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5 Often-Overlooked Tax Credits for Your Small Business

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Notebook with tax credit sign on a table. Business concept.As a small business owner, tax time can be stressful. That’s why ensuring you’re garnering every benefit possible is essential. Many small businesses overlook some huge benefits when it comes to tax credits. This article reveals five of the most overlooked tax credits for small businesses. Read on to determine if any of these apply to your business.

Tax Credit vs. Tax Deduction

Before jumping to five tax credits often overlooked by small businesses, let’s clarify the difference between a tax credit and a tax deduction.

While tax deductions reduce your taxable income resulting in you paying a lower tax amount, tax credits are a dollar amount deducted from the taxes you owe. So, if you receive a tax credit of $500, you subtract $500 from taxes due.

Tax credits can be highly beneficial come tax time, so knowing which ones your small business is eligible to claim is good. Unfortunately, there are quite a few that many business owners aren’t aware of.

Here are five tax credits that are the most overlooked by small businesses. After you review the list, check with your accountant to see if your business is eligible for these or other tax credits to reduce the amount you owe to the IRS.

5 Tax Credits You May be Overlooking

1. Retirement Saver’s Credit

For small businesses that start a retirement plan for their employees, the IRS offers this credit to offset some of the startup costs they consider “ordinary and necessary.” Your business must employ fewer than 100 employees and not have had a retirement plan previously. The credit is for 50 percent of your startup costs, with a maximum credit of $500.

This tax credit can be claimed for three years, beginning the year before your plan becomes effective. If you do not currently offer a retirement savings plan for your employees, now may be the time to establish one.

2. Research & Development Tax Credit

The R&D tax credit is one of the most overlooked because small business owners not in a “research” field with a laboratory setting often blaze right past this one. But according to the IRS, “research” isn’t necessarily in a lab.

To qualify for this tax credit, a business must improve a product or process, often occurring in many companies as part of their everyday operations. For example, you may qualify if you own a software company and develop or improve an IT process.

Developing, designing, enhancing, or improving a product or process related to your business can qualify you for a credit of 13 cents on every dollar. Of course, you’ll want to confirm whether your business qualifies, identify qualifying activities, and keep copious records so that you can back up your claim to the credit.

3. Rehabilitation Credit (Historic Preservation)

If your business spent money to rehabilitate or renovate a historic structure, this credit likely applies to you. A 20 percent tax credit is available for rehabilitating historic, income-producing buildings determined by the Secretary of the Interior to be “certified historic structures.”

This does not apply to residential structures; however, many businesses purchase historic properties to house their office, restaurant, or other business. Historic structures are certified by the National Park Service, which reports to the IRS. If that applies to the structure where your business is housed, it is worth reviewing this credit with your accountant.

4. Empowerment Zone Employment Credit

Empowerment Zones (EZ) are distressed urban and rural areas needing revitalization. The purpose of the EZ credit is to encourage business owners to operate in these areas and employ EZ residents.

The credit is 20 percent of qualified wages paid during a calendar year. Businesses are eligible for a wage credit of up to $3,000 annually for each eligible employee.

5. Plug-In Electric Vehicle Credit

Suppose you purchase a new plug-in electric vehicle (EV) for your business between 2023 and 2032. In that case, you may qualify for a tax credit of $7,500. To be eligible for the credit, your adjusted gross income (AGI) must not exceed $150,000 in the year you take delivery of the vehicle or the year before (whichever is less).

The EV must meet qualifications regarding battery capacity, retail price, and weight. Speak to your tax accountant for the guidelines and qualifications if you purchased a plug-in EV for your business.

Ensuring you claim every tax credit your small business is entitled to is the key to paying the lowest tax possible. There are dozens of tax credits that small businesses are eligible for. Be sure to have your accountant or CPA review your eligibility for maximum savings come tax time.

An HSA Can Also Be Used to Save for Retirement

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HSA, health savings account symbol. Wooden cubes with words 'HSA, health savings account'. Stethoscope. Wooden background. Medical and HSA, health savings account concept. Copy space.Health savings accounts (HSAs) were created as a savings vehicle to help people pay out-of-pocket medical expenses. If qualified, you can establish an HSA in much the same way you establish a traditional savings account or an individual retirement account. You can open one with a lump-sum payment or through regular contributions, usually through paycheck deductions.

What makes HSAs appealing is that they offer several valuable tax-saving features. For example, your contributions are excluded from deductible income, all account earnings accumulate tax free, and, as long as the medical expenses paid with HSA savings are “qualified” expenses for you, your spouse, or your dependents, withdrawals from HSAs are tax free also. It is these tax savings features plus the ability to invest contributions in longer term assets that can make HSAs viable as alternative retirement savings vehicles.

