Tax credits are one of the most valuable tax savings benefits available to businesses, but many employers don’t take full advantage of them. Understanding tax credits and the opportunities they provide can make a huge difference in reducing your overall tax liability. In this blog, we’ll explore some of the most common federal and state business tax credits available and tips to help you maximize your potential.
How many times as a business have you found yourself wondering, is there any way to reduce the amount of money I owe in taxes? And it’s a valid question. After all, taxes are a major expense for any business and can significantly dent your bottom line. The good news is that tax credits may be available to help reduce your tax liability and save you money.
Tax credits are one of the most valuable tax savings benefits available to businesses, and they’re different from deductions in that they can reduce your overall tax bill dollar-for-dollar instead of reducing taxable income. So what exactly are tax credits? And how can I qualify and claim them? This detailed guide will cover the basics of tax credits, the different types available for businesses, and how to use them to minimize your taxes.
What Are Tax Credits? Understanding The Basics
Tax credits are a form of tax relief that reduces the total amount of taxes you owe. For example, if you have a taxable income of $50,000 and you’re eligible for a tax credit of $5,000, then your total taxes owed drop to $45,000. Tax credits are often available from state and federal governments to encourage businesses to invest in certain activities or pursue specific goals.
Tax credits are usually available for specific activities such as childcare costs, home energy efficiency improvements, or education expenses. However, tax credits decrease your total tax liability and provide a more immediate benefit by reducing your taxable income. The amount of the tax credit is subtracted from your gross income before taxes are calculated, which can result in a lower taxable income and lower taxes overall.
What Are The Difference Between Tax Credit And Tax Deduction Or Tax Exemption
Tax credits are different from tax deductions and tax exemptions. A deduction reduces the amount of income subject to taxation, while a tax credit directly reduces the amount of taxes you owe. Tax exemptions also reduce your taxable income, but they provide an exemption from certain types of taxes, such as property or sales taxes, rather than a reduction in income-based taxes like those imposed by the Internal Revenue Service (IRS).
Additionally, tax credits are often refundable. This means that if you have no taxes due because your income doesn’t meet the minimum taxable threshold or because other deductions have already reduced your tax liability to zero, you may still be eligible for a full or partial refund of any residual credit after filing your return.
Different Types Of Tax Credits For Businesses
There are many different types of tax credits available to businesses, including the following:
- Earned Income Tax Credit (EITC)The EITC is a refundable federal tax credit available to low-income taxpayers and others who meet the eligibility criteria. It is designed to provide economic relief for working families and increase their disposable income. The amount of the credit varies based on your income and filing status.
Worth Of EITC: The maximum credit is up to $6,660 for taxpayers filing jointly with three or more qualifying children; for those without children, the maximum credit is up to $500.
- Child and Dependent Care Credit (CDCC)
The CDCC is a non-refundable tax credit available to taxpayers who pay for the care of a qualifying individual while they work or look for work. The amount of the credit is based on your income and the cost of the care. This credit’s main purpose is to reduce the childcare expenses burden on working families.
Worth Of CDCC: The maximum credit is 25-30% of the lesser of your total costs, or $3,000 for one qualifying individual and $6,000 for two or more.
- Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who hire individuals from certain target groups who have consistently faced significant barriers to employment. It gives employers an incentive to hire people from these target groups and gives them a tax break.
Worth Of WOTC: It depends on the salary, hours worked, and size of your company. The maximum value of the credit is $2,400 per eligible employee for businesses that employ fewer than 25 full-time employees. For larger businesses, the maximum credit ranges from $1,200 to $9,600 per eligible employee.
- Credit for Employer-Provided Childcare Facilities and Services
This credit rewards employers who provide childcare facilities and services for their employees on or off-site. It’s available to any business that incurs expenses related to building and maintaining a qualified childcare facility or providing services like referral, counseling, parental training, and more.
Worth Of CEPCFS: The amount of the credit is 25% of the amount paid for childcare expenditure and 10% of wages paid to employees providing care. The maximum credit is up to $150,000 annually for each qualifying employer.
- Credit for Small Employer Health Insurance Premiums
Suppose the business has less than 25 full-time employees and an average wage of less than $51,600 per year. Then they may be eligible for the Credit For Small Employer Health Insurance Premiums. This credit is designed to help relieve some of the financial burden small businesses face when providing health insurance coverage to their employees.
Worth Of CSEHIP: The credit is worth up to 50% of the amount paid for health insurance premiums (only 35% if your business is tax-exempt) and can be claimed for two consecutive tax years.
- Retirement Plans Startup Costs Tax Credit
Small businesses setting up retirement plans for their employees may also be eligible for a Retirement Plan Startup Costs Tax Credit. If the business has less than 100 employees, it may be able to qualify for this credit.
Worth Of RPSCTC: The credit is worth 50% of your startup cost up to $500 per year for three consecutive tax years.
- The Premium Tax Credit (PTC)
If you purchased your health insurance through the marketplace, you might be eligible for the Premium Tax Credit (PTC). The PTC can help to lower your monthly premiums and out-of-pocket costs.
Worth Of PTC: The cost varies depending on your income and family size, but the PTC can cover up to a certain percentage of your monthly premiums.
- Research and Development Tax Credit (R&DTC)
The Research and Development Tax Credit (R&DTC) is a great credit for companies researching, developing, or creating new products or processes. This tax break supports innovative businesses by providing a dollar-for-dollar reduction in their taxes.
Worth Of R&DTC: The amount of the credit depends on the amount of research and development expenses you have incurred during the year.
- Plug-In Electric Drive Vehicle Credit (PIEDVC)
If your business purchases or leases a new plug-in electric drive vehicle, you may be eligible for the Plug-In Electric Drive Vehicle Credit (PIEDVC). This credit is designed to promote the use of alternative fuel vehicles.
Worth Of PIEDVC: Your credit depends on the type of vehicle purchased and its battery capacity. It can range between $2,500 and $7,500.
By taking advantage of these business tax credits, you can save money and receive direct benefits from the government. With careful planning and sound advice from a professional, you can maximize your savings and reduce your tax burden significantly. Make sure to research all available credits and apply for those that apply to your business. It is essential to stay up-to-date on the latest changes, so you don’t miss out on any opportunities.