A trio of Black women wearing business attire faces the camera. The women are smiling. The woman standing on the left is holding an open binder and the one sitting on the right is holding an electronic tablet.
There are many tax credits and other incentives that minority-owned businesses should look into. — Getty Images/kali9

Minority-owned businesses are a crucial component of the American economy. Over the last 10 years, minority enterprises comprised more than 50% of new U.S.-based businesses and created 4.7 million jobs.

While the federal tax code doesn’t include any specific incentives for minority-owned businesses, entrepreneurs who identify as a member of a minority group may be better positioned to take advantage of certain tax credits and breaks. Here’s what you need to know about tax breaks for minority-owned businesses.

How is a minority-owned business defined on a federal level?

In the United States, there are seven recognized minority groupings: Hispanic/Latino Americans, Black/African Americans, Asian Americans, Arab Americans/Middle Eastern Americans, Native Americans/Alaska Natives and Native Hawaiians/Pacific Islanders.

To support entrepreneurs who identify as one or more of these minorities, federal agencies and other corporations often set aside a percentage of their budgets to work with these businesses. Businesses that work with certified Minority Business Enterprises (MBEs) may be eligible to receive certain tax benefits.

To qualify as an MBE, a business must meet the following criteria:

  • At least 51% of the business is owned and operated by one or more minority U.S. citizens.
  • Management and daily operations are carried out by the minority ownership member(s).
  • The business is a for-profit enterprise, physically located in the United States or trust territories.

[Read more: How to Get Certified as a Minority-Owned Business]

There are also national certifications for Women-Owned Small Businesses (WOSB) that are at least 51% woman-owned and operated, and Economically Disadvantaged Women-Owned Small Businesses (EDWOSB) whose qualifying woman owners have a personal net worth of less than $750,000. Because the Federal Reserve recognizes that minority households often have a lower mean and median net worth than white households, minority female entrepreneurs may meet the criteria for all three of these certifications.

Businesses that work with certified Minority Business Enterprises (MBEs) may be eligible to receive certain tax benefits.

What tax breaks are offered for minority-owned businesses?

There are no federal tax breaks specifically offered to certified minority-owned businesses, but there are tax incentives for working with other minority-owned businesses and operating in low-income areas, which often have larger minority populations. These indirect tax benefits are a great incentive for minority-owned businesses to support their fellow minority entrepreneurs while benefiting financially.

[Read more: 10 Resources for Minority-Owned Businesses]

Depending on the location and nature of their business, there are two particular tax breaks minority business owners may be able to take advantage of:

New-Markets Tax Credit (NMTC)

Established in 2000, the NMTC program has supported minority businesses within low-income areas. Under this program, taxpayers can receive a credit against federal income taxes by investing in designated community development entities (CDEs). Investors can then claim their up to 39% of tax credits in as little as seven years—5% of the investment for each of the first three years, then 6% of the project for each of the remaining four years.

A minority enterprise that falls under CDE designation can be its own investor, though it can also find outside investors (typically a regulated financial institution). Any entity or person is eligible to claim these credits. While the credit is set to expire in 2021, Congress has extended it several times since its initiation, so the NMTC program may continue well into the future.

Breaks for businesses in distressed and empowerment areas

There are several tax breaks that exist to encourage businesses to operate in economically distressed areas. These are not limited to minority enterprises and are open to any qualifying organization. However, if a minority entrepreneur has lived in or is familiar with these designated areas, they may have a competitive advantage in starting up and finding success.

One of the most common tax breaks is for businesses working in empowerment zones. Empowerment zones are areas designated by the Department of Housing and Urban Development (for urban areas) and the Department of Agriculture (for rural areas). Enterprises in these locations qualify for various tax credits, including the empowerment-zone employment credit, special capital-gain exclusion and additional first-year expensing write-offs.

[Read more: 9 Funding Options for Minority-Owned Businesses]

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Published May 17, 2021