In a previous blog article, we covered everything you need to know about tax deductions. Today, we’ll talk about small business tax credits and offer some tips for taking advantage
What Is a Tax Credit?
A tax credit is a dollar-for-dollar reduction. NerdWallet explains “A few credits are even refundable, which means that if you owe $250 in taxes but qualify for a $1,000 credit, you’ll get a check for $750.”
This is different from a deduction, which is a dollar amount you can subtract from your adjusted gross income.
There are two types of tax credits, according to the IRS:
- Nonrefundable: tax credits where you get a refund only up to the amount you owe
- Refundable: tax credits where you get a refund, even if it’s more than what you owe
Let’s go through some tax credits for the self-employed, including a few that have emerged in response to the coronavirus pandemic.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit is determined by income and is designed to help low- to moderate-income workers and families lower their tax burdens. To qualify, you must be between the ages of 25 and 65, be filing as an individual or married filing jointly, and be considered a low-income filer.
Small Business Healthcare Tax Credit
The Small Business Healthcare Tax Credit offers up to 50% in credits for “costs paid for premiums purchased through the Small Business Health Options Program (SHOP) plan for ACA coverage,” according to Zenefits.
This tax credit is for businesses with fewer than 25 employees whose average salary is $50,000 or less per year.
American Opportunity & Lifetime Learning Credits
The American Opportunity Tax Credit is a credit for “qualified education expenses paid for an eligible student for the first four years of higher education.” The maximum annual credit is $2,500 per eligible student, which includes people whose modified adjusted gross income is $80,000 or less ($160,000 for married couples filing jointly).
Similarly, the Lifetime Learning Credit is also for post-secondary education. The biggest difference is that you can claim this credit for any years of that education, not just the first four. The credit is for up to $2,000 per eligible student making $59,000 or less ($118,000 or less for those who are married filing jointly).
Residential Energy Tax Credit
The Residential Energy Tax Credit is claimable for up to 26% of the cost of solar energy systems like solar panels and solar water heaters. But this credit isn’t available forever – it decreases to 22% in 2023 and will expire in 2024.
Families First Coronavirus Response Act (FFCRA)
Under the Families First Coronavirus Response Act, businesses can claim a tax credit that covers 100% of the cost of any sick and family leave salaries, as well as any expenses from qualified healthcare plans. It also includes the employer’s share of FICA taxes for any sick leave expenses incurred under the FFCRA, so long as the leave qualified under the act.
COVID-Specific Tax Credit: Employee Retention Credit
The Employee Retention Credit provides a refundable credit of up to $5,000 for each full-time employee your business retained between March 13 and December 31, 2020, with as much as $14,000 for each employee you retain between January 1 and June 30, 2021.
This credit, put into effect due to the COVID pandemic, went through a significant change in early 2021. Here are the details of the change, from Accounting Today:
“Originally, the CARES Act added this refundable payroll tax credit equal to 50 percent of qualified wages at $10,000 per year per employee paid by eligible employers from March 13, 2020, to Dec. 31, 2020 — but if the taxpayer had a PPP loan, they could not take advantage of the ERC.
The Consolidated Appropriations Act of 2021 extended and expanded the availability of the credit. Now, a company that receives a PPP loan can claim the ERC, with this caveat: “A credit may not be claimed for wages paid with the proceeds of a PPP loan that has been forgiven. It may be necessary to file amended payroll tax returns to claim the credit.”
Let’s Talk Taxes
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