Stop Throwing Away Money: 5 Tax Incentives Your Business Is Missing Out On What you don't know about tax credits may cost you your business. Ensure you know how to maximize your tax savings this upcoming year.
By Shannon Scott •
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Often business leaders are too time-strapped and focused on the issues right in front of them to investigate out-of-the-box business strategies. This is why many small businesses and startups miss out on the lucrative tax credits and incentive opportunities that large corporations use to offset their tax liabilities.
In an effort to stimulate the economy and encourage hiring, the U.S. government offers tax breaks for businesses related to employment, growth, training and other activities that employers consider the day-to-day operations of a business. Identifying which incentives are available at the federal, state and local levels can be arduous. And many times, entrepreneurs blindly hope their CPA or accountant handles this for their company, but only a handful of CPAs offer these specialized credits to their clients.
If you want to avoid leaving money on the table, here are five tax credits your company needs to take advantage of.
Related: Tax Credits You Might Qualify For
1. R&D credits
Employers who create or improve products or processes in the course of their business can qualify for R&D credits. These credits increase your profitability by reducing current and future years' federal tax liability and creating a ready source of cash for furthering innovation and growing your business. The government wants to incentivize employers to continue innovation despite the cost and keep these jobs in the country, understanding there is a significant up-front investment in research and development efforts. This can be a game-changer for companies that invest heavily in research and development, as it frees up capital that can be reinvested in the business.
The R&D Tax Credit previously only applied to a handful of highly technical companies, but it now allows a broader range of businesses and industries to be eligible. There's a four-part test the R&D must use to qualify, including a business component, elimination of uncertainty, an iterative process of experimentation, and a technological nature. Although there are more hoops to jump through, R&D tax credits can be a significant advantage for forward-thinking businesses actively working toward keeping innovation within the United States.
Related: Hidden Cash: Tap Into R&D Tax Credits
2. Disaster credits
Dozens of natural disasters between 2018 and 2020 rendered hundreds of businesses inoperable. However, the government has taken steps to help those businesses regain their footing by offering a tax credit for those who were able to maintain employees on their payroll despite the disaster.
Within this program, employers who continued to pay their employees after a qualifying natural disaster may qualify for a tax credit of up to $2,400 for each employee, depending on the wages paid. It's important to note that not all natural disasters qualify for this tax credit, and employers must meet certain criteria. However, for businesses that qualify, this tax credit can significantly affect their ability to recover and rebuild after a disaster.
Related: How to Keep Your Business Running During a Natural Disaster
3. Employee retention tax credit
The employee retention tax credit is a lifeline for businesses that struggled during the pandemic. Passed with the CARES Act, this credit is worth up to $26,000 per employee retained. This is an incredible break for those who were able to keep people on payroll during a difficult time, but only 3% of employers who qualified for this credit in 2021 filed for it. This means that thousands of businesses may have missed an incredible opportunity to save money and help secure their future.
Small businesses with less than 500 full-time employees, regardless of profitability, may be eligible. This means that the more employees you had, the more money you could save since the credit is tied to payroll rather than income.
It's also retroactive, meaning businesses that failed to apply for it previously can still reap the rewards from this tax credit. If you're a business owner who is a part of the 97% of eligible businesses that didn't file for this credit, spend some time reviewing this lucrative tax credit to infuse cash flow into your bottom line.
4. Work opportunity tax credit
Hiring new talent can be challenging and costly to industries with high turnover rates. But this new hire credit encourages employers to look outside their normal candidate scope and hire from demographic groups who experience extra barriers to employment. This includes but is not limited to veterans, convicted felons, the long-term unemployed, and those currently served by government assistance programs such as food stamps.
They will credit businesses up to $9,600 per new hire that remains employed for at least 400 hours. The actual credit depends on the category of the targeted group the person falls within, among other factors.
But there's more to it than just a tax break. By hiring individuals who may have been overlooked, businesses can tap into a talent pool with a strong sense of loyalty and work ethic. As someone who has personally made it a point to hire individuals from disadvantaged backgrounds, I can attest to the dedication and hard work they bring to the table. This credit is an amazing resource for businesses willing to expand their hiring reach and for candidates who are usually passed over.
5. Empowerment zones
The location of a business plays an instrumental role in determining a brand's success. Businesses in urban or rural areas often face significant challenges in recruiting and retaining top talent. To offset this setback, businesses can be credited up to $3,000 per year for a max of three years for hiring someone who lives and works within an empowerment zone. To qualify for this credit, the employees must be working for you for 90 days. The program encourages employers to hire from within the community, which can help stimulate the local economy by offering work where job opportunities are often limited.
Related: Tax Credits are the Incentives in the Inflation Reduction Act
Do it or delegate it
The government enacts these kinds of credits to incentivize businesses to keep people employed. But just because they exist doesn't mean people know about them. As an entrepreneur, I have learned the hard way about the cost of missing out on these credits.
Take action yourself to find more ways to save or delegate the task to a company that can help you optimize these credits. Participating in incentive programs can lead to a substantial accumulation of funds, and these seemingly small opportunities could ultimately make the difference between a thriving organization and one that falls behind.
