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Do you know about these 3 tax credits for small businesses?

Posted by Shivali Anand

September 20, 2021    |     4-minute read (777 words)

Businesses may be able to reduce their tax bill by using certain business tax credits, which are often introduced by the government in support of a specific type of activity. The money you save is capital you can put back into your business.

Unfortunately, many entrepreneurs and business owners fail to take advantage of these credit, usually owing to the tax system's complexity or a lack of awareness and no access to an accountant or tax specialist.

Are you positive you're not leaving money on the table? Learn about three key small-business tax incentives that may benefit you.

  1. The Employee Retention Tax Credit 

The ERC's goal is to keep employees on American companies’ payrolls. The ERC was first established in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It was then extended through 2021 as part of the American Rescue Plan Act.

Here’s how the ERC works: 

In 2020, qualifying firms could claim a refundable tax credit of up to $10,000 in salaries, including some health insurance expenses paid to employees after March 12, 2020, but before January 1, 2021. As a result, qualified companies may get a $5,000 tax credit for each person they hired last year. Those who qualify for the credit might obtain it right now by decreasing the amount of employment tax payments they have to make. Employers who have low employment tax deposits to meet the credit might request an advance payment from the IRS.

The ERC was expanded under the American Rescue Plan Act. In 2021, qualifying firms can get up to 70% of up to $10,000 in quarterly salaries paid each employee, up to a total of $28,000 per employee.

Eligibility for the ERC is as follows: 

This credit is only given to firms that have been harmed financially by COVID-19. Only employers who experienced complete or partial shutdowns of operations or observed a 50% quarterly decrease in gross receipts owing to the COVID-19 epidemic are eligible for the 2020 credit.

The program's requirements were modified to encompass a broader range of pandemic-affected companies for the 2021 credit. Every quarter, the qualifying criterion was decreased to a 20% drop in gross receipts.

Claiming the ERC:

 Employers who qualify can utilize IRS Form 941.

  1. The Research and Development (R&D) Tax Credit

The R&D Tax Credit encourages companies to invest in innovation. The Protecting Americans from Tax Hikes Act of 2015 made it permanent after it was introduced in 1981.

How does the R&D tax credit work? 

The R&D tax credit's potential worth varies depending on the qualifying spending of an eligible firm. Startups and small firms can apply for a federal R&D credit of up to $250,000 annually for up to five years to offset the percentage of their yearly payroll taxes, income taxes, or alternative minimum tax paid to the Federal Insurance Contributions Act (FICA). The R&D tax credit is a federal program; however, most states in the United States provide a comparable tax benefit to businesses.

Eligibility for the R&D tax credit is based on the following criteria:

 All businesses that create, design, or enhance goods, processes, software, techniques or formulae in the course of their business are eligible for this tax credit.

Claiming the R&D tax credit:

 Fill out IRS Form 6765, Credit for Increasing Research Activities, and submit it to the IRS.

  1. The Work Opportunity Tax Credit 

This tax credit is aimed at expanding job possibilities for those who have previously experienced substantial employment obstacles.

The Small Business Job Protection Act of 1996 established the program, which has subsequently been expanded. The Work Opportunity Tax Credit was extended through 2025 as part of this year's Consolidated Appropriations Act.

The WOTC operates as follows: 

The program offers a tax credit of up to $9,600 per employee depending on the target category of persons from which companies hire. However, as applicable, the credit is restricted to the amount of taxable firms' or eligible tax-exempt organizations' business income tax liability or social security tax. The incentive is nonrefundable, but qualifying firms can carry any unused credit back one year and forward for up to 20 years.

Eligibility for the WOTC:

 Employers who hire someone from one of the IRS's 10 target categories are qualified for the Work Opportunity Tax Credit. Qualifying veterans, designated community residents, former criminals, qualified supplementary security income beneficiaries, summer youth employees, and Supplemental Nutrition Assistance Program recipients are among those eligible.

Using the WOTC: 

Employers who qualify can go to the IRS's Work Opportunity Tax Credit website.

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