How to Make the Most Out of Small Business Tax Credits
How to Make the Most Out of Small Business Tax Credits

How to Make the Most Out of Small Business Tax Credits

Paying taxes is a necessary evil of running a small business

Just the mere thought of year-end can really stress some folks out. Paying federal, state and sometimes local small business taxes can take a big bite out of a company’s bottom line. And sometimes it can feel like all of that hard-earned income is going straight into Uncle Sam’s coffers.

Fortunately, if you take advantage of a handful of small business tax credits they can help reduce the sting.

Note that these are just a few tax credits available to qualified small businesses. Always consult your accountant to make sure you’re taking advantage of the maximum available.

Tax Credits vs. Tax Deductions

First things first. It’s important to keep in mind that there’s a definite distinction between tax credits and tax deductions. Small business tax deductions lower total taxable income. Small business tax credits lower the total tax bill.

So, what’s the big difference?

Imagine that you made $200,000 in taxable income. A tax deduction of $4,000 would reduce that taxable income to $196,000. A tax credit, on the other hand, would reduce your actual overall tax bill. Because tax credits reduce your tax bill and not taxable income, a tax credit provides more of a savings than a deduction you could get in the same amount.

The 3 tax credits available to small business owners

  1. Disabled Access Credit (Form 8826)
    If your company incurs expenses for modifying your business to provide better access for disabled employees or customers, you might be eligible to take this tax credit. The max credit you can receive is 50% of $10,000 worth of expenditures.

  2. Employer-Provided Child Care Facilities and Services Credit (Form 8882)
    A business can qualify for this federal tax credit if you pay daycare expenses for your employees. The credit equals 25% of the daycare or baby-sitting expenses you pay up to $150,000 each year.

    An employee can actually benefit more from this credit than they would from the standard Child and Dependent Care Tax Credit they can take on their personal tax returns. For example, if the employee pays $5000 for child care, the max credit they are allowed is $1750 ($5000 x 35%). So, the employee pays $3250 out-of-pocket for their child care services ($5000 – $1750 = $3250). If you, as the employer, directly pay $5000 to a daycare facility for that employee’s child, they aren’t out that $3250. It’s important for the employees to understand that the child care payments you make that are more than $5,000 will be added to their gross wages. Also, bear in mind that, as the business owner, you can not only take advantage of the tax credit, but also the benefit. If your business is incorporated and you’re an employee of that corporation you, too, can reap the benefits.

  3. Work Opportunity Tax Credit and Welfare-to-Work Credit (Form 5884)
    The Work Opportunity Tax Credit (WOTC) is another tax credit given to companies that hire employees from certain groups that experience considerable barriers to employment, such as veterans, ex-felons, etc. Other job seekers who are on public assistance can also experience barriers to employment such as lack of transportation, education or child care. These tax credits are calculated based on time worked and wages paid to the employees, and the amount of credit varies depending on the target group. The tax credit for veterans, ex-felons, etc. is 40% of their first-year wages up to $6000 if the employee works at least 400 hours that year. If the employee works less than 400 hours but at least 120 hours you can get a 25% tax credit. The tax credit for an employee who is a long-term family assistance recipient is 40% of their first-year wages up to $10,000 and 50% of their second-year wages up to $10,000. The employee must work at least 180 days or 400 hours.

There is no limit to how many people a company can employ to receive these tax credits.

How to Claim Tax Credits

When filing your year-end taxes, you have to file the related forms like the examples we linked above. If you plan to take advantage of multiple tax credits, you also have to file Form 3880 for General Business Credits. Carefully review this form as it covers many more credits that your company might be eligible to receive.

Paycor Can Help

Making sure you’re taking all possible deductions and using the credits available to your business can be stressful and overwhelming, especially if you’re going it alone. Our experts can help you with complex topics such as payroll tax compliance so you can focus on running your business and paying your employees. Our tax team assisted companies with more than 450,000 tax notices in just the past year. Talk to a consultant to learn more.


hcm-software

More to Discover

2020 Small Business Health Insurance Requirements

2020 Small Business Health Insurance Requirements

Small business owners aren’t insurance experts and they shouldn’t have to be. Many businesses are so small that the folks in charge of evaluating benefits packages are sometimes in the dark about the myriad compliance requirements surrounding health insurance coverage. Even though small businesses that employ fewer than 50 full time employees aren’t legally bound to offer health insurance, many of them offer coverage to improve employee engagement and morale and also to attract the best talent. So, if your company plans to provide health insurance for your employees, it’s important that you understand your choices and the laws around them.If you’re looking to offer health insurance in 2020 you should consider adding these five popular...

SMB

3 Restaurant Problems That Human Resources Can Help Solve

3 Restaurant Problems That Human Resources Can Help Solve

People get into the restaurant business for a lot of reasons but managing complex HR challenges is usually not one of them. As a restaurant owner or operator, you’ve got a lot on your mind - menus, vendors, pricing, and of course keeping your customers well-fed and happy. The problem is, those complex HR challenges - the ones you don’t want to think about it - can become serious problems if you don’t get a handle on them. The good news is, with the right strategy and the right technology, you can dramatically simplify complex HR challenges before they become problems, protect your business, and get back to doing what you love to do. Restaurant PROBLEM #1: SCHEDULING THE WORKFORCE You don’t need us to remind you that restaurant profit...

CFO

The Importance of Non-Financial Incentives

The Importance of Non-Financial Incentives

Employees are motivated by more than money. Finding, recruiting and hiring talented people is just the beginning. Keeping them motivated throughout their careers is another challenge entirely. Ideally, talented people will have such a great work ethic that they’ll stay engaged no matter how they feel. But let’s face it, how we feel influences how we approach our work.Great managers need to become experts at keeping employees engaged—companies with highly engaged employees are more productive, have 21% higher productivity, and staff are more likely to stick around (Gallup). The problem is, though employee engagement is on the rise, it’s still only a minority of the US workforce who are engaged at work. Employee engagement is way more...

Webinar: March 2020 Web Summit - Keynote Session: 5 Ways HR Pros Can Engage the C-Suite Today - 3/4/20 @10:30am ET

Webinar: March 2020 Web Summit - Keynote Session: 5 Ways HR Pros Can Engage the C-Suite Today - 3/4/20 @10:30am ET

How can you balance people strategy with business strategy? Register for this session to learn our 5 step process to building bridges and the tools you need to help align with business leaders, impact the bottom line and get noticed.Speaker: Lori KleimanLori Kleiman is a business expert with more than 25 years of experience advising companies on HR issues. Her background as a human resources professional and consultant gives her unique insight on how HR professionals and executives can work together effectively to achieve business goals. Her programs are designed to provide critical HR updates and best practices to small businesses. In addition, she is has served as adjunct faculty member at a number of Universities.Wednesday, March 4,...