CNBC, in 2021, published a report talking about how businesses reduced their costs by getting back billions of dollars from the government. On August 2022, Bloomberg published a report talking about how covid relief program brought back billions of dollars to small businesses.
These tax exemptions come in the form of government incentives, grants, and tax deductions. The good news is that you can claim them as well!
In the coming section of the article, we will talk about tax Incentives and deductions that small business owners can take advantage of.
What is a Small Business Incentive and How Does it Work?
Small business incentives are government programs that provide monetary assistance by holding a specific requirement or criteria.
Small businesses’ tax incentives and grants benefit both parties – it helps the government to implement its policy and help a company to reduce costs.
Using these incentives, the government incentivizes companies to implement different types of policies into the economy, and a company reduces its liability to optimize operations. For example, to cover the Covid-19 economical damage, the IRS provided many coronavirus tax relief programs.
Following are some of the government incentives and grants available:
- Small Business Innovation Research Program (SBIR)
- Small Business Technology Transfer Program (STTR)
- U.S. Small Business Administration State Trade Expansion Program (STEP)
- Rural E-connectivity Program
How Do I Know if I Qualify?
Following are some of the steps to know if you qualify for an Incentive:
- Step 1: Understand the grant you are applying for since different grants may require different processes to follow.
- Step 2: Check the eligibility requirement of the grant. Normally, you can find it on its official website or any other related government website.
- Step 3: Consult a person with authority and expertise. Since the person has already seen the processes, it can save your time while focusing on the right things.
Do I Need to Apply for a Small Business Incentive?
The short and simple answer is “YES”.
The ultimate goal of any person is to reduce their liability to become profitable. Fortunately, small business incentives provide you with this advantage.
However, before taking any grant, you need to make sure that it aligns with the company’s goals. The incentive should NOT tie you with any regulations that may hurt your processes later on.
Since you may NOT be able to measure future operations and implications while adopting a grant, it is always recommended to consult with an expert about these processes, so he/she can save you from unforeseen circumstances.
Where Do I Find Small Business Incentives?
Following are some of the places to check out for small business grants/incentives.
- For federal grants: Grants.gov
- For agricultural and rural grants: USDA
- For research and development grants: DOE
- For environmental grants: EPA
- For biomedical grants: NIH
Small Business Incentives to Check Out
While there are many small business grants available, we have listed some of the popular small business grants to check out.
- Small Business Innovation Research Program (SBIR)
- Small Business Technology Transfer Program (STTR)
- U.S. Small Business Administration State Trade Expansion Program (STEP)
- Rural E-connectivity Program
Furthermore, in the coming section of the article, we have also listed these grants in the details. We have also mentioned the eligibility requirements for these grants as well.
1- Small Business Innovation Research Program (SBIR)
SBIR comes with the purpose to encourage technological innovation and helping domestic small enterprises to engage in R&D.
Using a highly competitive program, the government incentivizes small businesses to explore technological arenas. Furthermore, under certain criteria, the government provides them with different incentives for their commercialization.
However, the broader purpose of the SBIR program is to boost the overall economic health of the country.
SBIR Eligibility Requirements
Following are the requirements to claim SBIR:
- You must run a for-profit business.
- The business must be owned by multiple capital venture companies with equity of more than 50%.
- Your business must be located inside the U.S.
- You should NOT have more than 500 employees.
2- Small Business Technology Transfer Program (STTR)
Similar to SBIR, STTR also helps small enterprises to explore their technological potential. Furthermore, the program helps small businesses in their commercialization stages using a highly competitive method.
Both SBIR and STTR almost serve a similar purpose – to increase technological advancements in the U.S.
STTR Eligibility Requirements
The primary difference between STTR from SBIR is the requirements it has with its partner institutions:
- STTR mandates that at least 40% of the R&D should be carried out by small businesses and at least 30% by a single partner research institution.
- The Principal Investigator may work primarily for the joint research institution under the STTR program.
3- U.S. Small Business Administration State Trade Expansion Program (STEP)
If small businesses want to launch or increase their worldwide customer reach, they can get an advantage from the STEP financing program.
To assist businesses with export development, STEP provides many financial awards and government territories. The program has almost provided $200 million as of now to boost small businesses.
Small enterprises that meet the standards established by each state can utilize financial aid to take part in international trade missions and exhibitions, get access to foreign markets, create websites, and create products or campaigns for worldwide marketing.
STEP Eligibility Requirements
Following are the requirements and processes to claim SBIR:
- You must identify yourself as a small business.
- Submit an application to IBR (Itemized Budget Request) to request funding.
- The IBR must approve your application.
4- Rural E-connectivity Program
This initiative provides broadband service in rural areas without adequate broadband access, with 100 megabits per second (Mbps) downstream and 20 Mbps upstream.
ReConnect offers funds to improve broadband service in these areas. By providing better internet connectivity, the program aims to develop long-term economic growth in rural areas.
E-Connectivity Eligibility Requirements
Following are the requirements to claim Rural E-Connectivity Program:
- You can either be a for-profit or non-profit organization.
- Partnerships that are formed with individuals are NOT eligible.
- Co-applicants are NOT eligible.
What is a Small Business Credit & How Does it Work?
Small business tax credit is the amount that you can subtract from the taxes you owe to the government. For example, in the year 2022, if you have owe $500 taxes to the government with $300 tax credit, you will be liable to pay only $200 tax to the government.
