10 Valuable Small Business Tax Credits For The Tax Year 2022

Picture yourself as a small business owner.

You’re a jack-of-all-trades, juggling everything from managing employees to keeping customers happy and the lights on.

But when tax season rolls around, you can’t help but feel overwhelmed by the complexity of it all.

Luckily, there’s a silver lining – small business tax credits!

These hidden gems can significantly reduce your tax liability and help you save money.

In this article, we will introduce you to ten valuable small business tax credits for the tax year 2022 and share tips on how to claim them.

So buckle up and get ready to learn how to take advantage of tax season and keep more of your hard-earned money.

Small Business Tax Credit vs. Tax Deduction

Before we dive into the tax credits available for small businesses, let’s first clarify the difference between tax credits and tax deductions.

You may also like: Tax Credit vs. Deduction: What Are The Differences?

While both can reduce your tax liability, they work differently. The tax deduction reduces the amount of your taxable income.

For example, if you have $100,000 in business income and $20,000 in deductions, your taxable income is $80,000. This means you will pay taxes on $80,000 instead of $100,000.

A tax credit, on the other hand, directly reduces the amount of taxes you owe.

For example, if you owe $10,000 in taxes and have a $2,000 tax credit, you will only owe $8,000 in taxes.

In most cases, tax credits are more valuable than tax deductions since they provide a dollar-for-dollar reduction in your tax liability.

10 Small Business Tax Credits For The Tax Year 2022

Disabled Access Credit

If you make your business more accessible to people with disabilities, you may be eligible for the Disabled Access Credit.

You can take the maximum credit of up to $5,000. These credits cover half the eligible expenses up to $10,250, with no credit for the first $250.

Eligible expenses include barrier removal from your facilities, such as widening a doorway or installing a ramp.

This small business tax credit also covers providing accessibility services, such as sign language interpreters, and printed material in alternate formats, such as large print, audio, or Braille.

Finally, tax credits cover the provision or modification of equipment to make it accessible to people with disabilities.

To qualify for this credit, you must have fewer employees (under 30 full-time employees), have gross receipts of $1 million or less, or have had expenses of $10,250 or less for the previous year.

New Markets Tax Credit

Small businesses should know that investing in your community is one of the best ways to help it thrive.

But did you know that the government offers a tax credit for businesses that support Community Development Enterprises and Community Development Financial Institutions?

The New Markets Tax Credit is designed to support small businesses that invest in low-income communities through CDEs and CDFIs.

Also, the types of projects that meet the criteria for the New Markets Tax Credit involve activities such as purchasing, renovating, or building real estate in areas with a high concentration of low-income individuals or expanding existing businesses in those areas

There are a variety of projects that are eligible for the New Markets Tax Credit. These projects typically involve acquiring, renovating, or constructing real estate in low-income areas or expanding existing businesses.

Eligible projects include:

• Fixing up the residential property for resale and constructing or rehabilitating educational facilities, community centers, hospitals, and health facilities.
• The construction or rehabilitation of industrial facilities creates jobs and facilities or provides services to underserved communities, such as women and minorities.

To qualify, a project must be located in a census tract where the poverty rate is at least 20%, or the median family income is below 80% of the area’s median income.

This requirement ensures that the credit targets projects that will significantly impact low-income communities.

This means that the credit is targeted at projects that impact low-income communities the most.

Employer-Provided Childcare Facilities Credit

As a business owner, taking care of your employees is essential. One way to support your employees with children is by providing them with childcare services.

But did you know that offering this benefit can also earn you a tax credit?

Under the Internal Revenue Code Section 45F, the Employer-Provided Child Care Credit can provide employers with a tax credit of up to 25% of qualified child care expenditures and 10% of eligible child care resource and referral expenditures.

Qualified childcare expenditures include:

• Costs associated with acquiring, constructing, rehabilitating, or expanding the property to be part of a childcare facility.
• Such a facility’s operating costs include supporting childcare workers through training, scholarships, and wages.

The credit is capped at $150,000, so employers must spend around $430,000 to receive the full credit.

Any further spending exceeding that amount would not be reimbursed.

Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit (WOTC) encourages small business owners to hire ex-felons, veterans, and other targeted groups. The credit is worth up to $9,600 per eligible employee.

To qualify for this credit, you must hire an employee from one of the targeted groups and receive certification from the state workforce agency or Department of Labor.

Employees Health Insurance Premiums

As small business owners, providing health insurance to your employees can be a significant expense.

However, the small-business healthcare tax credit from the Affordable Care Act, better known as Obamacare, can help ease the burden.

