WHY TAX CREDITS ARE IMPORTANT TO SMALL BUSINESSES
MCKERNAN LAW is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.
Tax Credits vs. Tax Deductions – The government can provide a tax deduction or a tax credit to incentivize specific activities. Tax deductions reduce income subject to tax, whereas tax credits reduce the amount of taxes owed. Which is more valuable? As with most answers in taxes, it depends on the situation.
TYPES OF TAX CREDITS AND WHO IS QUALIFIED:
The Two Types of Tax Credits…
Nonrefundable tax credits can only reduce the amounts of taxes owed.
Refundable tax credits can provide for a refund larger than the tax paid. If a business is not yet profitable, they can provide the most immediate benefit of a cash infusion.
Retirement Plan Startup Costs Tax Credit – Thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, you may be eligible for valuable tax credits by setting up a retirement plan, such as an employer-sponsored 401(k).
Credit for Small Employer Health Insurance Premiums – The Affordable Care Act (colloquially known as Obamacare) encourages employers to provide health insurance to employees by offsetting some of the premium cost. If you qualify, this credit is equal to 50% of employer-paid health insurance premiums for up to 2 years.
Work Opportunity Tax Credit – Many Americans struggle to find a job, so barriers to employment can be common. To help reward diverse hiring practices, Congress approved a tax credit through 2025 for employers who hire from a targeted group, while meeting their business needs.
Research and Development Tax Credit – The government recognizes the value of R&D activities, so they provide tax credits (for most companies) of 5-10% of R&D costs. The credit is normally limited to the business's tax liability, as it is non-refundable.
However, there is a small business exception where up to $250K in credits can be used to offset payroll taxes.
How the government determines eligibility:
1. Qualified purpose
2. Elimination of uncertainty
3. Process of experimentation
4. Technological in nature
This document is designed for general information only. The information presented on this document should not be construed to be formal legal or tax advice nor the formation of a lawyer/client relationship.
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