Americans, Black and African Americans, American Indians, and Hispanic persons.)
These are just a few examples. The government can design tax incentives around set goals, from increasing research and development to workforce development.
Tax Incentives for Small Businesses
Some tax credits are available to all types of businesses, regardless of their size. However, quite a few tax incentives are designed for self-employed individuals and small businesses.
Why does the government care about small businesses? They are traditionally considered the backbone of U.S. economic activity. Small businesses drive local job growth and reinvest in their communities. They serve places that large corporations may overlook.
What are tax incentives for small businesses? They can reward you or your company for taking certain steps to improve your business operations or help your workers. When you claim these tax breaks, you reduce your tax bill, meaning the amount of tax you pay is less.
Some of the most common tax breaks for small businesses include:
Health Insurance Premiums
Health insurance premium credits reward businesses for paying premiums for their employees’ health care coverage. You can get a credit of 50% of the premiums you’ve paid. However, you must have paid at least half of your employees’ premiums to qualify. There are other criteria, too. First all employee coverage must have been purchased through the Small Business Health Options (SHOP) program.
Pension Plans
If you start a pension fund for your employees, you can get tax credits for the expenses needed to establish and maintain the fund. You can also get coverage for the cost of educating workers about the fund.
Research Costs
Some entrepreneurs incorrectly think that incentives for research and development are reserved only for major corporations with huge research labs. This is incorrect. If your business engages in research activities, you may be able to get a tax credit of up to 20% for your research expenses.
For smaller businesses, you can use this credit to offset up to $250,000 of your share of Social Security taxes. This is a tax that employees pay, and employers match.
Family and Medical Leave Credit
U.S. law doesn’t obligate you to provide your employees with paid time off for family matters like the adoption or birth of a child. There isn’t a blanket requirement to provide paid time off for medical purposes. However, if you choose to give your employees family and medical leave, you will benefit from a tax credit.
Energy Tax
Energy tax incentives can help you make business improvements at a more affordable rate. For example, if you make energy saving improvements, such as installing an energy efficient HVAC unit, or replacing existing appliances with energy efficient models, you can get tax benefits. Energy tax benefits are offered by Federal, State, and Local governments.
Disaster Situations
The IRS offers tax relief to businesses and individuals affected by disaster situations, such as hurricanes and wildfires. The IRS provides an up-to-date list of disasters that may qualify for tax relief, sorted on a year-by-year basis. For example, in 2020, the IRS announced tax relief initiatives for California wildfire victims, victims of Hurricane Delta in Louisiana, and victims of Tennessee tornadoes.
Employees and Tax Incentives
The employee retention credit (ERC) allows eligible employers to gain a refundable tax credit against specified employment taxes. The credit can be up to 50% of the wages an employer has paid to employees between March 12, 2020, and September 30, 2021.
Take Advantage of Small Business Tax Incentives
Taking the time to do your research on small business tax incentives can help to reduce your tax burden. This means you get to keep more of your money, giving you the funds you need to maintain and grow business operations.
