There is still time to take advantage of these tax credits on your 2022 filing.
It is tax season, and as small business owners, we know what that means – how can we save some cash without raising red flags with the IRS? Every year, the IRS collects over $4.9 trillion in taxes; in 2021, $419 million came from businesses. At 35%, America has the highest corporate tax rates in the world’s economies. No business owner looks forward to tax season, but there are ways for you to recoup some of that cash. While Viking Mergers & Acquisitions cannot give tax advice, we can connect you with an excellent tax advisor if you need assistance filing your 2022 taxes. Business owners leave thousands of dollars on the table through unclaimed tax credits every year. (Looking for more ways to save on your business taxes? Be sure to check out our list of tax deductions for business owners, too.)
Don’t miss these credits when filing your 2022 corporate taxes.
7 Often-Overlooked Tax Credits for Business Owners
1. R&D Credits
Percentage: Up to 20% of qualifying expenses.
Eligibility: All industries; must be conducting research that is technological in nature.
Research and development credits are one of the most overlooked tax credits available to business owners, and this is mostly due to the vague description of what qualifies as “R&D.” R&D credits became available in 1981 in an effort to incentivize businesses to hire research employees and advance technologically. Since then, the credit has expired and been renewed several times, but the Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently extended the R&D credits available to small businesses under Section 41 of the IRS code.
R&D credits are available to businesses that manufacture, develop, design and research product improvement. Business owners often think they are ineligible for the credit because they are not developing a new product – this is incorrect. As long as your business is improving an existing product or process, you are able to claim the credit. To be eligible for this credit, your research must be technological in nature and use a process of experimentation that eliminates uncertainty.
2. Investment Tax Credits
Percentage: 6%-30% of qualified costs.
Eligibility: Commercial, Industrial, Utility, & Agricultural sectors. Energy-saving equipment must meet specific criteria.
In an effort to encourage businesses to shift towards greener practices, the government offers several renewable energy tax credits, also known as investment tax credits. These include:
- Reforestation Credit, which allows forest owners to get a 10% tax credit (which is a deduction from what’s owed) for all replanting costs.
- Rehabilitation Tax Credit, which offers 20% of the costs to restore a historic building or structure for business use.
- Solar Energy Investment Credit, which provides up to 30% tax credit to businesses that install solar photovoltaic systems within a given tax year. The project must also meet labor requirements to get the full credit.
These tax credits have already made a difference in pushing the U.S. to use more environmentally friendly business practices. For example, solar and wind currently make up about 12% of our energy production. Since 2008 — not long after the energy-related ITCs were introduced — renewable energy from solar and wind power has doubled.
Businesses in the commercial, industrial, utility, and agricultural fields are eligible for these and other energy-related tax credits if they use solar energy, fuel cells, small wind turbines, geothermal systems, or microturbines as energy sources.
3. Work Opportunity Tax Credits
Percentage: 25%-50% of qualified wages.
Eligibility: Any target group employee who has worked at least 120 hours.
Every year, employers collect up to $1 billion dollars under Work Opportunity Tax Credit. The Work Opportunity Tax Credit is available to employers who hire and retain employees from target groups who often face significant barriers to fair employment. Employers may qualify for WOTC if they hire employees from eligible target groups, including veterans, TANF recipients, SNAP recipients, Designated Community Residents, Vocational Rehabilitation referrals, ex-felons, Supplemental Security Income recipients, and Summer Youth employees.
There is no limit to the number of employees that can be hired to qualify for this credit. However, former employees and family members or dependents of the employer will not qualify for this tax credit.
Employers are eligible for a 40% credit in the first year of employment and a 50% credit in the second year of employment. To be eligible for the full credit, the employee must have worked a minimum of 400 hours, but a 25% credit can still be received if the employee worked as little as 125 hours.
4. Retirement Plan Tax Credits
Percentage: 50% of startup expenses, or up to $5,000.
Eligibility: Fewer than 100 employees, who are paid more than $5,000 annually.
According to a study conducted by the U.S. Bureau of Labor Statistics, only 53% of businesses with fewer than 100 employees sponsor an employee retirement plan. Small businesses are hesitant to offer employee retirement plans due to expensive startup and administration costs. To encourage small businesses to provide retirement options, the IRS offers a Retirement Plan Tax Credit — known as the Credit for Small Employer Pension Plan Startup Costs — that can help business owners recoup some of the startup expenses.