To be eligible for this tax credit, small business owners must meet the following requirements:

• Having fewer than 25 full-time or equivalent employees ensures businesses with smaller staff can take advantage of the credit.
• Pay their full-time employees an average wage of less than $55,000 per year.. This means that businesses with lower-paid employees can still qualify for the credit.
• Cover at least 50% of your employee’s health insurance premiums, demonstrating your commitment to the health and well-being of your staff.
• Purchase a qualified health plan from the Small-Business Health Options Program (SHOP) Marketplace, which ensures that the project meets specific standards and provides quality coverage.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a tax credit for low- to moderate-income workers. Your employees who qualify for the EITC may be eligible for a credit of up to $6,938, depending on their income, family size, and filing status for the tax year 2022.

Let’s take a look at some of the other qualification rules and requirements:

• Your investment income must be at most $11,000 in 2023 or $10,300 in 2022.
• You must not be required to file Form 2555 or Form 2555-EZ.
• If you claim the EITC without qualifying children, you must be between 25 and 65. However, if you file jointly and claim without a child, only one spouse must meet the age requirement.
• Separated but still married individuals may qualify for the EITC if they file separately and their child lives with them for more than half the year. Additionally, they must not have lived with their spouse in the last six months or have a separation agreement or decree.
• Special rules apply to military members, clergy members, those with disability income, and those with children with disabilities.

Research and Development Tax Credit

The Research and Development (R&D) Tax Credit encourages companies to invest in research and development activities. Here are a few types of activities that might make you eligible:

• Creating new prototypes or models.
• Pursuing patents for proprietary products.
• Developing innovative manufacturing or business processes.
• Enhancing product efficiency or streamlining business processes.
• Improving quality control processes to ensure higher standards.
• Conducting environmental or certification testing to comply with regulations.

By taking advantage of the R&D tax credit, eligible small businesses can reduce their tax bills by up to 10% of their R&D costs.

This can substantially impact your company’s financial situation and provide much-needed flexibility for other expenses.

Employer Social Security and Medicare Taxes Credit

If your employees receive tips, you may be eligible for a credit for the employer portion of Medicare and Social Security taxes paid on those tips. The distinction is worth up to 7.65% of the tips delivered to your employees.

To qualify for this credit, you must have employees who receive tips and have paid Social Security and Medicare taxes on those tips.

Tax Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment

The Tax Credit for Small Employer Pension Plan Startup Costs and Auto-Enrollment can help offset the costs of setting up a retirement plan for your employees.

To qualify for this tax credit, you must meet two criteria:

• You had 100 or fewer employees during the tax year, all receiving at least $5,000 in wages.
• This is the first time you have had a retirement plan in place over the last three years for the same group of employees.

If you meet these criteria, you could be eligible for a tax credit of up to $5,000 per year for three years.

This credit can help offset the costs of setting up a retirement plan and encourage you to provide this valuable benefit to your employees.

Employer Credit for Paid Family and Medical Leave

If you provide paid family and medical leave to your employees, you may be eligible for a tax credit of up to 25% of the wages paid during the leave period.

The distinction is only available for two consecutive years.

To qualify for this credit, you must have a written policy that provides at least two weeks of paid family and medical leave per year to all qualifying employees.

You must spend at least 50% of the wages typically paid to the employee during the leave period.

Common Mistakes to Avoid when Claiming Several Tax Credits

When claiming tax credits, it’s essential to avoid common mistakes that can lead to errors on your tax return or result in the denial of the credit. These are four common mistakes to avoid:

• Failing to meet the eligibility criteria: Before claiming business tax credits, ensure you meet all the eligibility criteria. Each credit has different requirements, and failing to meet those requirements can result in the denial of the credit.
• Failing to keep good records: As mentioned earlier, keeping good records and retaining all supporting documentation is essential. Failing to keep adequate records can result in the denial of credit.
• Failing to claim all eligible credits: Make sure you know them and claim them on your tax return. Failing to claim all eligible credits means paying more taxes than needed.
• Failing to calculate the credit correctly: When calculating the credit, use the correct formula and consider any limitations or restrictions on credit.

In Conclusion

Small business tax credits can reduce your tax liability and save money. By taking advantage of the tax credits available, you can free up resources to invest in your business and grow your company.

Ensure you understand the eligibility criteria, filing requirements, and common mistakes to avoid when claiming tax credits.

Remember, seeking professional tax advice from a qualified tax advisor or accountant is always a good idea to ensure you take advantage of all available tax breaks and credits.

Doing so lets you focus on what you do best – running your business – and leave the tax season stress behind.