Before looking into how HSAs can be used to save for retirement, it can be helpful to explain how they actually work.

The Rules on Contributions

The maximum family contribution for 2024 is $8,300 plus a $1,000 maximum catch-up contribution for participants who are age 55 or more. For self-only coverage, the maximum contribution for 2024 is $4,150 plus a $1,000 catch-up contribution for those participants age 55 or more. The limits will be adjusted for inflation in future years. An individual’s employer or family member may contribute as long as the total contribution amount does not exceed the annual limit.

Investing Contributions

As a participant in an HSA, you have the choice of keeping contributions in cash or investing them in other assets, such as stock and bond mutual funds.* Money not spent on qualified expenses during the year is rolled over for subsequent years. If you are in fairly good health and underutilize medical and health services, you could potentially build up a relatively large balance in the HSA account over several years.

Making HSAs Work as Retirement Savings Vehicles

If you currently maximize contributions to all tax-favored retirement accounts and also save in taxable accounts, you could treat the HSA as one more option to increase your savings and do so in a tax-favored way. Essentially, you would treat the HSA as a retirement savings account and allow the assets in the account to accumulate for as long as possible while paying out-of-pocket medical costs with taxable funds. Of course, this approach does not work if you cannot fully fund all your tax-advantaged retirement savings vehicles.

Remember, each person’s situation is different and you will benefit from discussing this option — and other retirement savings options — with an experienced financial professional

Weighing Your Options: Promoting vs Hiring Externally

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Business people, hand shake and success in meeting, support and applause, hiring or onboarding with team. Collaboration, shaking hands and congratulations, promotion and achievement with diversityIt’s a quite common dilemma to figure out if you need to hire externally or promote from within to see improvement with your business. There are benefits to both. We will now go over the pros and cons to each side.

Hiring Externally 

Pros 

  • Can help a company gain new perspectives – Oftentimes, hiring a new candidate will allow businesses to gain new ideas that they would not have gotten internally. These hires could be from a different industry and their ideas could make a difference. They also might see flaws in your business model that you were too close to see. The external hires could help improve your business due to their original distance.
  • Gives you more people to consider –  When looking at a pool of candidates for a job, you are able to have a wider pool of people when hiring externally. If you hire internally, it’s going to be a smaller pool. You also could be exposed to people of higher skill sets than the employees you currently have on your team.
  • No conflict within the existing team – Employees in your business will not feel like they are competing for a position if it is already announced to be an external hire joining the team. This makes the environment calmer and you don’t need to worry about any potential conflict.

Cons 

  • More time and money searching – It can take a while to set up the hiring platforms and advertisements saying that you are looking to hire. If the need for a person is immediate, it will be hard to fill it right away due to the time setting up the logistics.
  • You don’t get all the information from their resume – At the end of the day, you only have a few interviews to be able to determine whether or not this person is good for the job. You can look at references but there still can be uncertainty with the offer.
  • You don’t know for certain that they will fit into the office dynamic – When people interview, they are on their best behavior and talk up their abilities and strengths. You can never be certain that they will fit in with your employees and your pace of work. You don’t know their true personality and how well that will mesh with the office environment.

Promoting from Within

Pros 

  • Positive morale for staff – Hiring from within shows that an employee’s work is valued and they will be rewarded for their time going above and beyond expectations. This will also show other employees that if they work hard, they could be promoted in the future. If the promotion is for a managerial role, people can feel more comfortable that they know who they will be working with than an outside recruit.
  • Keep your costs down – Internal recruits will save you money because you don’t need to spend money on external recruiting. You will not need to spend money on sites promoting your position.
  • You know the candidate – Interviews can be much more relaxed when you know the applicants from personally working with them. This allows you to skip the awkwardness of a first interview and ask them what they hope to contribute in the new position.

Cons

  • Stuck in an endless loop of filling positions – You probably will now need to fill in your promoted employee’s position unless they are just getting a promotion of responsibilities rather than a completely different title. This can be frustrating because you probably would have to hire an external candidate to end the repetition of hiring to fill.
  • Lack of change – You are keeping the same ideas that have been in your office already. This may promote a sense of conformity with ideas. The culture will continue to be the same because there is nothing causing a change. You just may lack some originality due to promoting and not hiring externally.
  • Competition between workers – People may become competitive with a position opening up. If employees don’t like the person who gets the promotion, they may leave because they don’t feel properly supported. They also may leave because they don’t feel valued if someone with less experience in the company gets the promotion instead of them.

Overall, consider your employees and the need within your organization to determine whether or not it would be more beneficial to promote or hire externally.

