Last Updated on April 17, 2024 by Umer Malik

Small-business tax credits can be effective since they immediately cut your tax burden. This guide will familiarize you with different tax credits available for small businesses. It will include ERC credit, paid leave credit, and much more. 

So, without squandering any time, let’s know about ERC credit and other available credits, part by part. 

1. Credit for Small-Business Health Insurance Premiums (Form 8941)

This famous small-business tax benefit is part of the Affordable Care Act, sometimes known as Obamacare. This credit is available to companies that provide small-business health insurance to their employees.

Businesses that:

  • Have less than 25 full-time or equivalent workers.
  • Pay a full-time employee an annual salary of less than $55,000 (this figure used to be higher).
  • Employers should cover at least half of their workers’ health insurance premiums.
  • Purchased a qualifying health plan through the SHOP (Small-Business Health Options Program) Marketplace for Small Businesses.

This credit, if you qualify, is equivalent to 50% of your employer-paid health insurance premiums. However, starting in 2014, you may only claim the credit for two years in a row. That implies you can no longer claim the credit if you’ve already claimed it for two years in a row.

2. Employee Retention Credit (ERC Credit) 

The Employee Retention Credit or ERC credit for small companies is extended through December 2021 under the American Rescue Plan, allowing firms to offset their current payroll tax bills by up to $7,000 per employee every quarter.

This refund of up to $28,000 per employee for 2021 is given to small enterprises that have witnessed revenue declines or even temporary closures due to COVID.

For FY2020

The ERC is a tax credit against various payroll taxes, including an employer’s portion of social security taxes, for salaries earned between March 12, 2020, and December 31, 2020. The tax credit is 50% of earnings paid up to $10,000 per employee, with a $5,000 maximum. If an employer’s tax credit exceeds the amount of the employer’s share of social security tax owing, the excess is repaid straight to the employer.

If your company qualifies for the ERC for 2020 but has yet to claim it, you can file revised payroll tax forms to claim the credit and obtain a tax refund.

Businesses that carried out PPP loans in 2020 can still apply for the ERC but cannot use the same earnings to apply for PPP debt forgiveness and count toward the ERC. If your company’s payroll expenditures exceed the amount covered by your PPP loan, you may be entitled to claim tax credits for the difference.

For FY2021

The ERC credit is now accessible for the entire year of 2021. The maximum tax credit has been raised to $7,000 per employee per quarter. In contrast, the level of qualifying business interruption has been decreased to a 20% drop in gross receipts for a single quarter, for a total benefit of $28,000 for the year. So, if your business qualifies for this credit, you can apply for Employee Retention Credit without hassle with ERC Specialists. Just visit the website of Claimer Ccredit, book a meeting, ask questions, tell them your details, and they will handle teh rest for you. 

3. Paid Leave Credit

The American Rescue Plan extends the availability of Paid Leave Credits for small and midsize enterprises that offer paid leave to employees who require time off due to sickness, quarantine, or caregiving until September 2021. Businesses that provide paid sick or quarantine leave to employees can claim tax credits equal to $5,000 in salary.

4. Employer Credit For Paid Family And Medical Leave (Form 8994)

This tax credit was created by Congress and is slightly different from the ERC credit. This tax credit was made to encourage small-business owners to give paid leave to their employees. This credit is not intended to promote vacation time but rather leave connected to the birth of a child, a family health emergency, or another cause covered under the Family and Medical Leave Act (FMLA).

Employers are qualified for the Family Leave Act Tax Credit if they:

  • Have a documented policy that allows full-time employees at least two weeks of paid family and medical leave every year (prorated for part-time employees).
  • Employees should be paid at least 50% of their regular salary while on leave.

5. Work Opportunity Credit (Form 5884)

The Work Opportunity Credit incentivizes businesses to recruit people from the underprivileged communities listed below:

  • Veterans
  • Recipients of family assistance or food stamps
  • Ex-felons.
  • Individuals who have been out of work for an extended time.
  • People who obtain Supplemental Security Income (SSI).
  • Residents of designated communities or summer youth employees residing in federal empowerment zones.

The tax credit amount is determined by the type of employee and the number of hours they worked for your firm during the tax year.

6. Credit For Increasing Research Activities (Form 6765)

For small firms, there are various R&D tax benefits available. Although the science, medical, and technology industries are more likely to qualify for these tax breaks, many other organizations invest in R&D.

Any of the following actions may assist you in qualifying for an R&D tax credit:

  • Making new prototypes or models.
  • Creating personal items and applying for patents on such things.
  • Improving the efficiency of current company processes or products.
  • Creating a new industrial or commercial process.
  • Processes for enhancing quality control.
  • Testing for environmental or certification purposes.

You can deduct up to 10% of your R&D expenditures from your tax bill if you qualify for this small-business tax credit. 

7. Alternative Motor Vehicles, Electric Vehicles, And Alternative Fuel Credits

The IRS provides many tax credits for the usage of alternative energy. Suppose you manufacture or utilize alternative fuels in your business, drive an electric car, or drive a vehicle that operates on alternative fuel. In that case, you may be suitable for one of the following small-business tax credits:

  • Credit for Biodiesel and Renewable Diesel Fuels (Form 8864).
  • Credit for Qualified Electric Vehicles (Form 8834).
  • Property Credit for Alternative Fuel Vehicle Refueling (Form 8911).
  • Credit for Rehabilitation and Alternative Energy Investment (Form 3468).
  • Credit for Biofuel Producers (Form 6478).

The amount of these tax credits varies depending on the credit claimed.

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