Did you know that sole proprietors in the US may pay a federal tax rate of 13%? That already seems high, but a small partnership may even face almost twice that! As a result, even small businesses shell out thousands of dollars every year on taxes alone.
That’s a massive expense for small business owners, who, on average, only make $61,620 a year. It’s even more concerning for entrepreneurs who face state-imposed taxes.
Fortunately, tax credits for business owners help ease some of that burden. This guide lists the top seven you should know as an entrepreneur, so keep reading to learn about them.
1. Green Energy Tax Credits
Installing energy-efficient systems may qualify your organization for green energy tax credits. A perfect example is the dollar-for-dollar federal solar investment tax credit (ITC). It applies to businesses that have installed solar photovoltaic (PV) or thermal systems.
The solar ITC currently offers a 26% tax credit for systems placed in service throughout 2022. That goes down to 22% the following year. By 2024, it permanently drops to 10%, so act fast and install yours this year to qualify for the 26% incentive.
The federal ITC is also claimable on other renewable energy systems, such as fuel cells. Even geothermal heat pumps and small wind turbines qualify.
One of the most crucial ITC requirements to meet is system ownership. Moreover, you have to be the first or original owner to qualify. If you only lease them, the leasing company has the right to claim the tax credits.
2. Green Vehicle Tax Credits
Does your business own cars that derive power from alternative energy sources? If so, they may qualify for the Alternative Motor Vehicle Credit. However, they must first meet the IRS definition of fuel cell vehicles.
The Alternative Fuel Vehicle Refueling Property Credit is another business vehicle-related tax credit. It’s an incentive for properties designed to dispense or store alternative fuels. It also applies to electrical vehicle recharging stations.
3. Research and Development (R&D) Tax Credit
Businesses that develop new processes or products may qualify for the R&D tax credit. It’s a dollar-for-dollar credit awarded at the federal and, in some cases, the state level.
Any cost related to improving or innovating a business may qualify for the R&D tax credit.
For instance, let’s say you’re developing software designed to improve workplace safety. Since its goal is to enhance business operations, the government may reward you with a tax credit. If you want to know more about this program and its requirements, click here for an in-depth guide.
4. Work Opportunity Tax Credit
The Work Opportunity Tax Credit credits businesses up to $9,600 for every qualified new hire.
Qualified workers include those who belong to under-served populations, veterans, and ex-felons. Also eligible are supplemental Nutrition Assistance Program (SNAP) Recipients.
The WOTC requires you to get a certification confirming your new hire’s qualification. Once you’ve secured that, you can claim your incentives as general business credits.
5. Small Business Health Care Tax Credit
Including health insurance in your employee benefits package can entice the right talents. It also encourages your existing employees to keep working for you.
Unfortunately, employer-sponsored health insurance keeps becoming more expensive. For example, it rose by 6.3% in 2021, reaching an average of $14,542 per employee. That’s a steep jump from the 3.4% increase in 2020.
Trimming those costs is something the Small Business Health Care Tax Credit can help you do. This tax credit can offset your employee health insurance expenses. The maximum credit it gives is 50% of the premiums you pay as a business owner.
Moreover, you can get this tax credit for small business owners for two consecutive tax years. You can also carry it back or forward to other tax years.
6. Disabled Access Credit
This tax credit is for small businesses providing access to people with disabilities.
Yours may qualify if you acquired or modified equipment or devices to improve access. The same goes if you removed barriers preventing ease of access in and out of your place of business.
If you earned $1 million or less in the past year, you could apply for the Disabled Access Credit. It’s also one of the tax credits for small business owners who employ 30 or fewer full-time employees. Moreover, it’s ongoing, so you can claim a credit for each year you incur access expenditures.
7. Childcare Facilities and Services Credit
According to 2020 federal data, 33 million US families had children younger than 18. Within the married-couple group, only 59.8% had parents who were both working. That implies some parents choose not to work so that they can look after their kids.
As an employer, you can give those parents a chance to work by offering childcare services. That may also qualify you for the Employer-Provided Childcare Facilities and Services credit.
You can get the credit if you provide care facilities for your employees’ children. Your business may also qualify if it offers childcare services to parent workers. Both can be on-site or through a referral or contract program with a third-party facility.
You can get a tax credit of up to 25% of what you pay to provide the benefits. Qualified costs include the construction and maintenance of on-site facilities.
If you use a third-party service, you can get up to a 10% credit on your incurred expenses.
The maximum credit you can apply for is $150,000 a year.
Apply for These Tax Credits for Business Owners
There you have it, your ultimate guide on the best tax credits for business owners in the US. Now that you know what they are, it’s time to check if you’re eligible and apply for those you qualify for ASAP. Start with the time-sensitive ones, such as the ITC, to maximize your tax breaks.
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