Building Your Business Business Taxes 8 Tax Credits to Reduce Your Business Taxes By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on November 30, 2022 Reviewed by Khadija Khartit Reviewed by Khadija Khartit Twitter Website Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder. learn about our financial review board In This Article View All In This Article Tax Credits vs. Tax Deductions Tax Credits for Purchases Eight Helpful Tax Credits for Businesses Before You Apply, Discuss with Your Tax Professional Tax Credits for Business Tax Savings. Photo: Tetra Images / Getty Images For some business owners, the term "tax credit" signifies something good, but they are not sure what the term means, or how tax credits are different from tax deductions. As you will see, tax credits are better than deductions. Take a look at some of the most common tax credits businesses can use to lower their taxes. Tax Credits vs. Tax Deductions Tax credits are given to businesses and individuals as incentives for certain kinds of activities. For example, businesses can get tax credits for purchasing energy-efficient vehicles or building with "green" materials. In the cases below, the actions benefit the economy, the environment, or business development, or have other positive business purposes. Usually, a tax credit is offered for a specific time period. Tax credits are superior, in terms of tax savings, to deductions. Tax credits are deducted from income before gross income is determined. Tax deductions are taken in the next step of the tax process, reducing the net taxable income. Tax Credits for Purchases For tax credits for business purchases, you must have purchased and put into service (meaning you've started using) the equipment, vehicle, or facility in the year in which you claim the tax credit. Eight Helpful Tax Credits for Businesses Here are more details about tax credits you may be able to use to help you lower your tax burden. Employee Retention Tax Credit As part of the 2020 CARES Act, the IRS created an employee retention tax credit to incentivize employers to keep employees on their payrolls. This fully refundable tax credit was for 50% of qualified employee wages (up to $10,000) paid after March 12, 2020. Effective Jan. 1, the amount of the credit was increased to 70% of qualified wages, including the cost of health benefits, with a cap of $7,000 per employee per quarter. With the passage of the American Rescue Plan Act (ARPA), the credits are extended through Dec. 31, 2021. Employers who receive Paycheck Protection Program (PPP) loans may still qualify for this tax credit, but not for wages paid for with forgiven PPP proceeds. Also, group health plan expenses can be considered qualified wages in some circumstances. Tax Credits for Paying Employees on Sick Leave and Family Leave The 2020 Families First Coronavirus Response Act (FFCRA) offered tax credits to employers that provide sick leave and family leave to employees. These credits are for small and mid-size employers (those with fewer than 500 employees) who give paid sick time to employees who stayed home for their own illness or for someone who needed their care. They also provide paid family leave for employees to care for a child. Employers who paid these expenses can get tax credits for part of the cost of providing these payments to employees. They can take the tax credits by deferring the employer's part of Social Security benefits on the employees' wages. The program originally ended Dec. 31, 2020, but Congress extended the credits, first through March 31, 2021, and then through Sept. 30, 2021, under the ARPA. Small Business Health Care Tax Credit The Affordable Care Act (also known as Obamacare) includes a small employer health insurance tax credit to encourage small employers to offer health insurance for the first time or maintain coverage they already have. The credit is available to small businesses that pay at least half the cost of single coverage for their employees. If your business and your plan meet the qualifications, you can get a credit of up to 50% of the health insurance premiums you paid for employees, but not for yourself as the business owner. To be eligible for the credit, you must: Have fewer than 25 full-time equivalent employees Have average wages be less than $54,200 for the tax year Pay for these premiums using an IRS-qualified arrangement Self-Employment Health Insurance Deduction If you are self-employed, you can get a similar tax deduction for yourself, your spouse, and your dependents. This self-employed health insurance deduction is available for the costs of medical insurance, dental insurance, and long-term care policies. You can deduct these costs up to the total of your self-employment income. Research and Development Tax Credit Research and development tax credits have been available for many years, but the owners of small businesses often don't realize they can qualify for these credits. This credit is specifically for