The Many Types of Investment Risk

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Risk assessment, analyze potential danger level, measure money loss acceptable for investing, control or limit loss concept, businessman investor stand on stack of risk boxes measure his assessment.It is important for investors to understand that every investment has its own set of risks. One key to successful investing is to recognize the different types of risks that could be a threat to one’s financial well-being and to take steps to minimize their impact. What follows is an overview of the primary forms of investment risk as well as some tips on how to minimize that risk.

Market Risk

This is the risk that the prices of securities may fall due to external factors such as world events, economic changes, or investors’ expectations and outlook. Stock investors are more likely to be impacted by this form of risk than fixed-income investors.

Inflation Risk

Also known as purchasing power risk, this is the risk that is connected to the uncertainty over the future purchasing power of the income and principal of an investment. When prices rise (inflation), purchasing power typically falls. Historically, stocks have been less impacted by this type of risk since they have been able to appreciate in price at a faster rate than the rate of inflation. Typically, lower yielding cash equivalents are more likely to be affected by a rise in inflation.

Interest Rate Risk

When interest rates move up and down, bond prices change. When interest rates move up, newly issued bonds will generally pay a higher interest rate than similar, older bonds. What happens next is that the market of existing bonds falls because there is less demand for them. In other words, they lose market value. The opposite happens when interest rates fall: Older, previously issued bonds will pay higher rates of interest than newly issued bonds, making the older bonds more appealing to investors. The bottom line is that falling interest rates are generally beneficial to bond owners.

Maturity Risk

Since it is impossible to predict how the financial markets will perform in the future, long-term bonds are generally considered to be riskier investments than short-term bonds. This type of risk is known as maturity risk. Issuers of long-term bonds attempt to compensate for the additional risk by offering higher yields.

Credit Risk

Credit risk is the risk that a bond issuer will be unable to pay interest on the bonds it issued or repay principal when the bonds mature. Rating services, such as Moody’s Investor Services and Standard & Poor’s, carefully investigate the financial health of a bond issuer in order to alert investors to the risks of a particular issue. The rating services rate municipal bonds, corporate bonds, and international bonds. They do not rate Treasury bonds since the assumption is that they are solid, backed by the full faith and credit of the federal government. The rating services rate bond quality according to a system that employs letters and numbers, with AAA or aaa indicating the highest quality issues and CCC or ccc and below indicating poor quality issues that could default.

Credit ratings influence the interest rate an issuer must pay in order to sell its bonds. However, credit ratings are opinions about credit risk. Even though credit ratings are forward looking in that they assess the impact of foreseeable future events and can be useful to investors, they are not a guarantee that an investment will pay out or that an issuer will not default.

Currency Risk

Changes in currency exchange rates will have an impact on returns from overseas investments. For example, when the dollar rises in value in relation to the Euro, the return on a fund that holds a large number of stocks in European businesses is reduced when the Euros are converted to U.S. dollars. The opposite occurs when the dollar falls in value in relation to the Euro.

All investments have risks. Before buying a security, understand that the key to investing success is balancing risk. You can do this by having a well-diversified portfolio and an asset allocation strategy based on your risk tolerance and the number of years until you retire.

Diversification helps you manage risk by spreading your assets among a broad mix of different investments. When you do this, you are taking advantage of the fact that securities usually don’t move in the same direction at the same time. When some investments drop in value, others may rise or remain unchanged, offsetting to some degree those investments that lose value. Of course, diversification does not ensure a profit or protect against loss in a declining market.

Be sure to talk to your financial professional for insights on how you can balance risk in your investment portfolio.

Valuing Your Estate’s Assets

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Estate planning abstract concept vector illustration. Real estate assets control, keep documents in order, trust account, attorney advise, life insurance, personal possession abstract metaphor.In estate planning, you often come across the term “fair market value.” However, some assets are easier to value than others.

The IRS defines fair market value as “the value at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”

Some assets are easily valued. A stock, for example, that is listed on a major exchange can be valued simply by averaging the highest and lowest quoted selling price for that day. That price, multiplied by the number of shares you own, gives you the value of your stock on that day. Establishing value on most other property is not quite as easy, though. Let’s look at other forms of property and how they might be valued for estate tax purposes.

