How Does the Federal Government Define a Minority Business?

minority-owned businesses may be able to take a few tax credits

According to the current tax code, minority-owned businesses have no specific incentives, but entrepreneurs can take advantage of certain tax breaks and credits. There are several recognized minority groups; they include:

  • Black/African Americans
  • Hispanic/Latino Americans
  • Asian Americans
  • Arab Americans/ Middle Eastern Americans
  • Native Americans/Alaska Natives
  • Native Hawaiians/Pacific Islanders

Are you searching for additional resources to help you navigate taxes? At TaxRobot, we have plenty of helpful tools and resources to help determine your tax credits and incentives.

Many federal agencies and corporations will set aside some of their budgets to help work with entrepreneurs and businesses to encourage growth and development in these communities. Companies that work with a certified Minority Business Enterprise (MBEs) could be eligible to receive certain tax benefits and incentives. 

For a business to qualify as MBE, it must meet a few criteria, such as:

  • The company must have a 51% ownership share by one or more minority U.S. citizen
  • The minority ownership member must carry out the daily operations and management
  • The business needs to be deemed as “for-profit,” and it must be located in the United States or trust territory. 
tax incentives help minority-owned businesses grow

While most tax incentives are based on racial groups or ethnicities, working with women-owned businesses can also lead to tax breaks. There are national certifications for Women-Owned Small Businesses (WOSB) in the United States. For a business to qualify, the company needs to be at least 51% woman-owned and operated. Women who have a personal net worth of less than $750,000 are considered Economically DisadFind Tax Incentives for Minority-Owned Businesses

Minority-owned businesses can take advantage of the numerous tax credits and receive incentives from the government. Over the past decade, minority-owned companies have accounted for 50% of new businesses in the United States, bringing over 4.7 million jobs. As you can imagine, these businesses are a vital part of the American economy and are continuing to grow. Tax credits are available exclusively for those minority-business owners to help encourage development. Here are a few things to know about these tax credits and incentives. 

vantaged Women-Owned Small Businesses by the U.S Small Business Association. 

Related: R&D Tax Credit Guide

According to the Federal Reserve, minority households have a lower median and mean net worth, meaning that many minority female entrepreneurs will meet the requirements for these certifications. Businesses working with a certified Minority Business Enterprise can take advantage of specific tax incentives and benefits. Many programs sponsored by the U.S. Small Business Administration and the Department of Transportation offer tax benefits to businesses that use minority contractors. However, the type of tax credits and incentives vary depending on the specific languages used for each program. 

But where does that leave the minority entrepreneurs and their businesses? Take a look at certain tax breaks for these business owners. 

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Tax Breaks Offered for Minority-Owned Businesses

As you may have known, there are no federal tax breaks for certified minority-owned businesses; there are tax incentives for those businesses operating in low-income areas. With these indirect tax benefits, minority-owned businesses can support fellow entrepreneurs while helping to benefit themselves financially. Depending on the business’s location and nature of their business, there are two specific tax breaks. 

New Markets Tax Credit (NMTC)

The United States government established the New Markets Tax Credit in 2000, and this program supports minority-owned businesses located in low-income areas. This program allows taxpayers to receive federal income credit for investing in designated community development entities (CDEs). An investor can claim up to 39% of these tax credits over seven years, which breaks down to 5% investment in the first three years, and then 6% for the remaining four years. If a minority enterprise falls into the CDE category, minority businesses can be their own investors. However, in most cases, these businesses seek funding from outside investors, such as regulated financial institutions. Any person or entity can be eligible to claim these tax credits. Some of these credits could expire, but typically Congress continues to approve funding for the NMTC program. 

Related: How to Calculate ERC Tax Credit [Guide & Calculator]

Tax Breaks for Businesses in Distressed Areas

If the minority-owned business operates in an economically distressed area, it may be able to qualify for tax breaks. However, these tax incentives are not limited to minority companies. These tax breaks are open to any qualifying organization. Keep in mind that if a minority owner lives in these designated areas, these owners will have a competitive advantage in finding credits and qualifying for them. 

Businesses in Empowerment Zones

One of the most common tax breaks involves those businesses working in empowerment zones. These zones have been designated by the Department of Housing and Urban Development and the Department of Agriculture. Businesses in these locations could qualify for several tax credits, including special capital gain exclusion, empowerment employment credits, and first-year expense write-offs. 

there are many tax incentives for women-owned businesses as well

State Tax Incentives

Along with federal tax incentives, many states also offer their own incentives for minority-owned businesses. Some states provide special training and networking for registered minority owners in their states. California and Georgia encourage minority business owners to participate in municipal purchasing programs. For example, the Official Code of Georgia actually does encourage female- and minority-owned businesses to operate in the state by providing state income tax credits. For the most part, states will mirror those federal certification programs. A few states, like Oklahoma, will also have their own independent state certification for minority business owners to help them get an edge in state contract funding. 

Related: Research and Experimentation Tax Credit Guide 

Tax Breaks Help Minority-Owned Business

Working with minority-owned businesses or being a minority owner can lead to significant tax breaks and incentives. The United States government encourages internship and business growth in minority communities. At one time, minority-owned businesses were rare, but these owners are making a significant impact on their communities and helping build the economy as a whole. These tax breaks and incentives allow businesses in countries to grow and flourish. 

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