• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
  • Facebook
  • Instagram
  • LinkedIn
  • Twitter
  • YouTube
Big Ideas for Small Business logo

Barbara Weltman

Big Ideas for Small Business, Inc.

Whitepaper download

Subscribe and download our eBook, "150+ Tax Deductions for Small Business A to Z."

This field is hidden when viewing the form
Get the:

  • Home
  • About Us
  • Big Ideas For Your Business
    • Idea Of The Day ®
    • SMB Legal
    • SMB Taxes
    • SMB Financial
    • Small Business
    • Newsletter Archive
  • Services
  • Books
  • Blog
  • Multimedia
    • Videos
    • Radio Shows/Podcasts
  • Be a Guest Blogger

Slash Your Federal Tax Bill with Income Tax Credits

July 27, 2021 / By Barbara Weltman

Income Tax CreditsA tax credit is a dollar-for-dollar reduction of tax liability. During COVID-19, much attention has been focused on employment tax credits for paid sick leave, paid family leave, employee retention, and COBRA payments. But income tax credits for small businesses may fit well into today’s economy and business planning, and provide significant tax savings.

Work opportunity credit

Your business goal: Hiring new employees. The biggest challenge facing many small businesses today is finding qualified employees. According to BLS, as of July 7, 2021, there are 9.2 million job openings. Small businesses aren’t the only ones hiring; large companies are also on the hunt to fill positions.

The business action: You need to use every action possible to fill your openings. This includes seeking referrals from current employees, posting on your website and on job sites (e.g., Indeed), and signs in your window.

The tax credit: If you hire someone from a targeted group specified by the IRS, you may claim a tax credit. One of the groups is “long-term unemployment recipient,” which includes anyone collecting unemployment for not less than 27 consecutive weeks. The amount of the credit varies somewhat with their targeted group. For a long-term unemployed, the credit is 40% of first year wages up to $6,000, for a maximum credit of $2,400. Important: To qualify for a credit, you must submit IRS Form 8850 to your state workforce agency no later than 28 days after a new employee begins working for you.

Retirement plan credits

Your business goal: Attracting and retaining employees. In today’s tight job market, companies are competing for talent by offering a variety of fringe benefits. One of the most common of these benefits is access to a retirement plan.

The business action: If you do not yet have a qualified retirement plan, such as a 401(k) plan, profit-sharing plan, or SEP, you can set one up. Depending on the plan you select, some or all of the contributions are made employee contributions (i.e., no cost to employers). Or employers may or must make contributions, which are deductible. Additional costs (explained below) may generate a tax credit. If you choose to adopt a 401(k) plan, it may include automatic enrollment with a salary reduction feature in which employees automatically participate and contribute within the annual limit a set percentage of their compensation (though they may opt out or reduce their salary reduction contributions).

The tax credit: A small employer may take a tax credit of up to $5,000 per year for up to 3 years to cover the cost of administration as well as employee education. The plan must cover at least one employee who is not highly compensated (i.e., not an owner) and the company may not have had a plan within the prior 3 years. A small employer that chooses an automatic enrollment plan—whether new or changing an existing plan—may claim an additional credit of up to $500 per year for up to 3 years. These two credits are explained in the instructions to Form 8881.

Research credit

Your business goal: Developing new products and/or processes. You may envision research as the domain of large pharmaceutical and technology companies. But many innovations come from small businesses…and even inventors in their basement labs.

The business action: Be sure you budget for your R&D activities. Carefully document expenditures related to determine the effectiveness of the research as well as to optimize the credit.

The tax credit: The research credit is up to 20% of increased research expenditures (there’s a 14% credit limit with different parameters). This research must be undertaken for discovering information that is technological in nature, and its application must be intended for use in developing a new or improved business component of your business. In addition, substantially all of the activities of the research must be elements of a process of experimentation relating to a new or improved function, performance, reliability, or quality. This doesn’t need to be a product or service; it may be an internal innovative process.

Note: Small businesses (gross receipts under $5 million) may apply up to $250,000 of their research credit as against employment tax liability rather than using the full credit as an income tax credit. This may be helpful for start-ups that don’t have sufficient revenue to create tax liability that an income tax credit could offset. More details about the credit may be found in an IRS Audit Technique Guide.

