Small Business Tax Preparation Guide

7. 30 Small Business Tax Credits You Should Know About

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30 Small Business Tax Credits You Should Know About

Apr 20, 2023 • 10+ min read
Tax Credits in front of $100 bills
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      Most entrepreneurs look forward to tax preparation season with the same amount of enthusiasm that kids usually have for a trip to the dentist. (Not that you can blame either party. Dentists are so widely dreaded that there’s a term for it: dentophobia.) Likewise, taxes can seem like a curse to business owners, adding pressure to the already slim margins of a small business.

      Taking this comparison a step further, which is worse? Is the impact of taxes on the bottom line as painful as a root canal? While the answer to these questions is debatable, research shows that the average effective tax rate hovers around 20%.

      “Small businesses of all types pay an estimated average effective tax rate of 19.8%,” says tax expert Jean Murray. “The effective tax rate is the average rate of tax for a business or an individual taxpayer. The effective tax rate is calculated by dividing the total tax paid by the taxable income.”

      The good news is that the federal government offers dozens of tax credits to small business owners. These incentives are intended to reward businesses that take actions that align with objectives outlined by the IRS, throughout the year. Think of it as an “I’ll scratch your back if you scratch the economy’s back” arrangement.

      Tax Credit Vs. Tax Deduction

      It’s important to note that these tax credits differ from tax deductions in terms of how and when they’re applied. A deduction is tied to specific expenses, such as supplies and travel, related to your business. Every relevant deduction reduces your taxable income so you will owe less.

      Tax credits, on the other hand, are applied after you’ve calculated your taxes. This distinction means any credit you qualify for will reduce the final amount you owe. While deductions impact your taxable income in smaller percentages, credits are dollar-for-dollar. A $1,000 credit will take exactly $1,000 off your tax bill.

      Obtaining tax credits requires a proactive approach. It’s not like an IRS agent is going to tap you on the shoulder while you’re filing your taxes and say, “Wait! Let me show you a couple of quick ways to save thousands of dollars.” For this reason, it behooves you to educate yourself on possible tax credits way before tax season and structure your budget and spending accordingly throughout the year.

      How To Claim A Tax Credit

      If your business is eligible for a tax credit, you can claim one by gathering the correct paperwork and filing Form 3800 with your tax return. The form will outline all available tax credits and you can determine which ones you’re eligible for and would like to claim before calculating your General Business Tax Credit.

      Tax Credits For Small Businesses

      Awareness is key. With that in mind, you should know about these 27 small business tax credits. Even if you qualify for just one or two of them, these credits could save you crucial money at tax time, leaving you with more cash on hand to run your business. (To see if you qualify, click the links below to view the individual form page on, where you can get additional details and submission instructions.)

      1. Work Opportunity Tax Credit

      Sometimes, it pays to do good. The Work Opportunity Tax Credit (WOTC) is available if your company hires people who traditionally face barriers to employment.

      The IRS has defined 10 categories of WOTC-eligible workers:

      • Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
      • Unemployed veterans, including disabled veterans
      • Ex-felons
      • Designated community residents living in Empowerment Zones or Rural Renewal Counties
      • Vocational rehabilitation referrals
      • Summer youth employees living in Empowerment Zones
      • Food stamp (SNAP) recipients
      • Supplemental Security Income (SSI) recipients
      • Long-term family assistance recipients
      • Qualified long-term unemployment recipients (for people who begin work after 2015)

      Your WOTC amount is determined by the wages you pay qualified employees, but you could save up to $9,000 over two years.

      2. Retirement Plan Startup Costs Tax Credit

      The government wants individuals to plan for retirement, and that’s why they’re willing to help your business start a retirement program.  

      The Retirement Plan Startup Costs Tax Credit can help you recoup 50% of the “ordinary and necessary eligible startup costs” (up to a maximum of $500 per year) of starting a company-sponsored retirement plan. These ordinary and necessary costs include setup and administration fees, plus any money used to educate employees about the program.

      This credit can be claimed only if you have 100 or fewer employees who received more than $5,000 in compensation from your business—and it’s only available for the first three years of your plan.

      3. Credit For Small Employer Health Insurance Premiums

      Fifty-five percent of full-time employees say health insurance is the most significant benefit they receive. However, health insurance can be complicated and expensive for small businesses. 

