Tax Advice

Your Complete 2024 Guide to U.S. Small Business Tax Credits

As a small business, you are entitled to claim tax credits that reduce the amount of tax you pay to the government. Businesses of all sizes usually file for tax credits (and their cousins, tax deductions) as part of their annual tax filing process.

However, tax time tends to bring out anxiety and confusion among many business owners. That’s why we’re breaking down everything you need to know about small business tax credits, including:

• What are tax credits and why do they exist?
• What’s the difference between tax credits and tax deductions?
• A comprehensive list of small business tax credits you need to know about

This guide will help small business owners understand the power of tax credits and discover which ones are relevant to their enterprise.

What Are Small Business Tax Credits and Why Do They Exist?

Tax credits are offered to businesses as tax incentives for activities that benefit employees, specific industries, and society at large. For example, businesses can claim tax credits for

• Improving society/industry: Doing research and development.
• Enhancing people’s lives: Providing benefits for their employees.
• Fighting climate change: Buying electric vehicles for their business.
• Being an employer: Hiring employees and contractors.
• Improving their community: Doing business in underserved communities.

It’s important to be aware of tax credits that apply to your small business because they can dramatically affect your bottom line. That’s because tax credits cut the actual tax you pay as a small business owner.

In fact, small business tax credits are dollar for dollar. This means every dollar of credit cuts your tax obligation by a full dollar. This is huge for small businesses because it allows you to recover some of the costs of running your business and keep much-needed capital, which allows you to grow and prosper.

For example, if you owe $15,000 in small business taxes but claim $5,000 for several tax credits, you can subtract that full amount from your tax bill. Your new tax bill would be $10,000.

It literally pays to pay attention to the way a small business tax credit can change your business. So, next time your talking to your accountant or tax professional, ask them about tax incentives and credits that apply to your business.

What’s the Difference Between a Tax Deduction and a Tax Credit?

Small businesses can take advantage of both deductions and credits, so it’s important to understand what they are and how they work.

You’ve probably heard about tax deductions. As a small business owner, you receive a tax deduction for every business-related expense you claim on your tax return. That includes things like rent, supplies, travel, and business-related subscriptions.

Deductions cut your taxable income, so every dollar of a deduction cuts your total tax by a percentage of that deduction, depending on your tax bracket. Essentially, tax deductions decrease how much tax you pay and become more valuable as your taxable income rises. For example, if you’re in the 15% tax bracket, every dollar you deduct cuts your tax by 15 cents. If you’re in the 35% tax bracket, that same dollar deduction cuts your tax by 35 cents.

In contrast, tax credits are like turbocharged tax deductions because every dollar of credit cuts your tax by a full dollar. Plus, tax credits are more valuable for taxpayers in lower brackets.

14 Tax Credits You Should Know About

Ready for the good stuff? Browse through the following list to see if your small business is eligible for any of these valuable tax credits. This comprehensive list doesn’t include every last small business tax credit available (some of them are very obscure), but these are the ones that many small businesses should know about and potentially pursue.

A word of caution: Before you start adding up your savings, remember that these small business tax credits have limits and qualifications that your business must meet to receive the credit. Flag the ones that seem like a good fit and make a note to discuss them with a trusted professional who can give you sound tax advice.

1. General Business Tax Credit

The general business tax credit is a catchall tax credit comprised of a number of individual tax credits designed to motivate business owners to do certain things, such as purchasing qualified electric vehicles, getting into new markets, and hiring more employees versus having fewer employees.

Some of these tax credits are covered below. You’ll need to fill out a separate form for each of these credits and then you can add them all up on the General Business Tax Credit—Form 3800.

2. Credit for Small Employer Health Insurance Premiums

If you want to provide health insurance coverage to your employees—and get a tax credit in the process—this one is for you. According to the IRS, the maximum tax credit amount can be up to 50% of the premiums you paid for health insurance coverage under a qualifying arrangement, or, if you’re an eligible tax-exempt employer, up to 35% of the premiums you paid. Either way, it’s a significant tax credit.