increasing research activities. A sole proprietor, partnership, or non-public corporation is eligible. Even if your business doesn't do traditional scientific research, you may be eligible for this tax credit for other kinds of research, including: Product developmentSurveys or studiesImproving product quality, reliability, or functionImproving business performance It may also be applied to payments to outside researchers or employees who do research. Qualified research activities must be able to show a connection between the expenses claimed and the research activity. The credit is for up to 20% of qualified research expenses, up to $250,000 annually. Note Read more about how to apply for the tax credit. Access for Disabled Persons Tax Credit If you make changes to your business location to accommodate employees and customers with disabilities, you may be eligible for disabled access tax credits. To qualify for this credit, your business must earn $1 million or less and have no more than 30 full-time employees the previous year. Note Your business may also be able to take a tax deduction for removing architectural and transportation barriers for employees and others. You can get this deduction in addition to the tax credit described above. Business Tax Credits and Deductions for "Going Green" Making changes to your business with equipment to make it more energy-efficient or more environmentally friendly can benefit you through tax credits. In addition to the tax credits, you may also be eligible for tax deductions for changes made to your business facilities. For example, the Business Energy Tax Investment Credit gives businesses credit for purchasing or implementing energy-saving activities, such as fuel cells and wind and solar energy. To qualify, your business must own or have built the equipment and it must meet specific quality and performance standards. Tax Credits for New All-Electric and Plug-in Hybrid Vehicles If you buy a new all-electric car or a plug-in hybrid vehicle, you may be eligible for a federal income tax credit of up to $7,500. The amount of the credit varies depending on the battery used to power the vehicle. You can't use the credit for a used vehicle for your business. The credit is for vehicles bought after Dec. 31, 2009, and it starts phasing out when at least 200,000 qualifying vehicles have been sold. To claim the credit, use IRS Form 8936 Qualified Plug-In Electric Drive Motor Vehicle Credit. Note The U.S. Department of Energy has a list of all qualified vehicles. Work Opportunity Tax Credit The Work Opportunity Tax Credit allows employers to get a business tax credit for hiring new employees in certain categories: Veterans TANF Recipients (Long-Term Temporary Assistance for Needy Families) SNAP (food stamp) recipients Designated Community Residents (living in Empowerment Zones or Rural Renewal Counties) Vocational Rehabilitation Referrals Ex-felons Supplemental Security Income recipients Summer youth employees living in Empowerment Zones The credit is taken against the employer's share of the employees' Social Security tax (6.2% of wages). Before You Apply, Discuss with Your Tax Professional All tax credits come with restrictions and qualifications that you must meet. You can't apply for a tax credit until you have spent money on the purchase or the activity, so get help from your tax professional before you make this commitment. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Tax Policy Center. "What are tax credits and how do they differ from tax deductions?" Accessed April 7, 2021. Internal Revenue Service. "Employee Retention Credit Available for Many Businesses Financially Impacted by COViD-19." Accessed April 7, 2021. Congress.gov. "The American Rescue Plan of 2021," Page 158. Accessed April 7, 2021. Internal Revenue Service. "COVID-19-Related Tax Credits for Paid Sick and Paid Family Leave: Overview." Accessed April 7, 2021. Internal Revenue Service. "How to Claim the Credits." Accessed April 7, 2021. Internal Revenue Service. "Periods of Time for Which Credits are Available." Accessed April 7, 2021. Internal Revenue Service. "Instructions for Form 8941 Credit for Small Employer health insurance Premiums." Accessed April 7, 2021. Internal Revenue Service. "Instructions for Form 6765 Credit for Increasing Research Activities." Accessed April 7, 2021. Internal Revenue Service. "Instructions for Form 6765 Credit for Increasing Research Activities," Page 1. Accessed April 7, 2021. Internal Revenue Service. "Form 8826 Disabled Access Credit." Accessed April 7, 2021. Internal Revenue Service. "Instructions for Form 3468 Investment Credit." Accessed April 7, 2021. U.S. Department of Energy. "Federal Tax Credits for New All-Electric and Plug-in Hybrid Vehicles." Accessed April 7, 2021. Internal Revenue Service. "IRC 30D New qualified Plug-In Electric Drive Motor Vehicle Credit." Accessed April 7, 2021. Internal Revenue Service. "Work Opportunity Tax Credit." Accessed April 7, 2021.