If you’re in the process of growing your business, these three types of business tax credits can set you up for success.
Small business tax credits don’t just help you save money—they can also facilitate business growth. Unlike tax deductions, which lower your taxable income, tax credits give you dollar-for-dollar reductions on your taxes as long as you meet certain qualifying criteria. Certain tax credits incentivize you to make strategic business decisions, like exploring new business opportunities, hiring employees, or improving operations. Find out which tax credits can help fuel your business’s long-term growth.
3 business tax credits for scaling your business
1. R&D tax credits
Research and Development (R&D) tax credits reward you for improving your business’s products, services or operational processes. Depending on the stage you’re in, you might be doing R&D work to bring your product or service to market, streamline operations, innovate your current offerings or create new ones.
R&D activities are expensive, but they’re a worthwhile investment in your business’s long-term growth. Strategic R&D work can help you expand to new markets, widen your customer base and ultimately generate more revenue. Here are just a handful of R&D projects you might take on:
- Developing prototypes
- Seeking patents
- Developing or improving manufacturing processes
- Improving product efficiency or innovation
- Improving quality control processes
- Testing products
If you’re planning to invest in R&D, the Credit for Increasing Research Activities can help offset your spending. If you qualify for the credit, you can apply up to $250,000 of the tax credit to your payroll tax liability instead of your income tax liability.
How to claim the credit
To qualify for the R&D credit, you have to carefully document your R&D activities and expenses, then apply for approval. You also have to run a corporation, partnership or sole proprietorship, and make sure your gross receipts for the taxable year are less than $5 million. If you have documentation of your R&D activities, take the following steps:
- Fill out IRS Form 6765, make the election and attach it to your business income tax return.
- Complete IRS Form 8974 to claim the payroll tax credit, then attach it to your payroll tax return.
2. Hiring tax credits
Another way to invest in your business’s growth is to take advantage of a hiring-focused business tax credit, like the Work Opportunity Tax Credit (WOTC). The WOTC, which was recently extended until December 31, 2025, helps you save money on business income taxes while diversifying and expanding your workforce.
The credit is available to employers who hire individuals who’ve historically had a harder time securing work, like veterans, family assistance recipients and people living in designated empowerment zones. Check out the IRS’ complete list of the 10 qualifying groups.
If you qualify as a taxable business, you can apply the credit to your business income taxes; if you qualify as a tax-exempt organization, you can put the credit toward your employer’s share of Social Security taxes. Depending on the person you hire, their salary and the amount of hours they work in a year, you can get a credit for either 25% or 40% of their first-year wages—up to certain amounts. For most individuals, you can get up to $6,000 or $2,400 in a one-year period.
How to claim the credit
There are several steps you need to take before you can claim the credit, the most important being screening your applicants. Here’s an overview of the process:
- Ask your job applicant to fill out and sign IRS Form 8850 as soon as possible (but no later than the day they accept the job). Then fill out and sign the rest of the form yourself.
- Download the Department of Labor Form 9061; either fill it out yourself or ask your job applicant to fill it out.
- Submit both forms to your state workforce agency no later than the 28th calendar day after your hire starts working.
- If you get the green light from your state workforce agency, fill out IRS Form 5884—after your employee has worked at least 120 hours in the first year. Then attach the form to your tax return.
3. Tax credits for offering employee benefits
Your employees keep your business running, so it’s crucial to keep them happy. Offering thoughtful benefits can help you attract and retain talented employees, setting your business up for steady growth and stable revenue.
Fortunately, there are a number of tax credits available to businesses that offer certain benefits, including:
- Health insurance: If you have 25 or fewer employees, pay those employees an average wage of less than $55,000 a year per full-time employee, offer a qualified health plan through the Small Business Health Options Program Marketplace, and pay at least half of your employees’ health insurance premiums, you qualify for the Credit for Small Employer Health Insurance Premiums. You can get a credit equal to 50% of the cost of your health insurance premiums.
- Paid leave: The Employer Credit for Paid Family and Medical Leave gives a tax credit to business owners who offer their full-time employees at least two weeks of annual paid leave (with not less than 50% of the normal wages paid) for disability recovery, caregiving or family bonding. You can get a credit equal to 12.5% (and up to 25%) of the wages you paid to qualifying employees on their leave.
- Child care assistance: The Credit for Employer-Provided Child Care Facilities and Services gives businesses a credit for building onsite child care facilities or paying for child care services for their employees. Businesses can get a credit of 25% of qualifying child care expenditures and 10% of child care resource and referral expenditures.
Using business tax credits is a great way to boost your cash flow and invest back into your operation. For more tips to support your business growth, check out our latest blogs.
About the Author
Written by Roll by ADP Editorial Team
Roll by ADP is the first chat-based payroll app for small business backed by ADP® — the largest payroll company in the US. From starting to growing a business, and everything in between, the Roll editorial team keeps you up to date on the latest small business trends.