If you're in the process of growing your business, these three types of business tax credits can set you up for success.
Small business tax credits don't just help you save money — they can also facilitate business growth. Unlike tax deductions, which lower your taxable income, tax credits give you dollar-for-dollar reductions on your taxes as long as you meet certain qualifying criteria. Certain tax credits incentivize you to make strategic business decisions, like exploring new business opportunities, hiring employees, or improving operations. Find out which tax credits can help fuel your business's long-term growth.
Research and Development (R&D) tax credits reward you for improving your business's products, services, or operational processes. Depending on the stage you're in, you might be doing R&D work to bring your product or service to market, streamline operations, innovate your current offerings, or create new ones.
R&D activities are expensive, but they're a worthwhile investment in your business's long-term growth. Strategic R&D work can help you expand to new markets, widen your customer base, and ultimately generate more revenue. Here are just a handful of R&D projects you might take on:
If you're planning to invest in R&D, the Credit for Increasing Research Activities can help offset your spending. If you qualify for the credit, you can apply up to $250,000 of the tax credit to your payroll tax liability instead of your income tax liability.
To qualify for the R&D credit, you have to carefully document your R&D activities and expenses, then apply for approval. You also have to run a corporation, partnership, or sole proprietorship, and make sure your gross receipts for the taxable year are less than $5 million. If you have documentation of your R&D activities, take the following steps:
Another way to invest in your business's growth is to take advantage of a hiring-focused business tax credit, like the Work Opportunity Tax Credit (WOTC). The WOTC, which was recently extended until December 31, 2025, helps you save money on business income taxes while diversifying and expanding your workforce.
The credit is available to employers who hire individuals who've historically had a harder time securing work, like veterans, family assistance recipients, and people living in designated empowerment zones. Check out the IRS' complete list of the 10 qualifying groups.
If you qualify as a taxable business, you can apply the credit to your business income taxes; if you qualify as a tax-exempt organization, you can put the credit toward your employer's share of Social Security taxes. Depending on the person you hire, their salary, and the amount of hours they work in a year, you can get a credit for either 25% or 40% of their first-year wages — up to certain amounts. For most individuals, you can get up to $6,000 or $2,400 in a one-year period.
There are several steps you need to take before you can claim the credit, the most important being screening your applicants. Here's an overview of the process:
Your employees keep your business running, so it's crucial to keep them happy. Offering thoughtful benefits can help you attract and retain talented employees, setting your business up for steady growth and stable revenue.
Fortunately, there are a number of tax credits available to businesses that offer certain benefits, including: