For many small business owners, navigating the ins and outs of taxes can seem insurmountable. Because of this, few business owners are aware of the full range of tax credits and deductions of which they can take advantage. For instance, less than three in 10 small businesses that qualify for the Research & Development (R&D) Tax Credit claim it, while most large companies make the claim.
CO– spoke with two tax professionals to get their advice on where your small business may be able to keep more of your hard-earned money on your 2023 tax return.
[Read more: 2023 Tax Season Planning You Should Be Doing Now]
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 equally beneficial credits. A tax deduction reduces how much of your business income is subject to taxes by potentially putting you into a lower tax bracket. A tax credit is more straightforward in that it reduces the amount of tax owed by giving you a dollar-for-dollar reduction of your liability. For instance, a tax credit valued at $500 will lower your bill by $500.
Business owners can claim both credits and deductions, as long as they meet the necessary qualifications. Here are a few credits that many business owners may be eligible to claim on their 2023 tax return.
Tax credits commonly missed by small businesses
The R&D tax credit is one for which many small business owners believe they are not eligible. However, there are many others, said Patrick Butler, CPA and Partner at Reynolds + Rowella.
[Read more: How to Qualify for and Claim the R&D Tax Credit]
Work Opportunity Tax Credit
The Consolidated Appropriations Act in 2021 extended the Work Opportunity Tax Credit (WOTC) program until December 31, 2025. The WOTC can be claimed by employers who hire individuals facing barriers to employment, explained Butler. Those categories include qualified Temporary Assistance for Needy Families recipients, ex-felons hired before reaching one year past their conviction date or prison release, qualified SNAP recipients, and some veterans, among others.
In addition to the categories of workers hired, the WOTC is based on the wages paid to those employees in their first year of employment who have worked at least 400 hours. Small businesses can receive a credit for up to $2,400 for every new full-time hire meeting the specifications of this tax credit.
R&D tax credit
The 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, product enhancements, and more. Businesses can also be eligible for this tax credit for qualifying basic research payments, though this is less common.
Effective 2024, changes will be introduced to Form 6765 for the R&D tax credit. The changes are focused on disclosing data relating to associated wage expenses and business component details. These changes made by the IRS are aimed at preventing fraud and enhancing data accuracy for the credit.
Business owners can claim both credits and deductions, as long as they meet the necessary qualifications.
SECURE 2.0 Act
Kevin Hamaker, CPA, MPAcc, and Partner at BSB CPAs + Business Advisors, added that, effective January 1, 2020, and later updated on December 29, 2022, 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 RMD age for IRA 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, simplify transferring accounts from one employer to another, and allow people to save for emergencies using retirement accounts.
Hamaker recommended that, in addition to exploring credits and the federal level, small businesses look into the hundreds of state and local credits available –– especially those related to the R&D and the Work Opportunity Tax Credits.
Butler had a few other suggestions for federal tax credits to explore:
- Retirement Plans Startup Costs Tax Credit: Eligible employers can qualify for this credit to cover the initial costs of establishing retirement plans like SIMPLE IRA, 401(k), or SEP. Meeting the specific eligibility requirements related to employee count, compensation, and plan history can reduce the amount of taxes owed by the business.
- Plug-In Electric Drive Vehicle Credit: If your business purchased a new plug-in electric vehicle in 2022 or earlier, this credit of up to $7,500 could be available to you. Qualifications include a gross vehicle weight under 14,000 pounds, an external charging source, and manufacture by a company that has sold fewer than 200,000 electric vehicles in the United States. Vehicles purchased after August 16, 2022, must undergo final assembly in North America to qualify.
- 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 in empowerment zones, or distressed areas, that hire and retain employees in that area can claim up to $3,000 per employee. The tax credit can be renewed annually and doesn’t limit the number of eligible employees.
- New Markets 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.
- Employee Retention Credit: Butler recommended exploring the Employee Retention Credit for small businesses whose operations were partially or fully suspended due to the COVID-19 pandemic. Companies can claim a refundable tax credit of up to 50% of $10,000 in qualifying wages for each full-time employee who you kept on your payroll in 2020 (up to a $5,000 credit for each employee). The value increases for 2021 wages, with 70% of qualifying wages of up to $10,000 each quarter (up to $21,000 credit for each employee).
[Everything you need to know about the Employee Retention Tax Credit]
Natural disaster tax relief
In addition to the array of small business tax credits, tax relief in disaster situations is available to help individuals and businesses impacted by severe natural disasters, such as winter storms, tornadoes, hurricanes, seawater intrusion, flooding, wildfires, and other severe storms.
A president has to declare an area as eligible for federal government assistance due to a major disaster, therefore declaring the area as a qualified disaster zone. Once declared, those 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.
Taxpayers may need to provide tax transcripts, which can be obtained online or by mail, to support disaster claims. The IRS waives fees and expedites requests for disaster-related amendments or applications for disaster benefits. If individuals need to temporarily change their address due to a disaster, they can notify the IRS using Form 8822. Overall, these measures aim to provide financial support and relief to those affected by natural disasters.
Butler noted that now is the time to begin preparing your tax return to make sure you’re taking full advantage of the credits and deductions available. Consult your accountant to see which of these credits you qualify for and make sure you’re not leaving any money on the table this tax season.
This article was originally written by Emily Heaslip and Lauren Kubiak.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
