Tax credits are one of the best ways to save money on your tax bill. But keeping track of them all can be difficult.
Here’s our definitive guide to all of the small business tax credits you might be eligible for, and which forms you need to file for each one.
What’s the difference between a tax credit and a tax deduction?
Tax deductions decrease your taxable income, which is taxed at a certain percentage depending on your bracket. This means only a certain percentage of every dollar you deduct gets taken off your income tax.
E.g. If your tax rate is 10%, one dollar of deductions will result in 10 cents of tax savings. If you’re taxed at 24%, one dollar will result in 24 cents in savings.
(Check out our big list of small business tax deductions to make sure you’re not missing any.)
Tax credits, on the other hand, decrease your taxes directly. One dollar of tax credits equals one dollar subtracted from your bill for the current tax year.
Further reading: Tax Credit vs Tax Deduction: What’s the Difference?
The General Business Tax Credit
The first stop for figuring out your tax credits is Form 3800, used to calculate what the IRS calls your “general business tax credit.”
This “credit” is actually a big menu of individual tax credits that encourage certain business activities (like starting a pension plan, reforestation and energy efficiency). We’ll cover these credits in detail below.
Keep in mind that each of these credits requires its own form, which you should fill out before filling out Form 3800. You’ll then tally all the credits to figure out your total general business tax credit for the year, and include the form in your tax return.
Keep in mind that the general business tax credit is “non-refundable,” meaning it can only reduce your total tax liability to zero.
Which form to use: Form 3800
Rehabilitation, Energy and Reforestation Investments Credit
You might be eligible for this credit if your business spent any money on rehabilitating or renovating an old building, reforestation, or used alternative energy sources like solar or wind power.
This credit usually covers 10% of your expenditures and is capped at $10,000 per year.
Which form to use: Form 3468, Investment Credit
Work Opportunity and Welfare-to-Work Expenses Credit
You may qualify for this credit if you hire employees who face significant barriers to employment.
The IRS provides the following list of 10 worker categories who are recognized by this credit:
Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
Unemployed veterans, including disabled veterans
Designated community residents living in Empowerment Zones or Rural Renewal Counties
Vocational rehabilitation referrals
Summer youth employees living in Empowerment Zones
Food stamp (SNAP) recipients
Supplemental Security Income (SSI) recipients
Long-term family assistance recipients
Qualified long-term unemployment recipients (for people who begin work after 2015).
This credit is calculated based on wages you pay to the qualified employee, and can save you a maximum of $9,000 over two years per worker category.
If you think any of your employees fall into one of the ten categories above, ask a tax credit specialist how to maximize your Form 5884 deduction.
Which form to use: Form 5884, Work Opportunity Credit
Alternative Fuel Credits
The IRS offers a bunch of credits related to certain alternative fuels. You might be eligible for one of them if you’ve sold or used certain eligible biofuels, biodiesels, or low sulfur diesel over the course of the year.
Biodiesel and Renewable Diesel Fuels Credit
Alternative Fuel Vehicle Refueling Property Credit
Alcohol and Cellulosic Biofuel Fuels Credit
Note: this credit only applies to companies that are involved in the production of biofuels.
Credit for Increasing Research Activities
If you spent any money developing a patent, building new software, working on a prototype for a new product, or any other kind of research or development, you might qualify for this credit.
This credit is open to individuals, partnerships and corporations and can cover up to 20% of your qualified research expenses. But only certain kinds of research qualify, and figuring out which kinds are eligible can be tricky.
Make sure to consult the instructions for Form 6765 or talk to an expert for a full breakdown of which kinds of research qualify.
Small businesses don’t claim this credit directly. Instead, they file Form 8974, which offsets up to $250,000 of that small business’ share of Social Security taxes for that year.
Disabled Access Credit
You may be eligible for this credit if you spent any money on making your business more accessible to people with disabilities. The IRS adopts a pretty broad definition of “accessible” here—make sure to consult the instructions appended to Form 8826 for a full breakdown of which expenses qualify.
The credit covers 50% of your expenses, up to $10,250 after the first $250. This means the maximum tax credit is $5,000 (50% of $10,250 - $250).