  • Real property. There are numerous factors that have to be considered, such as the size, shape, and location of the property, zoning restrictions, its potential use, and the value of surrounding property. The value of the buildings depends on whether they are rental properties, the present cost of reproducing them, and their loss of value because of depreciation. Also, certain properties, such as farm or business property, have special valuation issues that must be considered for estate tax purposes.
  • Personal property. Property such as your car, furniture, jewelry, etc., will be valued according to the definition mentioned above. If you have a house full of possessions, each object will be valued separately. Professional appraisals may be necessary for items such as collectibles or one-of-a-kind possessions.
  • Life insurance. Whether or not life insurance will be included in your estate depends on a number of factors. Do you own the policy or policies? Did you hold any incidents of ownership at the time of your death or did you transfer the ownership or incidents of ownership within three years of your death? Also, any insurance proceeds payable to your estate will be included in your estate for estate tax purposes. The value of the insurance is generally the lump-sum amount of the insurance proceeds.
  • Stock of closely held corporations. A professional appraisal is usually required. This stock is not often traded and, as a result, is difficult to value. Factors in valuation include: the nature and history of the business, its financial condition, its future outlook, its goodwill, and the market price of the stock of corporations in a similar business.
  • Professional practice. This is more difficult to value than other types of businesses because so much is dependent on the professional’s expertise. If, for example, a dentist dies, his or her family can’t simply take over the practice unless a family member happens to be a licensed dentist. The valuation will depend to a great degree on the practice’s client base, fee structure, competition, source of payments, strength of staff, location, and assets.

Regularly putting a value on your estate is a good idea because it allows you to plan for the payment of bequests, debts, and estate taxes. But it is only one step in the estate planning process. Your legal, tax, and financial professionals can help you understand the steps you need to take.

Bookkeeping & Accounting Tips for Small Business Owners

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Young asian female work with financial papers at home count on calculator before paying taxes receipts online, planning budget glad to find chance for economy saving money, audit conceptsRunning a small business is a demanding task, requiring you to wear many hats, from managing operations to marketing and customer service. Among these responsibilities, bookkeeping and accounting are crucial for the financial health and sustainability of your business. While it may seem daunting, effective financial management doesn’t have to be overly complicated. Here are some essential bookkeeping and accounting tips to help small business owners stay organized, compliant, and financially sound.

1. Separate Personal and Business Finances

One of the first steps for any small business owner is to separate personal and business finances. Open a dedicated business bank account and use it exclusively for business transactions. This separation simplifies bookkeeping, aids in tax preparation, and ensures legal protection of personal assets.

2. Use Accounting Software

Investing in accounting software can save you time and reduce the risk of errors. Tools like QuickBooks, Xero, or FreshBooks offer user-friendly interfaces and automate many bookkeeping tasks, such as invoicing, expense tracking, and financial reporting. Many of these platforms also integrate with your bank account, further streamlining the process.

3. Track All Expenses

Maintain meticulous records of all business expenses. Use your accounting software or apps to capture and categorize receipts immediately. Keeping a detailed record of expenses not only helps in managing cash flow but also ensures you can claim all possible tax deductions.

4. Regularly Reconcile Bank Statements

Reconcile your bank statements at least once a month. This process involves comparing your accounting records with your bank statements to ensure they match. Reconciling accounts helps identify discrepancies, catch errors, and detect potential fraud early.

5. Implement a Consistent Invoicing System

A consistent invoicing system ensures you get paid on time. Send out invoices promptly, set clear payment terms, and follow up on overdue payments. Using accounting software for invoicing can automate reminders and track outstanding invoices.

6. Monitor Cash Flow

Cash flow is the lifeblood of any small business. Regularly monitor your cash flow to ensure you have enough funds to cover operating expenses and invest in growth opportunities. Create cash flow projections to anticipate future needs and adjust your operations accordingly.

7. Set Aside Money for Taxes

Avoid the year-end scramble by setting aside money for taxes throughout the year. Estimate your tax liability and regularly deposit a portion of your revenue into a separate tax account. Consider consulting with a tax professional to understand your tax obligations and maximize deductions.

8. Maintain Accurate Financial Records

Accurate financial records are essential for making informed business decisions. Regularly update your books and keep records of all financial transactions, including sales, purchases, payroll, and other expenses. Accurate records are also crucial for compliance with tax laws and regulations.

9. Prepare for Financial Reporting

Prepare financial statements, such as the balance sheet, income statement, and cash flow statement, on a regular basis. These reports provide insights into your business’s financial health and performance. Use these reports to identify trends, assess profitability, and make strategic decisions.

10. Seek Professional Advice

Consider hiring a professional accountant or bookkeeper, especially if your business finances become complex. A professional can provide valuable insights, ensure compliance with tax laws, and help you optimize your financial strategy. Many small business owners find that the cost of professional advice is outweighed by the benefits of improved financial management and peace of mind.

Effective bookkeeping and accounting are fundamental to the success of any small business. By implementing these tips, small business owners can maintain financial order, make informed decisions, and ensure their business thrives. While it may require an initial investment of time and resources, the long-term benefits of sound financial practices are well worth the effort.