Five tax credits available to startups in the US 👨💻️
If you’re a startup, tax planning is vital. You need to ensure that the taxes you pay are as low as possible to boost your business and return on investment (ROI).
Most tax reliefs offered by the government are restricted to large companies. Fortunately, there are tax benefits available to startups, including tax credits and discounts. This blog covers five tax benefits available to startups in the US.
1. The $250,000 R&D federal tax credit 💳
The $250,000 R&D federal tax credit was introduced in 2015 to help startups reduce their payroll tax liability.
In general, eligible startups can use the credit to cover costs related to developing new products or services, trial and error processes, or science-related activities.
How to Qualify?
To qualify for the credit, startups must have receipts of gross income from business activities of $5 million or less in each of the preceding three tax years.
Startups must also have filed a tax return for any year ending with the tax year for which they are applying for the credit.
Besides, eligible startups must have conducted science-based research and development activities for a period of not less than 31 days during any tax year.
What about Investment? 💵
Eligible startups must also have made a business investment of $50,000 in qualified research expenses in connection with such business investment during the tax year. They must also have paid employees an average annual salary of no more than $50,000 during the tax year.
For these reasons, it is essential that you clearly document all activities related to the cost claimed to get the credit.
Who Is Most Likely to Use R&D Tax Credit?
- Software Publishers = $7.8M
- Computer System Design and Related Services = $4.8M
- Scientific Research and Development Services = $1.2M
- Business Support Services = $1.1M
- Other Financial Investment Activities = $1.0M
2. The small business health care tax credit 🩺
The small business healthcare tax credit is a federal tax credit designed to promote and encourage small businesses and startups to offer healthcare to their employees.
To be eligible, businesses must have fewer than 25 full-time equivalent employees and each employee must earn less than $56,000.
Businesses must also pay at least half of their employees’ health insurance premiums, complete IRS Form 8941 to receive the tax credit, and purchase SHOP insurance to qualify for it.
Generally, businesses must purchase SHOP insurance to qualify for the tax credit.
The American Rescue Plan extends a number of critical tax benefits, including the Employee Retention Credit and Paid Leave Credit, to small businesses. Businesses that participate in the small business health tax credit are eligible for a reduction in their income tax liability.
3. The startup tax credit for retirement plans 👴
Startups can claim up to $5,000 annually for up to three years when they start a company-wide retirement plan.
The tax credit consists of 50% of the cost to start up the retirement plan, up to a $5,000 annual limit.
Eligibility Requirements 📝
The eligibility requirements include businesses with 100 or fewer employees and a non-highly compensated employee. To be eligible, businesses must offer a retirement plan that is available to all employees and must make contributions based on employee income.
The tax credit is aimed at encouraging companies to offer retirement plans as an employee benefit, especially for small businesses. It also aims to increase access to retirement savings for employees and encourage employers to offer retirement plans as an employee benefit.
The tax credit is effective in encouraging small business startups and growth.
Besides, it is beneficial for small businesses because it provides flexibility in the planning of their finances and makes the business more attractive to prospective employees.
4. The CARES Act employee retention tax credit 👨💻️
The CARES Act employee retention tax credit provides income tax incentives for small business owners looking to retain employees.
Specific Eligible Businesses
Specifically, eligible businesses are those that have 100 or fewer employees and a gross annual income of $1 million or less.
In order to claim the tax credit, a business must have a qualified employee. A qualified employee is an individual who works full-time year-round at the business and has been with the business for at least 12 months.
Eligibility requirements are fairly straightforward, requiring a business to have begun operations after February 15, 2020, with annual gross revenue not exceeding $1 million.
Also, businesses can carry back losses up to five years in income tax to offset income taxed at the higher 35% rate in effect before 2018.
With this incentive, business owners may be incentivized to retain workers and encourage them to stay with the business long-term.
5. The work opportunity tax credit 🏗️
The Work Opportunity Tax Credit (WOTC) is a tax credit offered by the US government that provides financial incentives for employers to hire unemployed Americans.
What Tax Credit Offer
This tax credit can offer up to $6,000 per employee and is typically claimed in the year that the employee was hired. The WOTC has fewer restrictions than other credits offered to startups, such as the R&D tax credit and Employee Retention Credit (ERTC).
The WOTC allows businesses to offset the cost of investments in innovation, such as research and development. This tax credit can be beneficial for small businesses looking to invest in their employees’ training and development. It also helps small businesses attract new talent and make the workplace more diverse and inclusive.
Final Thoughts 🤔
Tax incentives have helped startup businesses in the United States to thrive, and have fueled their growth.
They have played a critical role in helping new businesses succeed and adapting to new markets quickly.
In addition to tax benefits, startup companies also benefit from employee benefits such as flexible work hours and remote work options.
Besides, startup tax credits also promote innovation by lowering costs for startup firms. It is essential that startups take advantage of tax benefits offered by the government so they can help them grow and thrive.