To support the business in their early stages, government offers many small business tax credits to reduce tax burdens and make them sustainable.
Following are some of the tax credits available for small business.
- Earned income tax credit.
- The premium tax credit
- R&D tax credit
- Work opportunity tax credit
- Child and dependent care credit.
How Do I Know if I Qualify?
Following are some of the steps to follow to know your eligibilty:
- Step 1: Understand the tax credit you are applying for.
- Step 2: Check its eligibility requirements. Normally, it is mentioned on the IRS website.
- Step 3: Follow the processes mentioned by the IRS or relevant department.
- Step 4: Consult with a CPA to understand the legalities.
Do I Need to Apply for a Small Business Credit?
Yes! It reduced your tax liabiities, optimize operations, reduces cost, and produces better efficiency to make your business sustainable.
Consult with a tax professional and know what tax credits your businesses can claim.
Where Do I Find Small Business Credits?
The IRS Website has a dedicated article listing all the business tax credits. There may be additional credits as well that your business can claim, you can consider consulting with a tax professional in such cases.
Small Business Credits to Start With
Following are some of the popular tax credits available that your business can take advantage of:
- Earned income tax credit.
- The premium tax credit
- R&D tax credit
- Work opportunity tax credit
- Child and dependent care credit.
To know more about these tax credits, check out the IRS website.
Small Business Deduction & How Does It Work
Tax deductions directly lowers your tax bracket. For example, you in 2022, you are liable to pay taxes on $20,000 income. However, if you have a tax deduction of $15,000, you will be liable to pay taxes on $5,000 income.
Tax deductions should NOT be mixed with tax credits. A tax credit reduces the amount of tax you owe to the government. In short, tax deductions reduce your tax bracket or taxable income. However, tax credits directly reduce the tax you are obliged to pay.
Following are some of the tax deductions to avoid paying extra money on taxes:
- Qualified Business Income Tax
- Retirement Plan
- Vehicle Depreciation Deduction
- Advertising Cost
How Do I Know if I Qualify?
To underastand the eligibility requirement, you need to go through the following process:
- Step 1: Understand the tax deductions you are applying for, and the business niche you operate in
- Step 2: Check the eligibility requirements mentioned on the IRS website.
- Step 3: Fill out the relevant form mentioned by the IRS or relevant department.
- Step 4: Consult with a CPA to understand the legalities.
Where Do I Find Small Business Deductions?
You can find all small business tax dedutions on the IRS website. Furthermore, you can also consult with an experienced CPA. He/she can get you the tax deductions by understanding your business and legal reuqirements.
1- Qualified Business Income Tax
If you are an eligible self-employed and a small-business owner, or a partnership entity, you may claim a tax deduction of 20% on your qualified business income.
QBI (qualified business income) does NOT include items like capital gains, losses, or dividends. Furthermore, the QBI is divided into two components – 1) QBI Component and 2) REIT/PTP Component.
The IRS has written a complete dedicated article about QBI, you can find additional details here.
Eligibility Requirements
Following are the requirements to claim Qualified Business Income Tax:
- You belong to one of the following categories: sole proprietorship, partnerships, S-corporations, or LLCs.
- Your total taxable income (business income + other income) is below $170,050 for single filers and $340,100 for joint filers.
Please note that these requirements may fluctuate with each changing year, you should contact a professional CPA to get an authoritative opinion about it.
2- Retirement Plan
There are different retirement plans available by the IRS to take advantage of. Each plan has its own pros and cons.
For example, you can start retirement accounts for yourself or for your staff members, which will benefit you as a business owner and your employees as well. if you are retired and earn more than $44,000 combined, 85% of your Social Security is taxable.
This alone should be enough to prompt you to seek proactive tax planning to help you keep more of your retirement income from being eaten by taxation.
A quick consultation with an expert CPA can help you identify the right plan. For instance,
Eligibility Requirements
Since there are many retirement plans available, the eligibility requirements vary as well. You can read more about retirement plans on the IRS website.
3 – Vehicle Depreciation Deduction
If you buy vehicles, equipment, or other assets for your business, you may be able to claim a deduction for some or all the costs.
You may also be able to claim the cost of repairs and insurance coverage on your software and equipment. Furthermore, any interest on the money you borrowed to buy these items may also be deductible.
We have written a complete dedicated article about vehicle tax deductions, you can further read it to know more about it.
Eligibility Requirements
Following are the requirements to claim business vehicle deductions:
- The vehicle must be used for business purposes.
- All receipts for business travel.
- The number of miles traveled.
- Traveling date
- All traveling bills.
4 – Advertising Cost
You may deduct 100% of your advertising cost. However, some niches are NOT tax-deductible. For example, spending your money on your political campaigns is NOT deductible.
These deductions may include logo costs, business print costs, spending money for a new website and the list goes on.
Eligibility Requirements
Following are the requirements to claim advertising cost deductions:
- You must belong to one of the following entities – sole proprietorship, partnerships, c-corporations, or s-corporation.
- You have NOT spent your money to promote political goals.
- Fill out the form required by the IRS.
Conclusion
Tax incentives are NOT limited to the details mentioned above, there are hundreds of other tax credits, grants, and deductions available for small business owners.
Furthermore, It is extremely important to talk with an expert CPA while claiming these incentives. A consultation with the right CPA is important for two reason – 1)Tax incentives depends upon your niche 2) falsely claiming tax incentives can result in penalties.
Claim these tax incentives and avoid paying unnecessary taxes today.
