A s an entrepreneur, keeping up with the ever-changing tax landscape can feel overwhelming—but it doesn’t have to be. The right tax credits and deductions can save your business thousands of dollars or even more. Recent legislation, such as the Inflation Reduction Act and other small-business-friendly policies, has introduced new tax credits and deductions to encourage growth and sustainability in the entrepreneurial space. Strategically applying these financial incentives can transform small businesses. Let’s look at some key tax credits and deductions that could make a big difference for your company.
Relevant Tax Credits for Entrepreneurs
Tax credits are one of the most effective tools for entrepreneurs to reduce tax liabilities. Don’t confuse tax deductions with tax credits. Tax deductions lower taxable income, while tax credits directly reduce the tax owed. This makes them extremely valuable, especially for cash-strapped enterprises looking to reinvest their savings into growth initiatives. Here are some of the most relevant tax credits for small businesses.
Research and Development Credit
The research and development (R&D) tax credit rewards companies that invest in developing new products, processes, or software. It’s particularly beneficial for tech startups, manufacturing firms, and innovation-focused companies. Even if you don’t have a dedicated R&D department, you may still qualify if you’re improving processes or creating something new. Check with your accountant today to see if your business qualifies for the R&D credit.
Energy Efficiency Credits
Businesses that invest in energy-efficient or renewable energy equipment, such as solar panels or energy-efficient vehicles, can qualify for these credits. These investments reduce environmental impact while providing significant savings.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) encourages enterprises to hire from targeted groups, such as veterans, the long-term unemployed, disabled individuals, or those receiving government assistance. While it’s a win-win for companies and employees, the WOTC requires specific qualifications and meeting filing deadlines, making it essential to stay organized and proactive. In addition to these classic credits, recent legislation has introduced exciting new opportunities for small business owners.
Tax credits directly reduce the tax owed, making them extremely valuable for cash-strapped enterprises.
New Tax Breaks Under the Inflation Reduction Act
The Inflation Reduction Act (IRA) of 2022 introduced several tax credits to promote energy efficiency and economic growth for small businesses.
Enhanced Energy Efficiency Tax Credits and Deductions
Building on previous energy-saving incentives, the IRA expands opportunities for small businesses to receive tax breaks for installing energy-efficient systems or investing in renewable energy technologies. These credits can lead to substantial savings, depending on the scope of your investment and the technology used. The Inflation Reduction Act also expanded the Energy Efficient Commercial Buildings Deduction, which may be available to building owners who expand energy efficiency in certain building systems.
Clean Vehicle Credits
The IRA offers credits for purchasing electric vehicles (EVs) or plug-in hybrid cars for entrepreneurs looking to upgrade their fleets. These credits help cut costs while contributing to reducing your business’s carbon footprint.
Small Business Health Insurance Tax Credit
Under certain conditions, companies that provide health insurance to their employees can claim a credit for up to 50% of their premiums. This particularly benefits entrepreneurs who want to offer competitive benefits while managing operating costs. The IRA and other recent legislation are designed to stimulate both economic and environmental progress. Savvy entrepreneurs who leverage these provisions can save significantly on their taxes while aligning with sustainability goals.
How to Qualify and Apply for Tax Credits
Knowing which credits are available is only half the battle. Understanding how to qualify and apply for them is critical. Below are some steps you can take to be sure you don’t miss out.
Step 1. Identify the Relevant Credits
The first step is determining which credits apply to your business. For example, if your company has invested in new technologies or processes, the R&D credit might be relevant. On the other hand, if you’ve hired employees from specific groups, the WOTC could apply.
Step 2. Document Your Expenses and Activities
Proper documentation is crucial when claiming tax credits. For the R&D credit, keep records of your research activities, development costs, and personnel involved. Ensure you have receipts, certifications, or energy audits to support your claims for energy efficiency credits.
Step 3. Work with a Tax Professional
Tax law and credits can be complicated and confusing. A certified tax professional, particularly one experienced with small businesses, can help identify opportunities and avoid costly mistakes. They can also ensure you comply with IRS requirements.
Step 4. Submit the Necessary Forms
Each credit will require specific IRS forms. For instance, the WOTC requires submitting Form 5884. Make sure to file these forms with your tax return and keep copies for your records. Following the above steps can significantly improve your chances of successfully claiming these valuable benefits.
Avoiding Common Pitfalls When Claiming Tax Credits
While tax credits offer tremendous value, some common mistakes can cause enterprises to miss out or face penalties. To maximize the benefits and avoid headaches, keep these points in mind.
Overlooking Eligible Credits
Many small businesses overlook certain credits, like the R&D credit, because they assume their activities don’t qualify or because they’re unaware of them. Always take the time to explore which credits are applicable.
Overstating Expenses
Claiming excessive or uncommon expenses may trigger penalties. You need to take care to claim the costs directly related to your qualifying activities.
Lack of Documentation
The IRS requires extensive documentation to support claims for most tax credits. Failing to keep thorough records could result in denied credits or audits. Be sure to keep organized records of all relevant activities and expenses.
Missing Deadlines
Many tax credits have strict deadlines for application or filing, and missing these can result in losing out entirely. Be sure to mark important tax dates on your calendar and consult with your tax professional well before the filing period.
Relying on Outdated Information
Tax laws constantly evolve, and credits or deductions available last year might no longer be applicable. Stay updated on current tax codes and collaborate with a tax professional to capitalize on the most recent opportunities.
Stay Proactive and Maximize Your Tax Savings
Entrepreneurs can access various tax credits and deductions, but it’s up to you to take the steps required to capitalize on these opportunities. By staying informed about recent changes to tax law and consulting with tax professionals, you can maximize your savings and continue growing your business. Whether investing in new technology, hiring new employees, or going green, a tax credit or deduction will likely help you along the way.
Disclaimer: Bizee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
