Minority-owned businesses play a crucial role in bolstering our nation’s economy. Over the last 10 years, minority enterprises comprised more than 50% of new U.S.-based businesses and created 4.7 million jobs. In total, over four million minority-owned businesses are in the country, accounting for nearly $700 billion in sales. Despite this, however, minority entrepreneurs often still face disparities in accessing capital and other opportunities.
While the federal tax code doesn’t include any specific incentives for minority-owned businesses, entrepreneurs who are part of a minority group may be better positioned to take advantage of certain tax credits and breaks. Here’s what you need to know about tax breaks for minority-owned businesses.
[Read more: 4 Things Every Minority Business Owner Can and Should Do Today ]
How is a minority-owned business defined on a federal level?
The following minority and indigenous groups are federally recognized in the United States:
- Hispanic/Latino American (including Puerto Rican).
- Black/African American.
- Asian American.
- Native American/Alaska Native.
- Native Hawaiian/Pacific Islander.
To support minority entrepreneurs, federal agencies and other corporations often set aside a percentage of their budgets to work with these businesses. Businesses that work with certified Minority Business Enterprises (MBEs) may be eligible to receive certain tax benefits.
To qualify as an MBE, a business must meet the following criteria:
- At least 51% of the business is owned and operated by one or more minority U.S. citizens, and they must have had the ownership and officer position for a minimum of six months.
- The minority ownership member(s) must have at least one-quarter of any of the minority origins listed above.
- Management and daily operations are carried out by the minority ownership member(s).
- The business is a for-profit enterprise, physically located in the United States or trust territories.
[Read more: How to Get Certified as a Minority-Owned Business]
Minority women entrepreneurs in particular may qualify for two additional national certifications:
- Woman-Owned Small Business (WOSB) certification. Eligible businesses must be at least 51% woman-owned and operated and meet the standards of a small business as defined by the Code of Federal Regulations.
- Economically Disadvantaged Woman-Owned Small Business certification. In addition to meeting all the criteria of a WOSB, qualifying woman owners must have a personal net worth of less than $750,000.
Because the Federal Reserve recognizes that minority households often have a lower mean and median net worth than white households, minority female entrepreneurs may meet the criteria for all three of these certifications.
Who does not qualify as a minority entrepreneur?
Though typically considered non-white by many in the United States and other Western countries, individuals of Middle Eastern and North African descent are considered white for the purposes of the U.S. Census. Additionally, entrepreneurs who belong to religious minority groups do not qualify as minority business owners at the federal level, nor do LGBTQ+ entrepreneurs or women entrepreneurs who do not belong to a racial or ethnic minority group.
Although not considered minority entrepreneurs at the federal level, private grants and other opportunities for individuals from these groups are available.
What tax breaks are offered for minority-owned businesses?
There are no federal tax breaks specifically offered to certified minority-owned businesses, but there are tax incentives for working with other minority-owned businesses and operating in low-income areas, which often have larger minority populations. These indirect tax benefits are a great incentive for minority-owned businesses to support their fellow minority entrepreneurs while benefiting financially.
[Read more: 10 Resources for Minority-Owned Businesses]
Businesses that work with certified Minority Business Enterprises (MBEs) may be eligible to receive certain tax benefits.
Depending on the location and nature of their business, multiple tax breaks are available that minority business owners may be able to take advantage of:
New Markets Tax Credit
The New Markets Tax Credit (NMTC) program aims to incentivize private investment in lower-income communities, which can bolster minority-owned businesses in these areas. Under this program, taxpayers can receive a credit against federal income taxes by investing in designated community development entities (CDEs). Investors can then claim up to 39% of tax credits in as little as seven years — 5% of the investment for each of the first three years, then 6% of the project for each of the remaining four years.
A minority enterprise that falls under CDE designation can be its own investor, though it can also find outside investors (typically a regulated financial institution). Any entity or person is eligible to claim these credits. While the credit was initially set to expire in 2021, Congress has extended it several times since its initiation, most recently through December 31, 2025; the proposed bipartisan New Markets Tax Credit Extension Act of 2023 could make the NMTC permanent.
Breaks for businesses in distressed and empowerment areas
Several tax breaks are available to encourage businesses to operate in economically distressed areas. These are not limited to minority enterprises and are open to any qualifying organization. However, if a minority entrepreneur has lived in or is familiar with these designated areas, they may have a competitive advantage in starting up and finding success
One of the most common tax breaks is for businesses working in empowerment zones. Empowerment zones (EZs) are areas designated for government aid by the Department of Housing and Urban Development (for urban areas) and the Department of Agriculture (for rural areas), intending to create jobs and stimulate the local economy. These empowerment zone designations are currently in effect through December 31, 2025. Enterprises that operate or invest in these locations qualify for the Empowerment Zone Employment Credit, which incentivizes area businesses to employ individuals who also live in EZs. Companies can receive a credit of up to 20% of the first $15,000 (up to $3,000) for annual wages paid to eligible employees.
The Work Opportunity Tax Credit
Though not limited to minority-owned businesses or minority employees, the Work Opportunity Tax Credit (WOTC) is a federal tax credit that encourages companies to hire employees from groups who have historically faced significant barriers to gainful employment. This credit was extended in 2021, and can currently apply to wages paid through December 31, 2025.
Eligible individuals may include first-year employees of any of the following targeted groups:
- Individuals who reside in EZs or rural renewal countries. Note that if you calculate wages for the WOTC, you cannot calculate these same wages for the Empowerment Zone Tax Credit.
- Individuals who receive state assistance or supplemental nutrition assistance, or whose families receive this assistance.
- Individuals who have been previously incarcerated and/or convicted of a felony.
- Individuals who have been referred to an employer after completing a rehabilitation program.
- Individuals who have experienced long-term unemployment.
- Veterans.
State-specific tax incentives and programs
In addition to federal tax breaks, certain states have additional tax incentives to encourage the growth and development of minority-owned businesses. For example, Georgia has a tax incentive program for companies that hire certified minority subcontractors, offering a break of 10% of wages (up to $100,000).
Though MBE certification is nationally recognized, some states offer their own minority certifications to facilitate participation in local contract funding. One such opportunity is the Oklahoma Diverse Business Certification, which aims to streamline the vendor registration process and offer enterprises a repository of qualified minority-owned businesses.
Consult with a local tax professional or your state’s taxation authority for up-to-date information on available state-level programs and eligibility requirements.
Additional resources for minority-owned businesses
Beyond tax incentives, several resources exist for entrepreneurs who belong to specific minority groups:
- Resources for Black-owned businesses, including Black-owned business directories and national initiatives designed specifically for Black entrepreneurs.
- Resources for Hispanic- and Latino-owned businesses, including professional networks and government-backed initiatives to support Hispanic and Latino business owners.
- Resources for women-owned businesses, including organizations and certifications for those who belong to minority groups.
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