Tax Credits Every Business Owner Should Know

Editor’s Note: Updated to reflect current federal small business tax rules for the 2025 tax year. Tax laws change frequently; always consult a tax professional.

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 you should know about to maximize your savings. 

Paid Family and Medical Leave Tax Credit

Under the Family and Medical Leave Act (FMLA), employers with 50 or more employees are required to provide eligible workers with unpaid, job‑protected leave for certain family and medical reasons, such as the birth of a child or caring for a close family member with a serious health condition.

There is also a federal Paid Family Leave Tax Credit designed to encourage employers to offer paid leave. This credit allows eligible businesses to claim 12.5% to 25% of qualifying wages paid to employees while they are on family and medical leave, for up to 12 weeks per employee per year. The percentage increases as the employer’s wage replacement exceeds 50%.

Beginning in 2026, this tax credit is permanent, following recent legislative changes. To qualify, employers must have a written policy that meets federal requirements, including minimum leave duration and wage‑replacement thresholds. The credit is non‑refundable and subject to employee compensation limits.

Employers can claim this credit using Form 8994 and should work with a tax advisor to confirm eligibility and ensure their leave policy complies with current rules.

Research Tax Credit

The Research and Development (R&D) Tax Credit, sometimes referred to as the Research Tax Credit, may be available to businesses that engage in certain qualified research activities. This can include efforts to develop or improve products, processes, software or technology. The credit is not limited to specific industries, and businesses in areas such as manufacturing, engineering and distribution may also be eligible, depending on their activities.

The credit is generally calculated as a percentage of qualified research expenses, which may include wages, supplies and certain third‑party costs, above a defined base amount. In some cases, eligible small businesses may be able to apply a portion of the credit against payroll taxes, which can help reduce overall tax liability even if little or no income tax is owed.

To claim the Research Tax Credit, businesses must file Form 6765 with their federal tax return and maintain appropriate documentation to support eligibility. Because qualification requirements and calculation rules can be complex, businesses may benefit from consulting a qualified tax professional to determine whether the credit applies to their situation.

Clean Vehicles Tax Credit

The Inflation Reduction Act made a non‑refundable tax credit of up to $7,500 available to individuals and businesses that purchase a new, qualified plug‑in electric or fuel‑cell vehicle, provided certain vehicle and income requirements are met.

In many cases, buyers can now transfer the credit to a registered dealer at the time of purchase, effectively reducing the vehicle’s purchase price instead of waiting to claim the credit when filing a tax return. Not all vehicles or buyers qualify, and eligibility depends on factors such as vehicle sourcing, dealer registration and income limits.

New Retirement Plan Credits

The Secure 2.0 Act created more incentives for employers to offer their workers retirement benefits. These include several tax credits designed to help offset the cost of starting and maintaining a retirement plan.

Some eligible employers with fewer than 100 employees may be able to claim the Retirement Plans Startup Costs Tax Credit, which can cover certain ordinary and necessary costs associated with setting up and administering a SEP, SIMPLE IRA or qualified retirement plan, such as a 401(k). The costs generally include everything related to setting up, administrating and educating your employees about the plan. 

In certain situations, employers may also qualify for an additional tax credit for adding an auto-enrollment component to a retirement plan. In some cases, eligible employers may also be able to claim a tax credit for employer contributions made to employees’ retirement plans during the plan’s first several years.

These non-refundable credits are generally claimed using Form 8881. Employers should consult a qualified tax professional to determine eligibility and ensure proper filing.

Work Opportunity Tax Credit

If you hire someone who has been unemployed for an extended period, you may have been eligible for the Work Opportunity Tax Credit (WOTC), which historically allowed businesses to claim up to $2,400 per eligible hire, or as much as $9,600 in certain cases, depending on the employee’s qualifying category. Eligible groups included veterans, individuals receiving public assistance, and previously incarcerated people.

However, the Work Opportunity Tax Credit expired on December 31, 2025 and is not currently available for employees who begin work in 2026, unless Congress renews the program. In the past, lawmakers have sometimes extended WOTC retroactively, so some employers continue screening new hires in case the credit is reinstated.

When the credit is active, employers must complete Form 8850 and receive certification from their state workforce agency before claiming it. The credit is non‑refundable and generally applies against income taxes owed. Businesses should consult a tax professional for guidance on current eligibility and legislative updates.