Businesses and business owners may be eligible for some valuable credits that can lower their tax bills. Here are seven credits for small business owners to consider this tax year and beyond.
1. Research credit
Even if you do not think of your company as being on the cutting edge of technology, it may qualify for federal and Virginia tax credits for research and development expenses. Typically, these expenses are related to a new or improved function, performance, reliability or quality of a product.
The Work Opportunity Tax Credit (WOTC) is available for hiring a worker from one of nine “target” groups. It is generally equal to the worker’s first-year wages up to $6,000 if he or she works at least 400 hours during the year, for a maximum credit of $2,400 per worker. For disabled veterans, the credit may be claimed for the first $24,000 of wages, for a maximum credit of $9,600 per worker. To qualify for the WOTC, a summer youth employee must be 16 or 17 and reside in an empowerment zone or enterprise community. This credit is equal to 40 percent of the first-year wages of $3,000 earned from May 1 through September 15, up to a maximum of $1,200 for someone working at least 400 hours.
To claim the WOTC, you must be able to show proof from your state’s employment commission that the employee is a member of a targeted group. To do this, you must either: 1) receive the certification from the state agency by the day the individual begins work, or 2) complete IRS Form 8850 on or before the day you offer the individual a job and receive the certification before you claim the credit. Form 8850 includes a list of “target” groups.
3. Disabled access credit
A qualified small business can claim a federal tax credit for making its business premises more accessible to disabled people. For this purpose, in the preceding tax year, qualified small businesses must have gross receipts of $1 million or less, or 30 or fewer full-time employees.
This credit equals 50 percent of the first $10,000 of qualified expenses. (Technically, the first $250 of expenses is excluded, but the credit applies to the first $10,250 of expenses.) Therefore, the maximum credit is $5,000.
4. Family and medical leave credit
The family and medical leave credit is based on wages paid to an employee who is on a family or medical leave. To qualify, the business must provide a leave of at least two weeks (pro-rated for part-time employees) at a rate of at least 50 percent of regular earnings.
The credit percentage ranges from 12.5 percent of wages to 25 percent, depending on the wages paid. If the business chooses to pay the full amount, for example, it can claim the maximum 25 percent credit.
5. Retirement plan start-up credit
Under current tax law, a federal tax credit is allowed for qualified start-up costs incurred by eligible small employers who adopt a new qualified retirement plan like a 401(k), SIMPLE-IRA plan or Simplified Employee Pension (SEP) plan.
For tax years beginning after 2019, the credit equals the greater of $500, or the lesser of 1) $5,000, or 2) $250 times the number of non-highly compensated employees who are eligible to participate in the plan. To qualify, the plan must cover at least one non-highly compensated employee. The credit is available for up to three years, beginning with either: 1) the year the plan is first effective, or 2) the year preceding the first plan year if the employer so elects.
6. Retirement plan automatic enrollment credit
Employers may encourage employees to participate in 401(k) plans and other qualified retirement plans by providing an “automatic enrollment” feature. These plans automatically enroll eligible employees in a plan at a prescribed contribution rate unless the employee affirmatively elects to opt out or make contributions at a different rate.
The SECURE Act establishes a new credit of up to $500 per year to employers who start 401(k) plans or SIMPLE-IRA plans that include an automatic-enrollment feature. The credit can also be claimed by a business converting an existing plan to an automatic-enrollment design. It is available for three years, beginning in 2020.
7. Energy credits
The tax law contains various tax credits relating to renewable energy and alternative fuels and makes certain other changes to energy tax-related provisions. Major eco-friendly provisions of the law are 1) a one-year extension of the production tax credit (PTC) for wind facilities if construction begins in 2020 at a 40 percent reduction of the full PTC, 2) a three-year extension for certain PTC-eligible facilities; and 3) extensions of the biodiesel and alternative fuel tax credits.
Consult with a professional
Your small business may qualify for valuable credits — and many other tax breaks — but numerous rules and restrictions apply. Meet with your tax advisor to discuss these credits and any additional tax-saving opportunities.