      The Credit for Small Employer Health Insurance Premiums seeks to alleviate some of that pain with a tax credit that will cover up to 50% of the amount you paid toward premiums for two consecutive years. To qualify, you’ll need to:

      • Employ fewer than 25 full-time employees
      • Pay average wages of less than $51,600 per year
      • Fund at least half of all your employees’ health insurance premiums
      • Purchase your health insurance plan through the Small Business Health Options Marketplace

      4. Disabled Access Credit

      If you’ve invested money to make your business more accessible, then you likely qualify for a Disabled Access Credit. The IRS gives a broad list of eligible access expenses, but here are a few practical examples:

      • Construct ramps for wheelchair access.
      • Provide text in braille.
      • Create accessible rooms, restrooms, and workspaces with wider doors.
      • Remove barriers and obstacles.
      • Install automatic doors.

      The Disabled Access Credit covers 50% of your expenses with a maximum credit of $5,000.

      5. Family And Medical Leave Credit

      Businesses who provided paid family and medical leave for employees can qualify for a Family and Medical Leave Credit. This credit can cover 12.5% to 25% of what you paid your employees (which must be at least 50% of the regular pre-leave wages) for up to 12 weeks.

      6. Employee Retention Credit

      The Employee Retention Credit (ERC) is a refundable tax credit for employers who paid employees while experiencing a shutdown during the COVID-19 pandemic. While the credit applies only to 2020 and 2021 payrolls, if you have yet to claim this credit for the associated wages paid, you can still do so retroactively this tax season. 

      To be eligible for the ERC, your business must have been fully or partially shut down during the COVID-19 pandemic, qualified as a recovery startup business, or experienced a decline in gross receipts during that time. If you meet the requirements and have not yet claimed the ERC in previous tax years, you can claim up to a $5,000 credit per employee for 2020 and up to a $21,000 credit per employee for 2021.

      7. Credit For Increasing Research Activities

      The Credit for Increasing Research Activities (R&D Tax Credit) exists to incentivize business owners to increase their research and development in their sector and help generate more jobs to help boost the economy. 

      According to the IRS, examples of qualifying “research” include activities that discover technological information, relate to science, are useful in the development of new and improved business components, and constitute a process of experimentation. This also includes wages paid to employees who partake in such research and supplies put toward the investment.

      This federal credit allows businesses to claim 20% of their research and development expenses for the year. However, the average annual gross receipts for a three-year period must be under $50 million.

      Additional Small Business Tax Credits

      The government offers many more business tax credits to encourage innovation and positive employment practices, as seen below.


      1. General Business Credit (Form 3800)
      2. Investment Credit (Form 3468)
      3. Orphan Drug Credit (Form 8820)
      4. New Markets Credit (Form 8874)

      Employee Benefits

      1. Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips (Form 8846)
      2. Credit for Small Employer Pension Plan Startup Costs (Form 8881)
      3. Credit for Employer-Provided Childcare Facilities and Services (Form 8882)

      Community Development

      1. American Samoa Economic Development Credit (Form 5735)
      2. Indian Employment Credit (Form 8845)
      3. Low-Income Housing Credit (Form 8586)
      4. Recapture of Low-Income Housing Credit (Form 8611)
      5. Credit for Contributions to Selected Community Development Corporations (Form 8847)
      6. Qualified Railroad Track Maintenance Credit (Form 8900)


      1. Alcohol and Cellulosic Biofuel Fuels Credit (Form 6478)
      2. Qualified Plug-in Electric and Electric Vehicle Credit (Form 8834)
      3. Renewable Electricity, Refined Coal, and Indian Coal Production Credit (Form 8835)
      4. Empowerment Zone and Renewal Community Employment Credit (Form 8844)
      5. Biodiesel and Renewable Diesel Fuels Credit (Form 8864)
      6. Low Sulfur Diesel Fuel Production Credit (Form 8896)
      7. Energy Efficient Home Credit (Form 8908)
      8. Alternative Motor Vehicle Credit (Form 8910)
      9. Alternative Fuel Vehicle Refueling Property Credit (Form 8911)
      10. Mine Rescue Team Training Credit (Form 8923)

      Whether you’re seeking credits and deductions or just want to survive tax season without an emotional breakdown, remember to set aside enough time to make it all possible. Due diligence before and during tax season will allow you to consider all your options thoughtfully and confidently pursue those that are best for your business. Time is money for entrepreneurs, but the ROI on that time is excellent whenever you score a new tax credit.

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      About the author
      Jesse Sumrak

      Jesse Sumrak is a Social Media Manager for SendGrid, a leading digital communication platform. He's created and managed content for startups, growth-stage companies, and publicly-traded businesses. Jesse has spent almost a decade writing about small business and entrepreneurship topics, having built and sold his own post-apocalyptic fitness bootstrapped startup. When he's not dabbling in digital marketing, you'll find him ultrarunning in the Rocky Mountains of Colorado. Jesse studied Public Relations at Brigham Young University.

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