For an entrepreneur, rising sales numbers and a growing client base are usually viewed as the primary signs of their business’ financial health. However, it’s also essential to have at least a basic understanding of the tax code—and not only what you’re responsible for paying.
Whether an entrepreneur is managing their own books or working with a tax specialist, it’s also wise to be up to speed on available tax credits and adjustments and the processes involved with leveraging them. Below, 11 members of Forbes Finance Council share valuable tax credits and important processes they believe every business owner should know about.
1. Research And Development Credit
The Research and Development Credit is a significant tax credit that can help both mature and startup companies in a vast array of industries. Yes, software developers and biotech companies will easily qualify, but many other industries, including construction, manufacturing and retail, can potentially have qualifying expenses. There’s also a refundable payroll tax option for startups. – Shaune Scutellaro, CohnReznick LLP
2. Section 280A
Section 280A allows homeowners to rent out their homes for up to 14 days per year without the need to report the rental income on their individual tax returns. That means a business owner can rent their personal residence to their business for a company retreat. The cost of the retreat, including the rent, is a deduction for their business, and the income is tax-free for the homeowner. – Marthin De Beer, BrightPlan
3. Employee Retention Credit
Small to medium-sized businesses harmed by Covid-19 may be eligible for the Employee Retention Credit. The ERC is a dollar-for-dollar credit on wages paid. The 2021 ERC is available up to three years from filing the first three quarters of 2021 payroll returns. Find a firm that will do the ERC on a time-incurred rather than a contingent-fee basis to ensure the ERC has maximum benefit for the employer. – Matthew Goldston, PKF Texas
4. Work Opportunity Credit; Disabled Access Credit
Many tax credits are available to small businesses that are often overlooked and underutilized. The Work Opportunity Credit provides 40% of the first $6,000 in first-year wages for hires from specific demographic groups. The Disabled Access Credit is available for businesses earning $1 million or less and with 30 or fewer full-time employees. It covers up to 50% of access expenditures, with a maximum of $5,000 in a single year. Research is key to matching your business needs. – Cynthia Hemingway, Fourlane, Inc.
5. Credit For Small-Business Health Insurance Premiums
There are several tax credits you can utilize to offset your liability; one you should know about is the Credit for Small-Business Health Insurance Premiums. This credit is for 50% of your employer-paid health premiums. As any entrepreneur can tell you, running a business becomes extremely costly when you start hiring; this credit can be a great way to reduce some of that cost while you invest in your team. – Patrick Rood, Rood Financial Services
6. SECURE Act
The SECURE Act was signed into law in 2019. It made significant changes to retirement plans, including the creation of enhanced tax credits for small businesses starting a new 401(k) plan or adding automatic enrollment to any 401(k) plan. These incentives are designed to encourage employers to set up employer-sponsored pension plans for employees and to increase participation. – Michael S. Schwartz, Magnus Financial Group LLC
7. Empowerment Zone Employment Credit
The Empowerment Zone Employment Credit offers business owners up to $3,000 per employee if the business operates within an empowerment zone and employs those who also live within the zone. It should be noted, however, that qualified zone wages can’t include wages that are being considered for the Work Opportunity Tax Credit. If you operate in an empowerment zone, this is a great tax credit. – Justin Goodbread, WealthSource Partners, LLC
8. Section 179 Deduction
The Section 179 deduction, previously known as the “SUV tax loophole” or the “Hummer Deduction,” is the most important tax credit for businesses to know about. This tax credit, sometimes referred to as a deduction, is for business equipment. You can deduct the full purchase price of qualifying equipment and software. – Jared Weitz, United Capital Source Inc.
9. Retirement Plans Startup Costs Tax Credit
A little-known credit available to small businesses is the Retirement Plans Startup Costs Tax Credit, which is available to businesses with 100 or fewer employees. The credit can generate tax savings of up to $5,000 per year for three years to help offset the cost of starting a new retirement plan for employees. – Jeff Call, Bennett Thrasher
10. General Business Tax Credit
The General Business Tax Credit gives small-business owners numerous options for investing in initiatives that help them, their employees and their business. I also like the simplicity of it; expenditures such as buying electric vehicles, entering new markets and retaining employees can be claimed on a single form. – Todd Sixt, Strait & Sound Wealth Management LLC
11. Granting Employees Shares And Options
The most important tax concept for founders to understand is how to most efficiently grant shares or options to their employees. Exercising options are often a tax nightmare for employees. Plans need to be set up correctly from the start. Knowing tax credits is important, but the tax implications of not setting your employee option pool up correctly will likely vastly outweigh any tax credit. – Rebecca Mitchem, Neotribe Ventures