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For startup businesses, often operating with razor-thin margins, it’s critical to find ways to function with as low overhead as possible. One simple way to do so is by taking advantage of tax credits. In this post, we’ll take a look at top tax credits you can use to save money on your tax bill, so you have more capital to use for client-facing and higher-level tasks.

What are startup tax credits?

Startup tax credits are tax incentives that are offered by federal, state, and local governments to encourage the growth and development of new businesses.

These tax credits are intended to help startups overcome some of the challenges and financial barriers to entry and growth, including high operating costs, limited access to capital, and expenses associated with regulatory compliance.

These credits have an abundance of benefits for startups, such as:

  • Financial and tax savings
  • Lesstax liability and more cash to spend growing the business and meeting consumer needs \
  • The ability to recoup some of your substantial investments into the company
  • Incentives for innovation
  • Access to capital

Tax credits for startups

Consider the following tax credits to hedge against high overhead costs and maximize savings for your startup:

The Work Opportunity Tax Credit

The federal government created the Work Opportunity Tax Credit (WOTC) to encourage businesses to hire people from certain marginalized groups, including:

  • Ex-felons
  • Veterans
  • Long-term recipients of unemployment benefits
  • People receiving state government assistance, including food stamps

If you are eligible for this credit, your startup can qualify for one of the following during the first year of employing one of the above groups of people:

  • A $2,400 tax credit
  • 40% off the first $6,000 of the employee’s wages

Empowerment zone employer credit

The empowerment zone employer credit is a federal tax credit available to businesses located in designated “empowerment zones,” which are economically distressed areas that the government has identified as needing help stimulating the economy and job growth.

The credit is equal to 20% of the first $15,000 in wages paid to each employee who lives and works in a designated empowerment zone. This means that the maximum credit per employee is $3,000.

You can find a list of designated empowerment zones in the U.S. here.

New markets tax credit

Low-income communities historically experience a lack of investment and, therefore, opportunities.

The new markets tax credit aims to break this cycle of oppression by encouraging the investment that’s needed in low-income communities to reinvigorate struggling local economies.

As long as you make equity investments in eligible Community Development Entities (CDEs), you can receive this tax credit. The tax credit is worth 39% of the original investment and gets claimed over seven years.

The research and development tax credit

If your startup is engaged in research and development functions, you could be eligible to take advantage of one of the biggest tax credits for U.S. startups, the research and development tax credit.

This federal tax credit allows eligible startups to use up to $250,000 in credits against their payroll liability each year.

To be eligible, your startup can only have generated revenue (less than $5 million annually) for less than five years. Your business also cannot be profitable yet.

You can claim the R&D tax credit for costs associated with the following functions:

  • The development of new products, processes, or services
  • The improvement of current products, processes, or services
  • Science-related activities
  • Trial and error processes

You must provide the IRS exact documentation of all activities related to the costs claimed in order to receive this tax credit, including:

  • Payroll records for all employees that participate in research and development
  • Supplies and equipment for third-party payments for R&D
  • Blueprints
  • Patents
  • Designs
  • Prototypes

In addition to the federal R&D tax credit, you may be eligible to receive a tax credit for R&D costs from your state if you live in:

  • Arizona
  • Arkansas
  • California
  • Colorado
  • Connecticut
  • Delaware
  • Florida
  • Georgia
  • Hawaii
  • Idaho
  • Illinois
  • Indiana
  • Iowa
  • Kansas
  • Kentucky
  • Minnesota
  • Missouri
  • Nebraska
  • NewHampshire
  • NewJersey
  • NewMexico
  • NewYork
  • North Dakota
  • Ohio
  • Pennsylvania
  • RhodeIsland
  • SouthCarolina
  • Texas
  • Utah
  • Vermont
  • Virginia
  • Wisconsin

The small business health care tax credit

Eligible small businesses can receive up to 50% of their health care premiums through the federal health care tax credit for small businesses.

To be eligible, your startup should have fewer than 25 full-time employees. Each employee you claim the credit for must have a salary of less than $56,000 and be enrolled in a federal small business health plan.

Once you’ve made sure you meet the criteria, you can complete IRS Form 8941.

Retirement plans startup costs tax credit

The IRS’ retirement plans startup costs tax credit incentivizes startups to offer their employees retirement plans. If you start a company-wide retirement plan, this credit allows you to claim up to $5,000 annually for up to three years.

You are eligible for this credit as long as you have 100 employees or fewer and at least one of them is a non-highly compensated employee.

The tax credit covers 50% of the cost to start the retirement plan, with up to a $5,000 annual limit.

Complete IRS Form 8881 to claim this tax credit.

Family leave tax credit

The family leave tax credit incentivizes employers to provide their employees paid time off to take care of a new baby, adopted child, or sick family member. This credit can help offset the costs of lost income or hiring temporary help while the employee is on leave.

It’s important to note that this credit does not apply if the FMLA leave is mandated by local or state law.

Business energy tax investment credit

The business energy tax investment credit is a federal tax credit for businesses that have made changes in order to be more energy efficient and environmentally friendly. The credit is available to businesses that have made qualified investments in solar technologies, fuel cells, geothermal systems, and other eligible renewable energy systems.

We kept this list of tax credits for startups to federal tax credits. But don’t forget to check your local tax laws because many states and municipalities offer additional tax credits for local residents. Take advantage of as many tax credits as you can to help maximize your budget and reduce your overhead costs.

Maximus can help

At Maximus, we are committed to providing you with the best possible service. If you’re looking to streamline your business operations, improve your efficiency, or reduce your tax liabilities, we’re here to help. Contact us today to learn how we can assist you in achieving your business goals.