Which form to use: Form 8826, Disabled Access Credit
Qualified Plug-in Electric and Electric Vehicle Credit
You might qualify for this credit if your business purchased and used a qualified plug-in electric vehicle on or after 2010, such as an electric car or scooter.
The credit is worth between $2,500 and $7,500, depending on the vehicle’s battery capacity. The EPA provides a handy calculator to figure out your total potential tax credit.
Which form to use: Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit
Alternative Motor Vehicle Credit
You might qualify for this credit if your business bought and used a vehicle that runs on alternative fuel, such as hydrogen fuel cells. (This one doesn’t apply to plug-in electric and hybrid vehicles.)
The credit is worth up to $8,000, but currently only a few vehicles qualify, including the Mercedes-Benz 2012 F-Cell and cars from the Honda FCX Clarity series.
Which form to use: Form 8910, Alternative Motor Vehicle Credit
Empowerment Zone and Renewal Community Employment Credit
If you hire someone who lives and works in a low-income area, you might qualify for this credit.
Empowerment Zones (EZs) were created by the U.S. Department of Housing and Urban Development (HUD) to encourage economic development in low-income areas. To see whether your employees are located in an Empowerment Zone, visit the HUD’s website.
If you qualify, you can receive a credit of up to $3,000 for each full or part-time employee who lives in an Empowerment Zone (up to 20% of the first $15,000 in wages).
Which form to use: Form 8844, Empowerment Zone and Renewal Community Employment Credit
Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips
You might qualify for this one if you employ workers in the food and beverage industry, your employees receive tips, and you pay social security or Medicare taxes on those tips. This credit only applies to food and beverage workers—other kinds of tips don’t qualify.
New Markets Credit
You could qualify if you invested in an organization that promotes job creation in low income communities.
The U.S. Department of Treasury calls these organizations community development entities (CDE), and provides a list of CDEs sorted by state here.
For a full discussion of the New Markets Credit, refer to the IRS’s guide here.
Which form to use: Form 8874, New Markets Credit
Credit for Small Employer Pension Plan Startup Costs
You might qualify for this credit if:
your company has 100 or fewer employees who received at least $5,000 in compensation
you haven’t had an existing 401(k) or other qualifying retirement plan for the past 3 years
you plan on starting up a pension plan for your employees
The credit is worth up to $500, or 50% of your startup costs, and you can claim it for the first three years of your plan.
Which form to use: Form 8881, Credit for Small Employer Pension Plan Startup Costs
Employer-Provided Child Care Credit
If you pay for your employees’ child care expenses, you can receive 25% of up to $150,000 of those expenses as a tax credit. (If your company is incorporated and you’re an employee, you could be eligible for the same benefits as your employees.)
Which form to use: Form 8882, Credit for Employer-Provided Child Care Facilities and Services
Credit for Small Employer Health Insurance Premiums
If you pay premiums for your employee’s health coverage, you might be able to take a tax credit for up to 50% of those expenses, if you meet certain criteria.
This credit applies only to companies with fewer than 25 full-time employees, who pay at least half of their employees’ premiums, and did not have an average payroll above $56,000 in 2020. Companies must also have purchased the coverage through the Small Business Health Options (SHOP) program.
Which form to use: Form 8941, Credit for Small Employer Health Insurance Premiums
Family and Medical Leave Credit
If you provided paid leave to an employee for family or health-related reasons for at least two weeks this year, you might qualify for this credit.
You must have paid at least 50% of the employees’ regular earnings, and the employee must have been on your payroll for at least one year. The credit is worth between 12.5% and 25% of what you paid the employee, depending on the employee’s pre-leave pay.
For more information about the credit, visit the IRS’s FAQ here.
Which form to use: IRS Form 8994, Employer Credit for Paid Family and Medical Leave
How Bench can help
The key to having the lowest tax bill is not leaving a single tax credit or deduction on the table. With clean and consistent financials, you’ll have all the information you need to take advantage of every discount the IRS offers to you. By making Bench a part of your business, you have a personal bookkeeping team importing transactions, categorizing expenses, generating reports, and reviewing your information so it’s up to IRS standards. Want to take your tax season to the next level? Upgrade to a premium subscription to get access to unlimited on-demand access to consultations with our in-house tax professionals to guarantee the most painless tax season with the lowest tax bill. Learn more.