When your small business is in the startup phase, it’s critical to take advantage of all the US tax incentives that apply to your business. Qualifying for government tax incentives can reduce your tax liability up to 30%. We’ll cover the different tax incentives available and why your business should leverage as many as possible.
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Table of Contents
What Are Tax Incentives?
Tax incentives are qualifying deductions, exemptions, and exclusions from tax liabilities to the government. The government provides these tax incentives to enable businesses to invest those tax savings back into their business as a reward for:
- Investing in environmentally-friendly choices
- Innovating in sciences and technology
- Providing specific benefits to employees
- Supporting disadvantaged groups of people
The tax incentive may provide tax relief by offering:
- Tax exemptions are where the business doesn’t have to pay a specified amount of tax.
- Tax refunds are where the business receives funds after they’ve paid taxes.
- Tax reductions reduce the business’s tax liabilities.
- Tax credits may be applied to future tax liabilities.
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Related Link: IRC Section 174: Get Lower Tax Bill for Inventors
How Tax Incentives Help Businesses
Federal, state, and local governments create tax incentives for businesses to help the government meet strategic goals, like employing disadvantaged groups of people, implementing environmental technologies, or innovating new technologies. In turn, the company can get grants or tax savings that they can:
- Reinvest in their business.
- Create more jobs.
- Stimulate the economy.
- Develop new technologies that better the community.
Common Tax Incentives for Small to Medium Businesses (SMEs)
Small and self-employed businesses can take advantage of the following tax incentives to reduce their tax liabilities.
The General Business Credit
The General Business Credit (Form 3800) is the main tax incentive form your business will submit. You can attach additional tax credit applications with your Form 3800 when applying for the following tax incentives:
Environmental Tax Incentives for Businesses
The government offers significant tax incentives for innovating and incorporating many environmental technologies:
- Investment Credit
- Alcohol and Cellulosic Biofuel Fuels Credit
- Qualified Plug-in Electric and Electric Vehicle Credit
- Renewable Electricity, Refined Coal, and Indian Coal Production Credit
- Biodiesel and Renewable Diesel Fuels Credit
- Low Sulfur Diesel Fuel Production Credit
- Energy Efficient Home Credit
- Alternative Motor Vehicle Credit
- Alternative Fuel Vehicle Refueling Property Credit
- Carbon Dioxide Sequestration Credit
- Qualified Plug-In Electric Driver Motor Vehicle Credit
Research and Development Tax Incentives:
SMEs account for 74% of R&D tax relief that take advantage of the following R&D tax incentives:
- Research and Experimentation (R&E) Credit
- Credit for Increasing Research Activities
- New Markets Credit
Employer-Provided Benefits Tax Incentives
The government offers these tax incentives to encourage businesses to provide these benefits for their employees:
- Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips
- Credit for Employer Differential Wage Payments
- Credit for Employer-Provided Childcare Facilities and Services
- Credit for Small Employer Health Insurance Premiums
- Employer Credit for Paid Family and Medical Leave
- Credit for Small Employer Pension Plan Startup Costs
Miscellaneous Business Tax Incentives
These are a few miscellaneous business tax incentives that may also apply to your business:
Special Tax Incentives For Accommodating Specific Groups
Businesses that make accommodations for employees or customers with disabilities or other target groups may qualify for these tax incentives:
- Work Opportunity Tax Credit (WOTC): The WOTC tax incentive is available to private sector businesses that employ people from specific groups that face challenging barriers to employment. To apply for this credit, employers must file Form 8850 with the state workforce agency.
- Disabled Access Credit: This tax incentive offers a nonrefundable credit of up to $5,000 for small private sector businesses that have expenses for creating access to their business for disabled individuals. To qualify for this credit, your business needs to earn less than $1 million and have less than thirty full-time employees. To claim the Disabled Access credit, you must file Form 8826.
- Indian Employment Credit: Businesses that employ American Indians can file Form 8845.
- American Samoa Economic Development Credit: Form 5735 can be used by domestic businesses that contribute to American Samoa’s economic development.
Want help identifying all the tax incentives your business could qualify for? Contact us for help.
Related Link: How R&D Credits Help with Payroll Taxes [2024]
How to Claim Tax Incentives for Your Business
The IRS provides detailed instructions on how to submit your General Business Credit Form. Businesses will attach a statement for each credit to their General Business Credit to apply for the different tax incentives. The attached statements must show several things to qualify for the credits:
- The tax year the credit originates.
- Amount of the credit reported on the original return
- Amount of the credit allowed for that year
It is way more convenient to utilize tax experts that specialize in small business accounting that have expertise in ensuring your business qualifies for all potential tax incentives. TaxRobot’s AI-powered R&D tax software proactively monitors and manages your expenses to secure the biggest refund.
Tax experts can also advise you during the year to ensure you make the necessary documentation and actions needed to qualify for specific tax incentives. This is especially helpful when some credits require detailed documentation to verify expenses or particular actions to qualify.
SMEs Should Maximize Their Tax Incentives
Small and medium enterprises should maximize their tax incentives by learning the available credits and taking the necessary actions to qualify for them. Consulting with tax experts can ensure you’re doing everything you can to take advantage of the various tax incentives.
TaxRobot has a powerful AI-powered tax tool that enables startup businesses to qualify for the R&E Credit. Our intuitive software automates and assesses areas where you can improve your business’s efficiency and productivity.