Final thought

These are not the only credits for which a small business may be eligible. For example, there’s a tax credit for paying at least half of employees’ group health costs if they meet certain conditions.

Best strategy: Meet with your CPA or other tax advisor to review the tax credits to which you potentially may be eligible and how to nail them down.

Tags business planning federal tax bill hiring income tax credits small business tax credits

Primary Sidebar

Categories

  • General Business (498)
  • Guest Blog (109)
  • Homepage (21)
  • Small Business (990)
  • SMB Financial (322)
  • SMB Legal (66)
  • SMB Taxes (324)

Barbara’s Recent Posts

  • Scale Your Business by Stepping Up IP Protection May 29, 2025
  • Disasters Happen: It’s Important to Be Prepared Now May 27, 2025
  • How Work Order Software Transforms Small Business Operations May 26, 2025
  • The Numbers Are Up for Sole Proprietorships May 22, 2025
  • New Business or Project Crowdfunding: What To Know May 20, 2025
  • Old-School Estimating vs. Smart Solutions: What’s Really Holding You Back? May 19, 2025
  • Employees Getting Called to Public Service: What to Know May 15, 2025
  • Not Too Late to Prep for Summer Now May 13, 2025
  • How Will the Next Generation of Learners Affect the Workplace May 12, 2025
  • Moms Know Best: Lessons for Entrepreneurs May 8, 2025
  • Mental Health Challenges in the Workplace May 6, 2025
  • Let’s Celebrate Small Business! May 1, 2025
Awarded Top 100 Small Business Blog medal (link will open in a new window or tab)
Marquis Who's Who 2023 Badge
Top Small Business Blogs (Link will open in a new window or tab.)
8 Financial blogs small business Owners Need to Read. Invoice home.  (link will open in a new window or tab)
Best Small Business Blog, Expertido.org
Top 50 Small Business Blogs 2018
Best Small Business Blogs
BizHumm Top 100 Business Blog Award to Barbara Weltman
FitsSmallBusiness.com: Award for Best Small Business Blog 2017 (link will open in a new window or tab)
FitsSmallBusiness.com: Award for Best Small Business Blog 2016 (link will open in a new window or tab)

Footer

Big Ideas for Small Business logo

Small business ideas, business tax news and small business consulting from Barbara Weltman to provide business owners with the information they need to succeed. Visit our small business blog, Idea of The Day®, small business books and articles on small business taxes, small business finance and small business legal advice.

Contact Us

[email protected]

(772) 492-9593

gacor maxwin situs slot thailand terpercaya situs slot gacor situs gacor akun pro thailand slot bandar togel terpercaya

Latest Tweets

bigideas4sb Big Ideas for Small Business® @bigideas4sb ·
May 31

Starbucks Rediscovers Its Human Side - Branding Strategy Insider https://bit.ly/3H9KwHP #smallbusiness #branding #marketing

Reply on Twitter 1928884285445931367 Retweet on Twitter 1928884285445931367 Like on Twitter 1928884285445931367 2 Twitter 1928884285445931367
bigideas4sb Big Ideas for Small Business® @bigideas4sb ·
May 31

New Business or Project Crowdfunding: What To Know - https://bit.ly/43nclnL #startups #loans #crowdfunding #smallbusiness

Reply on Twitter 1928862798886441182 Retweet on Twitter 1928862798886441182 Like on Twitter 1928862798886441182 1 Twitter 1928862798886441182
bigideas4sb Big Ideas for Small Business® @bigideas4sb ·
May 31

10 Simple Ways to Get Employees to Quit — Improve Your HR https://bit.ly/44KRu01 #smallbusiness #workplace #hiring #employees

Reply on Twitter 1928844506998136977 Retweet on Twitter 1928844506998136977 1 Like on Twitter 1928844506998136977 1 Twitter 1928844506998136977
Load More

Copyright © 2008–2025 Big Ideas for Small Business, Inc  |  Designed by Hudson Fusion

  • Privacy Policy
  • Sitemap