Businesses can get a credit of 50% of startup and administration costs, up to $500 or $250 times the number of non-highly compensated employees who are eligible for the retirement plan but no more than $5,000 — whichever is greater.
To be eligible for this credit, you must have fewer than 100 employees who are all paid more than $5,000 annually but are not considered highly compensated employees. Plans that are covered under this federal tax credit include SEP IRAs, Simple IRAs, and certain qualified plans, such as 401(k), profit-sharing, defined-benefit plans, and money-purchase pension plans.
5. Disabled Access Tax Credits
Percentage: 50% of qualified costs up to $10,250.
Eligibility: Available to small businesses with fewer than 30 full-time employees and less than $1M in revenue.
In 1990, the Americans with Disabilities Act (ADA) was passed by Congress, requiring employers to provide accommodation and facility access to those with disabilities. Businesses pay to install accommodations or renovate to provide better access for employees and patrons, so the IRS offers the Disabled Access Tax Credit to business owners who have fewer than 30 employees and under $1M in gross sales.
The credit may be claimed every year that the business makes an eligible access expenditure, which includes any modifications or installations made to the building to comply with the ADA and make the building more accessible for people with disabilities. Some examples of eligible access expenditures include:
- Providing tapered text for the visually impaired
- Removing barriers such as widening bathroom stalls
- Providing materials or a translator for the hearing impaired
6. Employer Credit for Paid Family and Medical Leave
Percentage: Between 12.5% and 25% of paid wages to an employee on family or medical leave.
Eligibility: Paid at least 50% of an eligible employee’s wages while they were on qualifying family or medical leave.
The Family and Medical Leave Act (FMLA) was passed in 1993 to provide job security to employees who needed extended time away from work to recover from medical treatment or emergency, after the birth or adoption of a new child, to care for an ill family member, or qualifying reason. FMLA does not require employers to pay employees on qualified leave, which can jeopardize many employees’ financial health.
The IRS offers the Employer Credit for Paid Family and Medical Leave to businesses that cover at least half of an employee’s wages while on leave to further protect individuals and families from hard times. Any business that pays 50% of its employees’ wages while on FMLA leave can get a tax credit of 12.5% of those wages. The credit increases by a quarter of a percent for each additional percentage point the amount paid increases. For example, an employer who pays 55% of their employee’s wages while on FMLA leave could qualify for a 13.75% tax credit. The credit cannot exceed 25%.
7. Credit for Employer-Provided Childcare Facilities and Services
Percentage: 25% of costs to build and maintain childcare facilities and/or 10% of costs to pay for childcare resources and referrals.
Eligibility: Pay to build, remodel, expand, or operate a childcare facility for employees or pay for childcare through a qualified childcare facility.
Finding reliable and affordable childcare is a challenge for many working parents, but the IRS provides tax credits to employers who make that easier. Businesses that spend money on one or more of the following may qualify for the Employer-Provided Childcare Facilities and Services Tax Credit:
- Building, remodeling, or expanding a childcare facility for employee use.
- Operating an existing childcare facility for employee use, such as paying childcare providers’ salaries, supply expenses, and utilities.
- Contracting a third-party childcare facility or provider to offer childcare services to employees.
All childcare services must meet state and local licensing requirements as qualified childcare facilities.
The credit is good for 25% of all costs related to building or operating a childcare facility, while an additional 10% is for any costs to provide childcare resources or referrals to outside childcare providers. The credit maxes out at $150,000 per tax year.
These seven tax credits for business owners can save your business some serious cash if you are eligible and aware of the documentation required to claim them. If you have not filed your 2022 corporate taxes yet, there is still time to take advantage of these credits, deductions, and more. As a reminder, Viking Mergers & Acquisitions cannot give tax advice, but we can connect you with an excellent tax advisor if you need assistance with filing your 2022 taxes.
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1. Government Revenue | U.S. Treasury Fiscal Data (Accessed January 2023)
2. Internal Revenue Service Data Book, 2021 (Page 25. Accessed January 2023)
3. Electricity in the U.S. – U.S. Energy Information Administration (EIA) (Accessed January 2023)
4. U.S. renewable electricity generation – U.S. Energy Information Administration (EIA) (Accessed January 2023)
5. U.S. Bureau of Labor Statistics : The Economics Daily (Accessed January 2023)