What Are Business Tax Credits and How Do I Use Them?

For most businesses, taxes are a burdensome expense. Business tax credits are a way to reduce the total dollar amount of taxes your organization pays each year.

Definition of Business Tax Credits

Put simply, tax credits are reductions to the actual dollar amount of taxes owed. They are offered by the government as an incentive for businesses to invest in things that improve society, such as research and development, using green energy, providing for employees’ needs, and so on.

Unlike tax deductions, which reduce the amount of income that can be taxed, credits are applied after tax has been calculated, reducing the actual amount owed. For this reason, business tax credits are far more valuable than tax deductions.

Types of Business Tax Credits

There are many business tax credits available, including the following, which are part of the general business credit.

Credit for Employer-Provided Childcare Facilities and Services

Businesses that pay for their employees’ childcare or provide childcare facilities to their employees can claim the Employer-Provided Childcare Facilities and Services tax credit.

This tax credit is limited to 25% of overall expenses plus 10% of childcare resource and referral expenditures. The maximum amount allowed under this credit is $150,000, and it’s claimed on Form 8882.

Rehabilitation, Energy, and Reforestation Investments Credits

The Investment Credit (Form 3468) allows businesses to claim tax credits for investments made in reforestation efforts, rehabilitating buildings, and implementing alternative energy. Businesses are able to claim 10% of their expenditures in these areas, to a maximum of $10,000 per year.

Credit for Increasing Research Activities

Research and development is rewarded with the Credit for Increasing Research Activities, which is claimed on Form 6765 for most businesses and Form 8974 for small businesses.

The types of activities rewarded include developing new products and processes, applying for patents, developing new technology, environmental testing, streamlining internal processes, and so on. Up to 20% of R&D expenses can be covered.

Alternative Motor Vehicle Credit

The Alternative Motor Vehicle Credit rewards businesses for purchasing vehicles that use alternative forms of fuel. Businesses can claim up to $8,000 under this credit on Form 8910.

It’s worth noting that this credit does not apply to electric or hybrid vehicles.

Work Opportunity Credit

Businesses that hire people who have traditionally faced barriers to securing employment may qualify for the Work Opportunity Credit. Businesses can claim up to $9,000 in tax credits over the course of two years on Form 5884.

Categories of employees who qualify under this tax credit include ex-felons, disabled veterans, food stamp recipients, long-term family assistance recipients, and vocational rehabilitation referrals, to name a few.

Making the Most of Tax Credits for Your Business

It’s worthwhile to qualify for as many tax credits as possible, even if doing so would seem like overkill. Excess credits can be applied to previous years retroactively or to future tax returns, meaning long-term savings on tax expenses.

The credits your business qualifies for will likely change from year to year, so it’s important to keep a close eye on these credits. A tax attorney can help you in that area.

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