A tax credit reduces your tax bill dollar for dollar, making it a valuable write-off if you can claim it. There are a number of tax credits that may reward you for taking certain action to help your employees or your business operations. Some tax credits are exclusively for small businesses while other can be claimed regardless of revenues, number of employees, or other factors.
Credit for Small Employer Health Insurance Premiums
You may be able to take a credit of 50% of the premiums you’ve paid for your employees’ health coverage. But you must meet a number of conditions that may limit or bar any credit:
- You bought the coverage through the government’s Small Business Health Options (SHOP) program.
- You paid at least half of your employees’ premiums
- You have fewer than 25 full-time and full-time equivalent employees.
- Your average payroll is less than a set amount ($53, 000 in 2017; $53, 400 in 2018)
- You didn’t claim the credit in both of the 2 prior years (the credit can only be claimed for 2 consecutive years). For example, if you want to take the credit on your 2017 return, you can’t have claimed in on your 2015 and 2016 returns.
The credit is figured on Form 8941 (https://www.irs.gov/pub/irs-pdf/f8941.pdf).
Credit for Small Employer Pension Plan Startup Costs
If you have 100 or fewer employees who received at least $5, 000 in compensation from you in the preceding year, there’s at least one plan participant who isn’t a highly-compensated employee (i.e., not an owner), and you don’t have a 401(k) or other qualified retirement plan, you can take a tax credit for the cost of setting up and administering it, including the cost of educating your employees about participation. The credit is half your costs up to $1, 000, for a credit of $500. The credit can be claimed for the first three years of the plan. You can even choose to take the credit in the year before the year in which the plan becomes effective.
The credit is figured on Form 8881 (https://www.irs.gov/pub/irs-pdf/f8881.pdf).
Credit for Increasing Research Activities
If you engage in research activities, you may qualify for a tax credit of 20%of your research-related expenses (it’s a little more complicated because the expenses are measured against prior ones and you must increase them to get the credit). For small businesses, rather than using the credit to offset income tax, it can be used to offset up to $250, 000 of the employer’s share of Social Security taxes. This option allows startups that don’t have tax liability yet because they aren’t generating revenue to benefit tax-wise from the costs they incur.
The credit is figured on Form 6765 (https://www.irs.gov/pub/irs-pdf/f6765.pdf). The payroll credit offset is figured on Form 8974 (https://www.irs.gov/pub/irs-pdf/f8974.pdf).
Family and Medical Leave Credit
Federal law doesn’t require you to give paid leave to employees taking time off for certain family matters (e.g., the birth or adoption of a child) or for medical purposes. (A handful of states require some paid leave that’s funded through payroll deductions.) However, if you choose to do so, there is a new tax credit. It applies only for 2018 and 2019, unless Congress extends it.
- To claim the credit, all of the following conditions must be met:
- You must offer a minimum of two weeks of leave.
- You must pay the employee at least 50% of regular earnings.
- The employee must be on your payroll for at least one year and receive no more than $72, 000 annually (adjusted for inflation).
- You must allow part-timers to take a commensurate amount of paid leave.
The credit ranges from 12.5% to 25% of the paid leave, depending on how much it relates to pre-leave pay.
Conclusion
All of the credits listed above are part of the general business credit, which isn’t a separate credit but rather an overall limitation on total credits that can be claimed annually. Talk to your CPA or other tax advisor about whether these or other credits may be available to you.
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