You’re eligible for the year if you:

• Paid premiums for employee health insurance coverage under a qualifying arrangement.
• You had fewer than 25 full-time equivalent employees (FTEs) for the tax year.
• You paid average annual wages for the tax year of less than $62,000 per FTE.

For the most up-to-date information about the Small Business Health Care Credit, visit the IRS Instructions for Form 8941. You can fill out a claim on Form 8941.

3. Credit for Paid Family and Medical Leave

This tax credit is designed to motivate small business owners to provide paid leave to their employees covered by the Family and Medical Leave Act (FMLA). FMLA provides certain employees up to 12 weeks of unpaid, job-protected leave, plus access to group health benefits, every year.

Reasons for leave include the birth of a child or a health emergency in the family. The IRS says that eligible small businesses may claim the credit, which is equal to a percentage of wages they pay to qualifying employees while they’re on family and medical leave.

Small business owners are eligible for this tax credit if:

• They have a written policy that meets the requirements.
• They provide at least two weeks of paid family and medical leave every year to all qualifying employees who work full-time (prorated for part-time employees).
• Leave is paid at not less than 50% of the wages normally paid to the employee.

Qualifying employees must have:

• Worked for at least one year for the employer.
• Earned less than $81,000 in the previous year.

The tax credit ranges from 12.5% to 25% of the wages paid to qualifying employees on family or medical leave for up to 12 weeks, depending on the amount of the employee’s normal wages.

For more information about this tax credit, see the IRS Instructions for Form 8994. You can enter a claim on Form 8994.

4. Alternative Fuel Credits

These niche tax credits are calculated from the costs associated with the production of alcohol-based fuels such as methanol and ethanol and other alternative fuels including biodiesel or renewable diesel. The idea behind them is to encourage business owners to invest in other fuels to reduce the U.S. dependence on imported oil.

Please note that they will only apply if you happen to be involved in the production of fuels, not the consumption of them.

You can use Forms 8849, 4136, 6478, 8864, or 8896 to make a claim for a refund for alcohol, biodiesel, low-sulfur diesel, or renewable diesel, or alternative fuel used to produce a mixture.

5. Commercial Clean Vehicle Credit

Take advantage of a tax credit of up to $40,000 that encourages the purchase of a qualified commercial clean vehicle. This does not apply to hybrids or electric vehicles since they use conventional fuel sources.

The IRS currently doesn’t publish a list of vehicles that are eligible for the credit, but it does provide a list of qualified manufacturers. You can rely on the manufacturer’s certification that the specific make, model, and year of the vehicle you purchase qualifies for the credit and the amount of the credit for which the vehicle qualifies.

To qualify, the vehicle’s battery capacity must be at least 15 kilowatt hours (7 kilowatt hours for vehicles that weigh less than 14,000 pounds) and be chargeable by an external electricity source. In addition, you have to be the original owner of the vehicle—used vehicles don’t qualify.

Related tax credits include:

• Alternative Fuel Vehicle Refueling Property Credit (Form 8911)
• Qualified Electric Vehicle Credit (Form 8834)
• Clean Vehicle Credits – Partnerships & S Corps (Form 8936)

6. Disabled Access Credit

This tax credit encourages businesses to make their offices and other facilities fully accessible to people with disabilities. This might include installing ramps, improving storage and display units, upgrading restrooms, and providing text in braille.

Your small business is eligible for this credit if you have a total revenue of $1 million or less or have 30 or fewer full-time employees. You can cover up to 50% of disabled access expenditures ranging from $250 to $10,250. However, you can’t claim a credit for the first $250 of expenditures, so the maximum credit available is $5,000 on $10,250 of expenditures.

Claim this credit on Form 8826.

