What Are Tax Credits for Small Businesses?

Small businesses are an important part of the national economy. As such, a wide range of legislation has been enacted to help small businesses save money on taxes. Here is a guide to tax credits specially designed for small businesses:

Health care tax credits Mike D’Avolio, Senior Tax Analyst for Intuit, suggests that businesses may be under-utilizing this new tax credit. “As many as 4 million small businesses may be eligible for the credit if they offer insurance,” he says. Thanks to the Affordable Care Act, small businesses can now claim tax credits for providing health insurance coverage to their employees. Businesses can deduct up to 35 percent of employee premium costs, and that rate will increase to 50 percent by 2014. To claim this credit, you have to cover at least 50 percent of the cost of single health care coverage to your employees. To qualify as a small business for this tax credit, you must have fewer than 25 full-time employees or an equivalent, with average wages of less than $50,000 a year. Note that two part-time employees count as one full-time employee. The credit works on a sliding scale, so smaller businesses will receive a larger credit.

Self-employed individuals can deduct 100 percent of insurance costs for themselves and their families. Even if you did not end up owing any tax money, you can carry the credit back or forward to other tax years. Tax-exempt small businesses may be able to receive the credit as a refund, even if they had no taxable income that year.

Retirement plan tax creditsAs a small business, you can claim credits for starting a retirement plan for your employees. This includes simple employee pension (SEP) plans, SIMPLE plans and Qualified plans, such as a 401(k). Setting up each plan comes with its own set of rules and tax rates, which you can see in detail on the IRS Publication 560. Generally speaking, the credit covers part of the cost to get your retirement plans off the ground, even including any costs incurred to educate your employees about a plan. To qualify for this credit, a small business must have fewer than 100 employees.

5-Year carryback of general business creditsMost businesses can usually apply their most recent business credits to the past year, if they want to carry those credits back. (The time period changes for firms who want to carry forward.) Under the Small Business Jobs Act, small businesses can apply their tax credits back as long as five years, potentially increasing their refunds. The ability to carry back can greatly assist small businesses during tough times. “Let’s say a florist loses $25,000 in 2011, but earned a $50,000 profit in 2009,” explains D’Avolio, ”The business is allowed to offset the $25,000 loss against the $50,000 profit and thereby receive a refund for the tax savings.”

General business credit not subject to alternative minimum taxGeneral business credits apply to both small and large businesses, and the term covers a wide range of available credits. The alternative minimum tax is an added tax, meant to prevent individuals and businesses from exploiting tax breaks. General business credits were traditionally applied to a business’ regular income tax liability, but the Small Business Jobs Act now allows you to apply this credit to your alternative minimum tax liability.