If you have ever considered looking into tax credits for your business, now is the time. You have probably seen news articles, blog posts or clickbait social media posts with headlines like “How Large Corporations Get Huge Tax Breaks.” Well, these tax breaks are real and usually come in the form of tax credits.
While I’m not an accounting professional, spending the better part of two decades on Wall Street working with large corporations, I saw how they utilized tax credits to their advantage to invest back into their company and scale their operations.
The thing is, though, tax credits are not just for large corporations. Small and medium-sized businesses can qualify for them, as well. Most business owners I speak with have never heard of these kinds of incentives or thought they were only for bigger companies. A big reason business owners are not aware of tax credit programs is they lack the infrastructure of larger corporations and are busy running their business day to day.
Entrepreneurs and small-business owners who are feeling the pressure of inflation, higher minimum wage requirements and a tight labor market should take a page out of corporate America’s playbook to see which tax credit programs they can qualify for.
Here are highlights of three tax credit programs I believe can be beneficial:
The Employee Retention Tax Credit (ERTC)
The ERTC was signed into law in March 2020 as part of the CARES Act. The program was created to encourage businesses to keep workers on payroll and was extended with the American Rescue Plan Act through 2021. This credit is available to businesses that suffered full or partial shutdowns of operations or suffered a dip in gross receipts of at least 20% in one quarter (for 2021) due to the pandemic. (This threshold was originally a decline of at least 50% for 2020.)
For 2020, eligible employers can receive 50% of the first $10,000 of qualified wages paid for each employee. For 2021, for each qualifying quarter, employers can get 70% of the first $10,000 per employee, up to a maximum $28,000 per employee.
The Work Opportunity Tax Credit (WOTC)
The WOTC is beneficial for businesses that are looking to hire new employees. This tax credit was designed to encourage the hiring of people from certain groups that have historically faced employment obstacles.
The WOTC program was initially created in the Small Business Job Protection Act of 1996 and has since been extended. The Consolidated Appropriations Act, 2021 extended the WOTC through 2025.
For employers that hire employees from target groups, the credit can provide up to $9,600 per employee, depending on the group. Targeted groups include qualified veterans, former felons, designated community residents, summer youth employees and Supplemental Nutrition Assistance Program recipients, among others.
The Research And Development (R&D) Tax Credit
This is for businesses that are improving existing products, developing new software or creating innovative products and processes. The R&D tax credit was created in 1981 and was made permanent in the Protecting Americans from Tax Hikes Act of 2015. It was designed to help facilitate research and development.
The R&D tax credit is a federal program; however, the majority of states provide a comparable credit. The potential credit varies depending upon qualified spending and can be used by eligible companies to offset up to $250,000 per year in payroll taxes, income taxes or alternative minimum tax (AMT).
These are just a few of the tax credits available to business owners. Remember that all tax credit programs come with certain restrictions and measures for qualification. While you can start researching the programs on your own, reaching out to a qualified tax professional can help you determine your eligibility.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.