Welcome to STA’s most recent blog with the goal of clearing away financial fog!
Our previous blog discussed tax deductions for eligible expenses within your business. Here, we are going to take a look at the business tax credits.
Although tax deductions and tax credits both result in a lower overall tax bill, we can recap their different natures again.
Last week, we discussed how tax deductions work directly with your expenses. So, they impact your income before tax is accounted for. In sum, the deductions work on the front-end, or “above the tax line”.
Tax credits are prepared on the back-end, or “below the tax line”. After your taxable income has been determined, tax credits are applied and they can lower your tax liability even more or, if you don’t owe anything to the IRS, they can provide you with a lovely tax refund.
Now that we clearly understand the differences between the two, we present the question:
Would you rather have a $10,000 tax deduction or a $10,000 tax credit?
Remember, the deductions decrease your taxable income before tax is calculated into the formula while credits reduce the amount of taxes you owe after they’ve been calculated.
Examine the table below to get a visual representation of this very question.
Notice how the overall tax bill after a $10,000 tax deduction on an AGI of $100,000 leaves the business owner with a payment of $22,500. With a $10,000 tax credit on the other hand, on the exact same AGI, the business owner will only have to pay back $15,000! If you weren’t already sure, now you know what the best option is between the two.
Having broken down deductions and credits, we will now describe some specific tax credits.
#1 Employer Credit for Paid Family and Medical Leave (Form 8994)
Congress authorized this tax credit to encourage small-business owners to provide paid leave to employees. This credit applies ONLY to leave related to:
The birth of a child
Health emergency in the family
Or another reason covered by the Family and Medical Leave Act (FMLA).
Employers are eligible for the Family Leave Act Tax Credit if they:
Have a written policy that provides full-time employees with at least two weeks of paid family and medical leave annually (prorated for part-time employees).
Pay employees at least 50% of their wages during leave.
The credit is equal to 12.5% of the wages that are paid to qualifying employees on family and medical leave during the tax year. The credit increases incrementally if you pay employees more than half of their wages during their leave. The maximum credit is 25% of wages for businesses that cover 100% of an employee’s salary during leave.
IMPORTANT! If you claim the Family Leave Act Tax Credit, the amount of the credit will offset any deduction that you take for employee wages.
#2 Work Opportunity Credit (Form 5884)
Work Opportunity Credit encourages businesses to hire employees in underserved populations:
Family assistance or food stamp recipients
Individuals who have been unemployed long-term
Individuals receiving Supplemental Security Income (SSI)
Designated residents or summer youth employees living in federal empowerment zones
The size of the credit depends on these different categories, and how many hours they worked for your company during the tax year.
In general, you can claim a tax credit of 40% of the first $6,000 of the employee’s first-year wages, which equals $2,400. Higher credits are available for companies that employ veterans and long-term family assistance recipients.
#3 Tax Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment (Form 8881)
This tax credit helps to lower the cost of setting up a retirement plan for you & your employees.
Businesses are eligible for the tax credit if:
They had 100 or fewer employees during the tax year, all of whom received at least $5,000 in wages
They have not previously had a retirement plan in place over the last three years for the same group of employees
Most common retirement plans, including 401(k) plans, SEP IRA plans and SIMPLE IRA plans, qualify under this tax credit.
The credit is worth $500, to be claimed for administrative costs and money spent to inform employees about their benefits and options under the plan.
AND THEN! People who contribute to a retirement plan, including “YOU,” can take advantage of a retirement savings contribution tax credit if they fall into a lower income bracket.
#4 Credit for Employer-Provided Childcare Facilities and Services (Form 8882)
This tax credit aids businesses that pay for their employees’ child care expenses or help their employees obtain child care.
The following expenses are covered:
Expenses used to construct, remodel or expand a child care facility.
Expenses used to operate an existing child care facility, such as caregiver salaries.
Expenses used to provide child care to employees’ children, through a contract with a qualified child care facility.
Expenses used to provide child care resources and referrals through a contract with a child care provider.
Businesses that qualify can claim 25% of their expenditures on child care, plus 10% of child care resource and referral expenditures. The credit is limited to $150,000 per tax year. All facilities must be qualified child care facilities, meaning that they must comply with the licensing requirements of the state or locality in which they are located.
#5 Credit for Small-Business Health Insurance Premiums (Form 8941)
This credit is for companies that provide small-business health insurance to their employees.
It is available to businesses that:
Have fewer than 25 full-time or equivalent employees.
Pay an average wage of less than $55,000 a year per full-time employee
Pay at least half of their employees’ health insurance premiums.
Purchased a qualified health plan from the Small-Business Health Options Program (SHOP) Marketplace.
If you qualify, this credit is equal to 50% of employer-paid health insurance premiums.
BUT!! You can only claim the credit for two consecutive years after 2014. No further!
#6 Disabled Access Credit (Form 8826)
This credit encourages companies to make their business locations accessible to customers with disabilities.
FYI – The Americans with Disabilities Act (ADA), enacted in 1990, requires businesses with 15 or more employees to provide reasonable accommodations to employees with disabilities.
The credit is available to businesses that have total revenues of $1 million or less, or 30 or fewer full-time employees. With this credit, you can cover up to 50% of disabled access expenditures, ranging from $250 to $10,000.
You can claim a maximum credit of $5,000 in one year.
#7 Employee Retention Tax Credit (Form 8874)
With the signing of the Infrastructure Investment and Jobs Act on Nov. 15, 2021, the ERTC program end date changed to Sept. 30, 2021, for most businesses.
Businesses have up to three years to determine if wages they paid after March 12, 2020 through Sept. 30, 2021 are eligible.
***Under the American Rescue Plan Act of 2021…
The credit remains at 70% of qualified wages up to a $10,000 limit per quarter.
A maximum of $7,000 per employee per quarter (or, up to $21,000 for 2021)
Recovery Startup Businesses are still eligible for ERTC through December 31st.
RSB: One that started after Feb. 15, 2020 and, in general, had an average of $1 million or less in gross receipts.
They could be eligible to take a credit of up to $50,000 for the third and fourth quarters of 2021.
This information is intended to assist and uplift new and veteran business owners in the areas of tax deductions and tax credits. If you have any follow-up questions for our certified accountant, do not hesitate to schedule your FREE consultation today!