While tax deductions are great, tax credits can be even better. That’s because a tax credit is taken directly against the taxes you owe, as opposed to a deduction, which reduces taxable income. Some tax credits are refundable, which means that if the credit is bigger than what’s owed, you get a check back from the government.

If you’re running a small business, here are several credits to know about to maximize your savings. 

Work Opportunity Tax Credit

If you hire someone that has been unemployed for more than six months, you may be entitled to up to a $2,400 tax credit; or as much as $9,600 in some cases. You can also receive this tax credit if you hire someone that is:

  • Out of the military
  • Coming off welfare
  • Out of prison

The Work Opportunity Tax Credit expires at the end of 2025, but for now remains a powerful incentive to hire people from these groups. Before you can claim the credit, the calculation needs to be done in advance using Form 8850.  The credit can be applied to either payroll and income taxes owed, depending on your organization. It’s not refundable.

Research Tax Credit

Small business research tax credit

Many of my clients think this credit is available only for certain industries, like pharmaceuticals, but that’s not the case. The Research Tax Credit can be used by any company that develops new products. I have clients in both manufacturing and distribution that take advantage of it.

This credit has been expanded by the Inflation Reduction Act and can now also be applied against payroll taxes. The credit is usually equal to the sum of 20% of the excess of certain qualified research expenses (wages, supplies, outside contractors, etc.) over a base amount. To claim this non-refundable credit, you need to file Form 6765. The calculation can be complicated. I recommend working with an accounting firm that specializes in it.

Clean Vehicles Tax Credit

The Inflation Reduction Act made a non-refundable credit of up to $7,500 available to both individuals and businesses when they buy a new, qualified plug-in electric vehicle or fuel cell electric vehicle, assuming you meet certain income qualifications.  

What’s cool about this credit is that you can get the money back against the purchase price from your dealer at the time of your vehicle purchase.

Paid Family and Medical Leave Tax Credit

Under 1993’s Family Medical Leave Act, employers with more than 50 employees must provide unpaid leave and keep jobs open for employees during certain medical and family leave situations. This includes the birth of a child or caring for a close family member.

There’s also a tax credit available to encourage employers to pay their employees while on leave. The Paid Family Leave Tax Credit is calculated by taking a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. The minimum percentage is 12.5% of wages paid. This increases by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages, with a maximum of 25%.

To qualify for this non-refundable credit, an employer must have a written policy that makes this benefit available to all employees. But note, there are some income limitations. Use Form 8894 for this credit.

New Retirement Plan Credits

The Secure 2.0 Act created more incentives for employers to offer their workers benefits for retirement savings. Among these are three significant tax credits.

The first is the Retirement Plans Startup Costs Tax Credit. Eligible employers with fewer than 100 employees may be able to claim a tax credit of up to $5,000 per year, every year for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan, like a 401(k) plan. The expenses include everything related to setting up, administrating and educating your employees about the plan. 

If you’re eligible, you can also get an additional tax credit of up to $500 per year for three years for adding an auto-enrollment component to your existing retirement plan (employees can still opt out).

Eligible employers with fewer than 100 employees can also receive a tax credit for matching their employees’ retirement plan contributions. For an eligible employer, the credit is a percentage of qualifying employer contributions, up to $1,000 per employee, made for the first tax year during which the plan becomes effective and the succeeding four tax years.

All of these non-refundable credits can be claimed on Form 8881.

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