Howard Makler is the cofounder and CEO of Innovation Refunds.
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Tax law is daunting and ever-changing, making it especially tricky to navigate for first-time small-business owners who don’t have much time to devote to tasks outside of the realm of everyday business. Ponying up the funds to pay a seasoned tax professional can also be stressful for small- and mid-size businesses (SMBs) doing their best to make ends meet.
Understanding tax deductions that work to the advantage of SMBs is critical and can often provide a lifeline of “found money” for small businesses, especially during times of economic volatility.
According to the Office of Advocacy of the U.S. Small Business Administration, 99.9% of American businesses count as a small business, employing 46.4% of private sector employees and accounting for 62.7% of net jobs created since 1995. It’s then understandable that the IRS has created a number of tax credits and incentives for them to leverage. However, navigating these incentives and credits on a year-to-year basis can be extremely time-consuming, as there are often new incentives being introduced, tweaks to existing incentives and credits that expire or are phased out after a set period of time.
SMBs should create a timeline to give themselves the proper amount of time over the course of the year to make sure they address all of these possible scenarios and plan their finances accordingly. Below are a few tips and tricks I recommend to SMB owners looking to make the most of what’s available to them.
Expiring Tax Credits And Incentives
Every year, the IRS phases out certain tax credits and incentives that have been introduced. Usually, these are tied to very specific economic moments in time, like the pandemic or times of economic volatility. While SMBs can often file for these credits and incentives after they end, they need to make sure that the financial actions that are required to meet their requirements are taken before they expire.
As SMBs wind down each year, it’s a good practice to work with their trusted tax professionals to identify any of these credits and incentives that might help them in the future and decide whether it makes sense to allocate a budget for them before the end of the year.
For example, an expiring 2023 benefit includes a tax deduction for purchasing an SUV, pickup or van over 6,000 pounds. Not every SMB will need this type of benefit, but for those that have been considering this type of purchase, it’s important to have spent the time to research the eligibility requirements and to make sure time and budget are allocated to make that purchase prior to the end of the year. And there are a number of similar credits and incentives to consider.
Existing Tax Credits And Incentives
While less time-sensitive, there is an ever-evolving number of existing credits and incentives that can help SMBs. While it’s important to work with a trusted professional to understand which are the most relevant for a specific business, there are a few small business tax credits and deductions that I always look to as a strong starting point to consider:
• Work Opportunity Tax Credit (WOTC): WOTC is a federal tax credit available to businesses that hire individuals from certain target groups, such as veterans, ex-felons or individuals receiving government assistance. This credit aims to promote employment opportunities for those facing barriers to entering the workforce.
• Research And Development (R&D) Tax Credit: Governments often provide tax incentives to encourage businesses to invest in research and development activities. Small businesses engaged in innovative projects or product development may qualify for R&D tax credits, allowing them to offset a portion of their R&D expenditures. Despite common misconceptions, the R&D credit extends beyond healthcare companies and lab work. If data and research are used to develop innovative customer-facing solutions, you may be eligible.
• Self-Employment Tax Deduction: Whereas employers and employees typically split the cost of Social Security and Medicare evenly (7.65% in taxes each), self-employed individuals are responsible for the full amount (15.3%). This can be a daunting number to freelancers and consultants who are trying to make ends meet. Luckily, the IRS considers the 7.65% of taxes that technically belong to the “employer” as a business expense and allows for deductions.
Future Tax Credits And Incentives
Always plan ahead! Tax professionals can also help business owners stay up to date on the status of future credits and incentives, as new initiatives are often announced and introduced well in advance. The sooner a business owner knows about a relevant credit or incentive, the sooner they can plan a budget that takes these into account.
For example, in 2025, the Clean Energy Production Tax Credit and Clean Electricity Investment Tax Credit will roll out. While these credits are similar to previously existing credits, there are some minor changes that SMBs will need to consider if they plan to take advantage of them in future years, and the earlier they can plan for them, the better equipped they will be in the coming years.
Staying on top of these credits and incentives can be a full-time job that requires a significant investment of time and capital, but the benefits can be game-changers for SMBs, so it’s vital to stay diligent.
Aside from consulting with a tax professional, staying on top of announcements and following the right tax “influencers” can be a great way for small-business owners to keep credits and incentives top of mind. Accounting Today, AccountingWEB and the American Institute of CPAs are a few examples of publications to follow (both on their website and through social media channels). With the proper collection of tax resources, SMBs (and, by proxy, the American economy) will be well-positioned for success long into the future.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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