A tax credit is a write-off that’s more valuable than a deduction. Each dollar of tax credit saves you one dollar of taxes, while deductions are worth only as much in tax savings as the tax bracket you’re in. For example, a $1,000 credit saves you $1,000 in taxes, while a $1,000 deduction only saves you $250 if you’re in the 25 percent tax bracket. Despite the importance of tax credits to reducing tax liability, many small-business owners fail to take advantage of them. Don’t be one of these people. Small adjustments in your business activities can result in eligibility for these tax credits.
1. Small Employer Health Insurance Credit
The Government Accountability Office (GAO) found that while as many as 4 million small businesses may have been eligible for the small employer health insurance credit, only about 170,000 businesses actually claimed it. Why? To be eligible, you must pay at least half the cost of your employees’ health coverage. Some businesses simply can’t afford this. Others, however, that are paying toward coverage may be missing the mark by not knowing the rules.
The credit in 2013 is up to 35 percent of the premiums you pay for your staff’s coverage, including coverage for spouses, dependents and employees’ children up to age 26. If you’re paying less than half of the premiums, determine whether additional payments on your part will secure the credit for you and what the after-tax cost will be.
Another reason that fewer than expected small businesses have claimed the credit is because of its complexity. You must be a “small business” (fewer than 25 full-time equivalent employees) and have average payroll below set limits. (The IRS explains these rules.)
2. Credit for Starting a Retirement Plan
Small businesses can help their employees save for retirement by setting up a qualified retirement plan. There are several plan options for small businesses, but whichever one you choose, there are two tax breaks for you. Contributions to the plan that you make on behalf of employees are deductible. And the administrative costs you incur in setting up the plan and educating your staff about it can generate a tax credit.
The credit is 50 percent of plan startup costs, for a credit of up to $500 per year for the first three years of the plan. However, to be eligible for this credit, the plan must cover at least one employee who is not the owner or the owner’s spouse. (Find more about this tax credit in the instructions to Form 8881.)
3. Disabled Access Credit
If you remove barriers that prevent your business from being accessible or usable by people with disabilities, you’re not only engaging in a smart business practice but may claim a tax credit for your expenditures. The credit is limited to 50 percent of costs over $250 but not over $10,250 (a maximum credit of $5,000).
Expenditures eligible for the credit are not limited to physical alterations to your premises (e.g., widening doorways for wheelchair access). They can also include the cost of providing aids to the hearing- or visually-impaired or modifying equipment for the disabled. (Find more in the IRS instructions to Form 8826.)
4. Work Opportunity Credit
If you need to hire more workers, consider looking at those who can give you a tax credit in addition to their service. There are a number of “targeted groups” of workers, including ex-felons, certain veterans and certain summer youth, who entitle an employer to take a tax credit based on their wages.
One of the key reasons why this credit fails to be claimed is that an employer must, in effect, apply for it. The employer must have a new worker sign Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit; the form must be submitted to the state workforce agency within 28 days of starting employment. Even if a worker is in a targeted group, failing to submit the form on time makes an employer ineligible for the credit. (For more information, see the instructions to Form 8854.)
5. Research Credit
If your company is engaged in any type of research, you may be eligible for a tax credit of up to 20 percent of your costs as compared with certain previous amounts. The credit is often overlooked by businesses that aren’t focused on research but may be eligible nonetheless.
The credit applies not only to research aimed at developing products intended for sale, such as medications, new electronic items and scientific breakthroughs. The credit can also be claimed for research you do to improve your internal processes—which activities qualify for the credit is highly technical. (Find more in the instructions to Form 6765.)
Looking for more small-business financial tips and advice? Check out these finance articles.
Barbara Weltman is an attorney, author of J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com.