Tax Credits to Keep in Mind When Filing Business Taxes

Tuesday, February 23, 2021

Applying for a tax credit is a great way to save your business a large sum of money. However, the term "tax credit" is often confused with "tax deductions", as understanding these key terms is essential to help you manage your taxes.

All tax credits come with qualifications and restrictions, including 2020 tax credits related to the Coronavirus. Uncovering which tax credits are applicable to your business + working alongside your tax professional before applying = a golden fastrack to lowered business taxes.


How Your Business Qualifies for Tax Credits

Certain activities make it possible for businesses and individuals to qualify for tax credits. For example, using green products or buying energy-efficient vehicles can make it possible for a business to receive a tax credit. These tax credits are often for a specific period and will eventually end after a set timeframe. Tax credits are also deducted from your income before gross pay, as they can often result in significant savings compared to tax deductions.


Using Tax Credits for Purchases

Business purchases can qualify for tax credits if you bought and began using the equipment, facility, or vehicle within the same year you claimed the tax credit. New tax credits are also available to companies due to the impact of the coronavirus.


Here are a few of the tax credits to keep in mind while filing your business taxes. 


1) Employee Retention Tax Credit

The IRS recently created an employee retention tax credit to encourage businesses to keep paying their employees during the pandemic. A company can receive a fully refundable tax credit that's 50% of a qualified employee's wage up to $10,000 for paying employees after March 12, 2020. The max amount of tax credit for each worker is $5,000.


An update to the CARES Act also includes various modifications to the employee retention tax credit, including: 

•   Tax credit extension through June 30, 2021 

•   An increase in employee base from 100 to 500 or fewer workers. 

•   Per-employee creditable wages are now $10,000 per quarter instead of $10,000 per year 

•   Group help plan costs can also be considered as qualified wages in some cases. 

•   Expanded eligibility by decreasing gross receipts decline to 20% from 50% 

•   Employers who receive Paycheck Protection Program loans may qualify for this tax credit, but it doesn't include wages paid with forgiven PPP loans 


Your company can still be eligible for the employee retention tax credit if you continue to provide health insurance benefits for laid-off employees.


2) Employee Sick Leave and Family Leave Tax Credits

The Families First Coronavirus Response Act (FFCRA) also helps companies offer sick leave and earn a paid family leave tax credit for employees.


Paid Sick Time - Small to mid-size businesses (less than 500 employees) must offer up to 80 hours of paid sick time to each worker for COVID-19 related issues due to their own illness or if they are taking care of someone.


Paid Family Leave - Additionally, a company also needs to give employees paid family leave if they are caring for a child dealing with COVID-19. All of these details are listed in the Family and Medical Leave Act.


Employers with these expenses can receive tax credits to handle part of the cost of providing payments to employees. These tax credits will defer the companies part of Social Security benefits for the employees' wages, which lasts through December 21, 2020.


Congress has also extended the tax credits through March 31, 2021, as the program originally ended on December 31, 2020.


3) Healthcare Tax Credit

The Affordable Care Act also includes a health care tax credit to encourage small businesses to provide health insurance or maintain existing coverage.


The small business health care tax credit pays for at least half the cost of single insurance coverage for employees. While you can earn a tax credit of up to 50% of health insurance premiums for employees, you will not be eligible for yourself as a business owner.


Here is how to be eligible for the small employer health insurance tax credit: 

•   Have less than 25 full-time employees 

•   Average employee wages need to be less than $54,200 

•   Use an IRS-qualified arrangement to pay for premiums 


4) Work Opportunity Tax Credit

Employers can also receive a Work Opportunity Tax Credit for hiring new employees in specific categories: 

•   Veterans 

•   Supplemental Security Income Recipients 

•   TANF or SNAP Recipients 

•   Summer Youth Employee 

•   Vocational Rehab Referral 

•   Ex-Felons 

•   Designated Community Residents 


5) Research and Development Tax Credit

Most small businesses don't realize they can qualify for Research and Development Tax Credits, even though they have been available for many years. The focus of this small business tax credit is to encourage research activities. A partnership, sole proprietor, or non-public corporation is eligible for this tax credit.


Your small business may also be eligible for this tax credit even if you don't perform scientific research, such as: 

•   Enhancing product function, quality, or reliability 

•   Surveys 

•   Product development 

•   Increasing business performance by paying outside research 


All of these research activities need to show a connection with the expenses claimed to be eligible for this small business tax credit.


These tax credits are up to 20% of research costs, which is up to $250,000 each year. 


6) Eco-Friendly Tax Credits

Making a few eco-friendly changes to your business or investing in equipment to improve energy efficiency can also help you earn tax credits. In addition to these tax credits, you may also earn tax deductions for making modifications to your business facility.


For example, investing in energy-saving activities can help you earn tax credits, whether it's related to fuel, wind, cells, or solar energy.


Owning or building the equipment while meeting specific performance standards will allow you to qualify for this tax credit.


7) Earn Tax Credit With All-Electric or Plug-in Hybrid Vehicles

Purchasing a new all-electric vehicle or plug-in hybrid car can help you become eligible for a tax credit of up to $7,500. The amount will vary due to the battery used for the vehicle. However, you are not able to use the tax credit on a used vehicle for your company.


The tax credit is available for vehicles purchased after December 31, 2009, and it will begin to phase out once 200,000 qualifying vehicles are bought. You can also visit the United States Department of Energy's website to review a list of eligible vehicles.


8) Accessibility for Disabled Persons Tax Credit

Making changes to your business to accommodate customers and employees with disabilities can help you be eligible for a disabled access tax credit.


Your company can qualify for this tax credit by earning $1 million or less while also having no more than 30 full-time employees from the previous year.


A tax deduction may also be available by removing transportation and architectural barriers for disabled employees and clients. You can receive this tax deduction while also gaining the Disabled Persons Tax Credit.


Final Thoughts

Applying for tax credits and business tax deductions can save your company a significant amount of money. Reaching out to a tax professional is a great way to maximize your savings and help your business fully take advantage of the available tax credits. Now is the perfect time to contact a tax professional to learn more information!


Curious about navigating tax compliance for your business?

To add clarity to the complicated subject of Sales and Use Tax Laws, Dynamic Communities is convening with Avalara tax experts for a free virtual Tax Law Binge Day event.

Join us for Tax Law Binge Day on February 24, 2021, from 11:00 am-1:00 pm EST!


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