Tax Credits for Small Businesses: Complete Guide
Let's talk about keeping more money in your business. While nobody enjoys thinking about taxes, smart business owners know that tax credits can significantly boost their bottom line. Tax credits for small businesses aren't just nice-to-have bonuses — they're powerful tools that can help fund your next big move, whether that's buying new equipment or bringing on your next star employee.
Why claiming tax credits matters
Think of tax credits as a reward from the government for activities that strengthen the economy. Unlike other tax benefits, credits reduce your taxes dollar for dollar, making them especially valuable for businesses watching their bottom line.
Tax credits vs. deductions: Understanding the difference
While both credits and deductions lower your tax bill, they work differently:
Tax credits directly reduce taxes owed, dollar for dollar — a $1,000 credit saves you $1,000.
Tax deductions lower taxable income — a $1,000 deduction in the 25% tax bracket saves $250.
This difference makes credits particularly powerful for small businesses looking to maximize tax savings.
Key tax credits small businesses should know about
Here are six valuable credits worth exploring. Remember, every business is unique — consulting with a tax professional ensures you understand all available opportunities.
Small business health insurance credit
This credit helps smaller employers provide health coverage. Key points:
You have to have fewer than 25 full-time equivalent employees.
Your average employee salary must be under $56,000 annually (adjusted for inflation).
Employers must pay at least 50% of employee-only health insurance premiums.
The credit covers up to 50% of premiums paid (35% for tax-exempt employers).
This credit can only be claimed for two consecutive years.
Employer credit for paid family and medical leave
This credit rewards employers who support their team during important life events, covered by the Family Medical Leave Act (FMLA). Here are the details:The credit ranges from 12.5% to 25% of wages paid during leave.
You must provide at least two weeks of leave annually.
The policy needs to cover at least 50% of regular wages.
Leave must be available for up to 12 weeks per employee annually.
Your written policy required with non-interference language.
You can also increase your credit percentage by offering higher wage replacement rates. For example, paying 100% of regular wages during leave qualifies for the maximum 25% credit rate.
Research and development credit
Don't let the name fool you — this credit extends beyond traditional research:
It covers employee wages for research activities.
It includes research supplies and materials.
It applies to contract research (65% of payments).
It’s available for software development.
It helps fund product and process improvements.
To qualify, activities must:
Create new or improved products/processes.
Rely on hard sciences.
Address technical uncertainty.
Involve experimentation.
If these conditions are all met, startup businesses may apply up to $250,000 against payroll taxes.
Work opportunity tax credit
This credit encourages hiring from groups facing employment barriers:
Qualified groups include:
Veterans.
Long-term unemployment recipients.
SNAP benefit recipients.
Designated community residents.
Vocational rehabilitation referrals.
Eligible employees must work at least 120 hours. You must certify within 28 days of start date. This credit varies by target group and hours worked, and it’s based on first-year wages, up to 40% of eligible wages.
Disabled access credit
This credit helps offset costs of making businesses more accessible by offsetting the cost of ADA compliance.
Available for businesses with $1 million or less in revenue.
Must have 30 or fewer full-time employees.
Covers 50% of eligible expenses over $250.
Maximum credit is $5,000 annually.
Eligible modifications include:
Providing accessible parking.
Installing ramps and lifts.
Modifying restrooms.
Adding Braille signage.
Providing accessible equipment.
The disabled access credit is available for small businesses with:
$1 million or less in revenue.
30 or fewer full-time employees
Employee tip credit
Particularly valuable for food service businesses, this credit helps offset FICA taxes on reported tips.
Requirements include:
Proper tip reporting procedures.
Employee documentation.
Minimum wage compliance.
Mistakes to avoid
Many business owners miss out on valuable credits because of:
Incomplete documentation.
Misunderstanding eligibility requirements.
Overlooking available credits.
Calculation errors.
Many small business owners leave money on the table by not claiming all available credits or making errors in their applications. The IRS estimates that millions of dollars in available tax credits go unclaimed each year.
Partner with a professional
Tax credits change frequently, and requirements can be complex. At Archer Lewis, we help small business owners identify and maximize available credits while ensuring compliance. Our experienced team specializes in making tax strategy understandable and actionable for businesses like yours.
Don't leave valuable tax savings unclaimed. Learn how we can help you take advantage of tax credit opportunities.