Take full advantage of available tax credits.
There are several tax credits and deductions available to small businesses, though many business owners are unaware of them. — Getty Images/fizkes

For many small business owners, 2020 was a difficult year, making it all the more important that merchants take full advantage of the tax credits and deductions available. Unfortunately, few business owners are aware of the full range of tax credits of which they can take advantage.

For instance, less than three in 10 businesses who qualify for the R&D tax credit actually claim it, while virtually every large company makes the claim.

Quite often small businesses leave significant amounts of money on the table by neglecting to take advantage of tax credits. CO– spoke to two tax professionals to get their advice on where your business may be able to save money on your 2020 tax return.

[Read more: 2021 Tax Season Planning You Should Be Doing Now]

What’s the difference between a tax credit and a tax deduction?

Before we get into the different credits you may be able to claim, it’s important to understand the difference between a tax credit and a tax deduction. Too often, business owners focus exclusively on deductions and ignore the potential to claim equally beneficial credits.

A tax deduction reduces how much of your business income is subject to taxes. “Deductions lower your taxable income by the percentage of your highest federal income tax bracket. So if you fall into the 22% tax bracket, a $1,000 deduction saves you $220,” explains Nerdwallet.

A tax credit is more straightforward in that it reduces the amount of tax owed by giving you a dollar-for-dollar reduction of your liability. For instance, a tax credit valued at $500 will lower your bill by $500.

Business owners can claim both credits and deductions, as long as you meet the necessary qualifications. Here are a few credits that many business owners may be eligible to claim on their 2020 tax return.

Tax credits commonly missed by small businesses

The research and development (R&D) tax credit is one for which many small business owners believe they are not eligible. However, there are many others, said Patrick Butler, CPA and partner at Reynolds + Rowella.

[Read more: How to Qualify for and Claim the R&D Tax Credit]

The first is the Work Opportunity Tax Credit. The Work Opportunity Tax Credit can be claimed by employers who hire individuals from specific targeted groups, explained Butler. This credit is based on three things: the category of workers hired; the wages paid to those employees in their first year; and how many hours these employees worked. If your business hires a veteran, for instance, the company can receive a credit for up to $2,400 for every new full-time hire.

Kevin Hamaker, CPA, MPAcc and partner at BSB CPAs + Business Advisors added that effective January 1, 2020, the SECURE Act offers credits for implementing a 401K plan or adding an auto-enrollment feature to a plan. “Companies can receive a credit up to $5,000 to offset startup costs of creating a 401K plan,” said Hamaker. “If a company implements an auto-enrollment feature to a 401K plan they can receive a $500 credit.”

Companies can receive a credit up to $5,000 to offset startup costs of creating a 401K plan.

Kevin Hamaker, CPA, MPAcc and partner at BSB CPAs + Business Advisors

Hamaker recommended that, in addition to exploring credits and the federal level, small businesses look into the hundreds of state and local credits available –– especially those related to the R&D and the Work Opportunity Tax Credits.

Butler had a few other suggestions of federal tax credits to explore:

In addition to the credits listed above, there are some new tax credits that you may be able to apply specifically to your 2020 tax return.

Tax credits related to the COVID-19 pandemic

This year, Congress passed two financial relief bills to mitigate the economic fallout of the pandemic. Within these bills were a few credits aimed to help small businesses reduce their tax burden in this difficult time.

“The FFCRA provides businesses with tax credits to cover certain costs of providing employees with required paid sick leave and expanded family and medical leave for reasons related to COVID-19, from April 1, 2020, through December 31, 2020,” said Hamaker. “The credit covers 100% of up to 10 days of qualified sick leave, plus the Medicare tax on those wages.”

Butler recommended exploring the Employee Retention Credit. This credit is offered to employers whose operations have been partially or fully suspended due to COVID-19. Companies can claim 50% of up to $10,000 in qualifying wages for each full-time employee who you continue to keep on your payroll (up to a $5,000 credit for each employee).

[Everything you need to know about the Employee Retention Tax Credit]

Both Hamaker and Butler note that the second stimulus bill passed in December, 2020, clarified some of the confusion around Paycheck Protection Program loan forgiveness and taxes. Small businesses with PPP loans forgiven will not be able to deduct the associated costs on their tax return. “To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period of either eight or 24 weeks,” said Butler.

Butler noted that now is the time to begin preparing your tax return to make sure you’re taking full advantage of the credits and deductions available. Consult your accountant to see for which of these credits you qualify and make sure you’re not leaving any money on the table this tax season.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published January 15, 2021