Gray & Harasym, LLP | San Luis Obispo CA CPA

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5 Often-Overlooked Tax Credits for Your Small Business


As a small business owner, tax time can be stressful. That’s why ensuring you’re garnering every benefit possible is essential. Many small businesses overlook some huge benefits when it comes to tax credits. This article reveals five of the most overlooked tax credits for small businesses. Read on to determine if any of these apply to your business.

Tax Credit vs. Tax Deduction

Before jumping to five tax credits often overlooked by small businesses, let’s clarify the difference between a tax credit and a tax deduction.

While tax deductions reduce your taxable income resulting in you paying a lower tax amount, tax credits are a dollar amount deducted from the taxes you owe. So, if you receive a tax credit of $500, you subtract $500 from taxes due.

Tax credits can be highly beneficial come tax time, so knowing which ones your small business is eligible to claim is good. Unfortunately, there are quite a few that many business owners aren’t aware of.

Here are five tax credits that are the most overlooked by small businesses. After you review the list, check with your accountant to see if your business is eligible for these or other tax credits to reduce the amount you owe to the IRS.

5 Tax Credits You May be Overlooking

1. Retirement Saver’s Credit

For small businesses that start a retirement plan for their employees, the IRS offers this credit to offset some of the startup costs they consider “ordinary and necessary.” Your business must employ fewer than 100 employees and not have had a retirement plan previously. The credit is for 50 percent of your startup costs, with a maximum credit of $500.

This tax credit can be claimed for three years, beginning the year before your plan becomes effective. If you do not currently offer a retirement savings plan for your employees, now may be the time to establish one.

2. Research & Development Tax Credit

The R&D tax credit is one of the most overlooked because small business owners not in a “research” field with a laboratory setting often blaze right past this one. But according to the IRS, “research” isn’t necessarily in a lab.

To qualify for this tax credit, a business must improve a product or process, often occurring in many companies as part of their everyday operations. For example, you may qualify if you own a software company and develop or improve an IT process.

Developing, designing, enhancing, or improving a product or process related to your business can qualify you for a credit of 13 cents on every dollar. Of course, you’ll want to confirm whether your business qualifies, identify qualifying activities, and keep copious records so that you can back up your claim to the credit.

3. Rehabilitation Credit (Historic Preservation)

If your business spent money to rehabilitate or renovate a historic structure, this credit likely applies to you. A 20 percent tax credit is available for rehabilitating historic, income-producing buildings determined by the Secretary of the Interior to be “certified historic structures.”

This does not apply to residential structures; however, many businesses purchase historic properties to house their office, restaurant, or other business. Historic structures are certified by the National Park Service, which reports to the IRS. If that applies to the structure where your business is housed, it is worth reviewing this credit with your accountant.

4. Empowerment Zone Employment Credit

Empowerment Zones (EZ) are distressed urban and rural areas needing revitalization. The purpose of the EZ credit is to encourage business owners to operate in these areas and employ EZ residents.

The credit is 20 percent of qualified wages paid during a calendar year. Businesses are eligible for a wage credit of up to $3,000 annually for each eligible employee. 

5. Plug-In Electric Vehicle Credit

Suppose you purchase a new plug-in electric vehicle (EV) for your business between 2023 and 2032. In that case, you may qualify for a tax credit of $7,500. To be eligible for the credit, your adjusted gross income (AGI) must not exceed $150,000 in the year you take delivery of the vehicle or the year before (whichever is less).

The EV must meet qualifications regarding battery capacity, retail price, and weight. Speak to your tax accountant for the guidelines and qualifications if you purchased a plug-in EV for your business.

Ensuring you claim every tax credit your small business is entitled to is the key to paying the lowest tax possible. There are dozens of tax credits that small businesses are eligible for. Be sure to have your accountant or CPA review your eligibility for maximum savings come tax time.