7. Credit for Employer-Provided Childcare Facilities and Services

Here’s a tax credit for businesses that directly pay the childcare expenses for their employees or help their employees secure childcare. The credit is for 25% of employee childcare expenses only, plus 10% of childcare resource and referral expenditures. The maximum credit is $150,000 a year.

Fun fact: Employees can realize a greater benefit from the Employer-Provided Child Care Tax Credit than they would from the Child and Dependent Care Tax Credit they could claim on their tax return. Let’s say an employee pays $3,000 for childcare, the maximum credit they can take on their return is $1,050 ($3,000 x 35%). The employee effectively paid $1,950 for childcare services ($3,000 – $1,050 = $1,950).

If the employer pays $3,000 to a childcare facility for an employee’s child, the employee saves $1,950. It is important to note that the employer is not subject to the $3,000 limitation per child when calculating the credit. On average, full-time care for a child costs $229 per week ($11,908 per year). Thus, savings for most employees would be substantial, although childcare payments made more than $5,000 are added to the employee’s gross wages.

Keep in mind if you are incorporated and an employee of the corporation, you could also be eligible for the same benefits that you offer to the rest of your employees.

Claim this tax credit on Form 8882.

8. Rehabilitation, Energy, and Reforestation Investment Credit

This tax credit is for investments in reforestation, building rehabilitation, and alternative energy property used in business. The credit is generally 10% of expenditures and is limited to $10,000 per year.

Claim this tax credit on Form 3468.

9. Increasing Research Activities Credit

These small business tax credits are designed to encourage domestic research and development. The calculation of the credit can be very complex, but it can also provide substantial tax savings.

This definition encompasses activities such as:

• Developing new or improved products, processes, or formulas.
• Prototype or model development.
• Developing or applying for patents.
• Certification testing.
• Developing new technology.
• Environmental testing.
• Developing or improving software technologies.
• Building or improving manufacturing facilities.
• Streamlining internal processes.

This credit is open to individuals, partnerships, and corporations and can cover up to 20% of expenses. Check out the instructions for Form 6765 or consult a tax expert to see if your research is eligible.

Another thing to note: Small businesses don’t have to use this credit to offset income taxes directly. You can file Form 8974, which offsets up to $250,000 of the employer’s share of social security taxes for that year.

10. Small Employer Pension Plan Startup Costs Credit

This small business tax credit is designed to offset the costs of starting a pension. The credit is limited to $500—or 50% of your startup costs. You can claim it for the first three years of your plan and credit remains at the $500 maximum per year.

To be eligible, your business must:

• Have fewer than 100 employees who receive at least $5,000 in compensation.
• NOT have had an existing 401(k) or other qualifying retirement plan for the past three years.

To claim this tax credit, fill out Form 8881.

11. Work Opportunity Tax Credit

This is a tax credit available to businesses that hire employees who have traditionally faced significant barriers to employment. Many job seekers experience one or more barriers to employment during their careers. Although this makes finding or keeping a job more difficult, it’s not impossible. Some barriers, such as lack of transportation, are temporary and easier to address than others like education, childcare, or disabilities.

There are 10 categories of eligible workers, including:

• ex-felons
• unemployed veterans, including disabled veterans
• long-term family assistance recipients
• summer youth employees living in empowerment zones

The credits are calculated based on wages paid to the employees and can provide up to $9,600 in savings per employee over two years.

You’ll need to ask a tax professional to help you optimize the Form 5884 tax credit.

12. Empowerment Zone Employment Credit

Here’s a tax credit for businesses that hire someone who lives and works in a low-income area. The U.S. Department of Housing and Urban Development created empowerment zones to stimulate development in low-income areas. Visit the IRS website to see the zones.

Although the empowerment zones expired at the end of 2017, the Consolidated Appropriations Act of 2021 provides an extension of these designations to the end of 2025. Qualifying businesses can receive up to $3,000 for each full- or part-time employee who lives in an empowerment zone. This comprises up to 20% of the first $15,000 in wages.

Claim this tax credit on Form 8844.

