Small business tax credits can have a powerful impact on your bottom line. They cut the amount of tax you pay, dollar for dollar.
Credits are different from deductions. They decrease your taxable income and can potentially put you in a lower tax bracket.
Each credit requires its own specific form. These forms are then tallied on IRS Form 3800.
1. Procurement
Whether you’re buying raw materials for production or office supplies for your team, procurement is a big part of running a business. Using a purchase order system, ensuring that all expenses are documented, and regularly evaluating the best options for your business can save money in many ways.
It also helps to take advantage of tax credits designed to help small businesses grow and be more creative. But, figuring out which credits are right for you can be challenging—and sometimes requires expert help.
Eligibility criteria can be complicated, and rules change often. The best way to stay on top of it is to check official websites and talk to a specialist in the field. Keeping meticulous records and ensuring all of your documentation is ready to go when it’s time to file is essential as well. This will reduce the risk of rejection or review by tax authorities.
2. Tax Deductions
Most small business owners are familiar with tax deductions, which decrease taxable income and reduce the amount of taxes owed. But there are also dozens of tax credits available, many of them geared specifically to small businesses.
Unlike deductions, which come at the end of your tax calculation (and are subtracted from your gross income), tax credits arrive before you calculate your tax liability. Credits can directly lower the amount you owe in a year or increase your refund — they are often dollar-for-dollar reductions of your tax bill.
For example, the popular small-business health insurance premium credit encourages employers to offer health coverage to their employees. Claiming this credit will lower your taxable income, potentially saving you thousands in taxes in 2023. However, it’s important to note that eligibility for these and other tax credits can change from year to year, so be sure to check on them before filing your return.
3. Business Investments
In addition to reducing your tax bill dollar for dollar, credits can make it easier to take on new projects that help you grow. Whether it’s research and development for better products or hiring employees to work in an environment that supports diversity, many tax credits can give you the funding you need to try new things and move your business forward.
The first step is to find out which credit applies to your small business. Then, review eligibility requirements and gather documents that prove you qualify. You may have to file multiple IRS forms based on the credits you claim.
For example, a research and development credit requires detailed documentation that includes lab notes, process diagrams and other records to prove you have R&D activities in place. Then you need to submit Form 3800. But other credits, such as the credit for investment in community development enterprises or the credit for alternative energy property, require only a single filing on Form 3800.
4. Employment
Tax credits are like special rewards in the form of dollar amounts that can be subtracted from the total amount owed in taxes. Unlike deductions, which reduce taxable income, credits cut actual tax bills dollar for dollar. They are especially useful for small businesses that need to keep money in the business for new projects and growth.
For example, the R&D credit is available to companies that spend money on research and development that improves products, processes, or software. It can be complex to calculate and qualify, so it is important for a small business to talk with an R&D tax consultant to learn more about it.
It is also possible to get a credit for providing health insurance to employees. This credit is available to companies that meet size, wage, and other requirements. The rules for this credit change often, so it is important to watch out for changes and speak with tax professionals regularly.