Tax Incentives for New Businesses

Piggy bank and tax concept

Starting a business means paying business taxes. While that’s not something most business owners get excited about, here’s a fact that might inspire more enthusiasm: in addition to the tax deductions for routine business expenses, there are a number of federal tax credits that can reduce the tax burden on businesses.

New business owners often assume that business tax credits are designed for larger, more established companies, but that’s not always the case. Among the broad selection of business tax credits the IRS offers are a handful that merit special attention by organizations in the startup phase. By taking advantage of these credits, you’ll help create a sound financial footing for your fledgling enterprise and increase the chances of its long-term success.

Work Opportunity Credit

As you’re staffing up to begin operations, consider the value of tax credits that can offset some of your initial labor costs. The Work Opportunity Tax Credit (WOTC) provides employers with a one-time tax credit for each new hire they take on from targeted labor pools. The targeted categories represent barriers to employment related to income, geography, disability, veteran status and criminal history. Specific requirements apply to each category so be sure to verify eligibility details if you’re considering this credit.

Credit for Increasing Research Activities

Innovation and improvement are key elements of business success, and the U.S. government agrees. Business can claim the Credit for Increasing Research Activities (R&D credit) for wages, supplies and certain other costs related to research and development. To qualify for the credit, R&D activities must meet several tests regarding purpose, method and technique. Small businesses with qualified R&D activities can also opt to take the credit as an offset to payroll taxes.

Disabled Access Credit

Some small businesses that incur expenses to comply with the Americans With Disabilities Act may be able to claim the Disabled Access Credit. This federal tax credit can help with the costs of removing barriers to access, providing interpreters or accessibility technology, and purchasing or modifying equipment to make it usable by those with disabilities. The credit can be worth up to half of such costs, up to a maximum credit value of $5,000.

Employer Tip Credit

Restaurants, bars and other businesses with tipped employees may be able to claim the Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips. When employers pay Social Security and Medicare taxes on employees’ tip income, they can claim a credit for taxes paid on tip amounts over the minimum wage. The rules and calculations governing the employer tip credit are complex, so business owners should review carefully or seek professional guidance in claiming this credit.

Credit for Small Employer Pension Plan Startup Costs

Establishing a qualified retirement plan can help your tax situation as well as your employees. Eligible small businesses can claim up to half the costs of setting up and administrating a SEP, SIMPLE IRA or other qualified retirement plan, thanks to the the Retirement Plans Startup Costs Tax Credit. The maximum value is $500 per year, and business owners can claim the credit for the plan’s initial three years – including the year before the plan first becomes effective.

In addition to federal tax credits, states and municipalities often provide credits that can further limit business tax liability. Tech-focused businesses in the District of Columbia can take advantage of the district’s Qualified High Technology Credit. This credit offers a lucrative incentive package to qualified businesses that provide technology products or services. Georgia’s Film Tax Incentive is another appealing option, and there are numerous region-specific credits and incentives offered in locations across the U.S.  

Minimizing your tax liability with appropriate tax credits is a smart move for your business at every stage of the business cycle. You can learn more smart strategies and tax-saving techniques to help your business thrive by talking to the tax-savvy professionals at HBP.