13. New Markets Credit

This tax credit supports businesses that invest in qualified community development entities (CDEs), which are organizations of state and local governments that help low-income communities.

Most eligible projects involve acquiring, renovating, or building real estate in low-income areas, such as:

• educational facilities or community centers
• hospitals or healthcare facilities
• industrial buildings that create jobs
• facilities that serve women, minorities, or other underserved communities

Your project must be located within an area with a 20% poverty rate or median family income that doesn’t exceed 80% of the area median income. When you’re ready, file for this tax credit on Form 8874.

14. Renewal Community Employment Credit (RCEC)

Eligible employers should definitely take advantage of the Renewal Community Employment Credit (RCEC). It’s a federal tax incentive aimed at promoting economic development in underserved areas across the United States. It rewards businesses that hire employees living in designated Renewal Communities, areas identified by the government as needing economic revitalization.

What is the RCEC?

The RCEC provides businesses with a tax credit of up to $1,500 per qualified employee per year. This credit is designed to encourage job creation within these Renewal Communities, spurring economic growth and providing local residents with meaningful employment opportunities.

Who Qualifies for the Credit?

To claim the RCEC, businesses must meet the following criteria:

1. Operate in a Renewal Community: The business must be located within a federally designated Renewal Community area.
2. Hire Local Employees: Eligible employees must live in the same Renewal Community where the business operates.
3. Full-Time or Part-Time Work: Employees must perform services for the business within the Renewal Community and meet minimum working hour requirements.

Benefits of the RCEC

For businesses, the RCEC provides dual benefits:

1. Financial Savings: By reducing federal tax liability, the credit offers direct financial benefits that businesses can reinvest in operations, hiring, or expansion.
2. Community Impact: Supporting local talent strengthens ties with the community and contributes to its long-term economic stability.

How to Claim the RCEC

Claiming the RCEC requires attention to detail and proper documentation. Here’s a step-by-step guide:

1. Confirm Designation: Verify that your business operates in a federally designated Renewal Community.
2. Track Employee Eligibility: Maintain records showing that employees live within the Renewal Community and work for your business in that area.
3. File the Right Forms: Use the appropriate IRS forms to claim the credit when you file your tax return. Businesses should consult a tax professional to ensure compliance and accuracy.

BONUS: Qualified Business Income Deduction

Since 2017, the Tax Cuts and Jobs Act (TCJA) allows owners of “pass-through” entities, including sole proprietorships, S-corporations, and partnerships, to deduct up to 20% of their qualified business income.

• Income Thresholds: For single filers, the deduction begins to phase out at $190,000 of taxable income, and for married couples filing jointly, at $380,000. The phase-out thresholds depend on whether the business is a specified service trade or business (SSTB) like consulting, law, or healthcare.
• Deduction Limitations: If income exceeds these thresholds, the deduction is subject to additional restrictions based on W-2 wages paid by the business or the unadjusted basis of qualifying property.
• Specified Service Trades or Businesses (SSTBs): High-income SSTBs may lose eligibility entirely once taxable income surpasses the top phase-out limit.
• Aggregation Rules: Taxpayers with multiple businesses can aggregate income from related entities under certain conditions to maximize the deduction.

The deduction applies only to income directly from eligible business activities and excludes items like wages earned as an employee, guaranteed payments, or investment-related income (e.g., dividends or capital gains).

Business owners should consider planning strategies such as monitoring taxable income levels, optimizing business structure, and taking advantage of aggregation rules to maximize the deduction. With the expiration date approaching, it’s important to leverage this benefit while it lasts

Small business tax credits and other tax incentives can be hard to parse and challenging to keep track of, but they are worth every minute of your time—or the expense of a qualified tax professional to review the ones for which your business is eligible.

One way to make things easier at tax time is to have all of your accounting numbers in order. Many cloud accounting solutions categorize and present small business financial information into tax-ready accounting reports.

A little organization and investigation into small business tax credits go a long way!

This post was updated in December 2024.