10 Commonly Overlooked Small Business Tax Credits

For many small business owners, 2020 was a difficult year, making it all the more important that merchants take full advantage of the tax credits and deductions available. Unfortunately, few business owners are aware of the full range of tax credits of which they can take advantage. For instance, less than three in 10 businesses who qualify for the R&D tax credit actually claim it, while virtually every large company makes the claim.

Quite often small businesses leave significant amounts of money on the table by neglecting to take advantage of tax credits. CO– spoke to two tax professionals to get their advice on where your business may be able to save money on your 2022 tax return.

[Read more: Tax Season Planning You Should Be Doing Now]

What’s the difference between a tax credit and a tax deduction?

Before we get into the different credits you may be able to claim, it’s important to understand the difference between a tax credit and a tax deduction. Too often, business owners focus exclusively on deductions and ignore the potential to claim equally beneficial credits.

A tax deduction reduces how much of your business income is subject to taxes by potentially putting you into a lower tax bracket. A tax credit is more straightforward in that it reduces the amount of tax owed by giving you a dollar-for-dollar reduction of your liability. For instance, a tax credit valued at $500 will lower your bill by $500.

Business owners can claim both credits and deductions, as long as they meet the necessary qualifications. Here are a few credits that many business owners may be eligible to claim on their 2022 tax return.

Tax credits commonly missed by small businesses

The research and development (R&D) tax credit is one for which many small business owners believe they are not eligible. However, there are many others, said Patrick Butler, CPA and partner at Reynolds + Rowella.

[Read more: How to Qualify for and Claim the R&D Tax Credit]

The first is the Work Opportunity Tax Credit. The Work Opportunity Tax Credit can be claimed by employers who hire individuals from specific targeted groups, explained Butler. This credit is based on three things: the category of workers hired; the wages paid to those employees in their first year; and how many hours these employees worked. If your business hires a veteran, for instance, the company can receive a credit for up to $2,400 for every new full-time hire.

Kevin Hamaker, CPA, MPAcc and partner at BSB CPAs + Business Advisors, added that effective January 1, 2020 and later updated on December 29, 2022, the SECURE 2.0 Act offers credits for implementing a 401K plan or adding an auto-enrollment feature to a plan. SECURE 2.0 has various provisions, including increasing the RMD age for IRA and 401(k) accounts and altering the catch-up contribution limit for older workers with workplace plans. The legislation also aims to assist younger individuals with saving while repaying student loans, simplify transferring accounts from one employer to another, and allow people to save for emergencies using retirement accounts.

Hamaker recommended that, in addition to exploring credits and the federal level, small businesses look into the hundreds of state and local credits available –– especially those related to the R&D and the Work Opportunity Tax Credits.

Butler had a few other suggestions for federal tax credits to explore:

• Retirement Plans Startup Costs Tax Credit
• Health Coverage Tax Credit
• Credit for Increasing Research Activities
• Plug-In Electric Drive Vehicle Credit
• Alternative Motor Vehicle Credit
• Empowerment Zone Employment Credit
• New Markets Credit

In addition to the credits listed above, there are some new tax credits that you may be able to apply specifically to your 2022 tax return.

Tax credits related to the COVID-19 pandemic

Butler recommended exploring the Employee Retention Credit. This credit is offered to employers whose operations were partially or fully suspended due to COVID-19. Companies can claim 50% of up to $10,000 in qualifying wages for each full-time employee in 2020 who you continue to keep on your payroll (up to a $5,000 credit for each employee). The value increases for 2021 wages, with 70% of qualifying wages of up to $10,000 for each quarter (up to $21,000 credit for each employee).

[Everything you need to know about the Employee Retention Tax Credit]

The IRS has issued guidance that clarifies that taxpayers who receive loan forgiveness based on misrepresentations or omissions must include the forgiven portion in their taxable income. Taxpayers who incorrectly received Paycheck Protection Program loan forgiveness are advised to take corrective measures, such as filing amended tax returns that include forgiven loan proceeds as income.

The PPP loan program was established to help small U.S. businesses adversely affected by COVID-19 and was extended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act. To qualify for full loan forgiveness, the recipient must have been eligible for the PPP loan, used the loan proceeds to pay eligible expenses such as payroll costs, and applied for loan forgiveness.

Eligible recipients include small business concerns, independent contractors, eligible self-employed individuals, sole proprietors, business concerns, or certain types of tax-exempt entities who were in business on or before February 15, 2020, and had paid employees, independent contractors, or were self-employed.

Butler noted that now is the time to begin preparing your tax return to make sure you’re taking full advantage of the credits and deductions available. Consult your accountant to see for which of these credits you qualify and make sure you’re not leaving any money on the table this tax season.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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