Tax Credits Every Small Business Owner Should Know About

Deductions vs. Credits: Why Credits Are More Valuable

Before diving into specific credits, it's worth clarifying the difference between a deduction and a credit — because most business owners conflate the two.

• A deduction reduces your taxable income. If you're in the 24% bracket and claim a $1,000 deduction, you save $240 in taxes.
• A credit reduces your actual tax bill. A $1,000 tax credit saves you exactly $1,000 in taxes, regardless of your bracket.

This means tax credits are far more valuable — sometimes 4–5x more valuable than an equivalent deduction. Yet many small business owners don't even know they exist, let alone claim them. See our full guide on building a complete tax structure to understand how credits fit into the bigger picture.

The Research & Development (R&D) Tax Credit

The R&D tax credit is one of the most underutilized credits in the tax code — and one of the most valuable. Contrary to what many business owners assume, you don't have to be a tech startup or a pharmaceutical company to qualify. The credit was designed to incentivize any U.S. business that invests in developing or improving products, processes, software, or formulas.

Qualifying activities include:

• Developing or improving software or apps (including internal-use software)
• Engineering new products or prototypes
• Testing and improving manufacturing processes
• Developing new formulations or compounds
• Creating or improving food or beverage products

The credit is worth up to 20% of qualified research expenses over a base amount. For startups and small businesses under $5 million in revenue, there's a special provision that allows you to apply up to $500,000 of R&D credits against your payroll taxes — even if you don't have taxable income yet.

Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit rewards businesses that hire workers from certain target groups that face barriers to employment. The credit ranges from $1,200 to $9,600 per qualifying employee, depending on the target group and number of hours worked in their first year.

Target groups include:

• SNAP (food stamp) recipients
• Veterans, including disabled veterans
• Long-term unemployment recipients
• Ex-felons hired within one year of conviction or release
• Supplemental Security Income (SSI) recipients
• Vocational rehabilitation referrals

To claim WOTC, you must file IRS Form 8850 within 28 days of the employee's start date, so timing is critical. Many businesses miss this credit simply because they don't have the process in place to identify qualifying hires at onboarding.

Small Business Health Care Tax Credit

If you have fewer than 25 full-time equivalent employees, pay average wages below a certain threshold, and contribute at least 50% of your employees' health insurance premiums, you may qualify for the Small Business Health Care Tax Credit worth up to 50% of the premiums you pay (35% for tax-exempt employers).

The credit is available for two consecutive years and is claimed on IRS Form 8941. It's designed to make health insurance more accessible for small businesses and their employees.

Disabled Access Credit

Small businesses with fewer than 30 full-time employees or gross receipts under $1 million can claim a credit of up to $5,000 per year for costs incurred to comply with the Americans with Disabilities Act (ADA) or to make their business more accessible. Qualifying expenses include making a facility accessible to people with disabilities, acquiring accessible equipment, providing accessibility services or materials, and removing transportation barriers.

Energy Efficiency Tax Credits

The Inflation Reduction Act significantly expanded energy-related tax credits for businesses. If your business invests in qualifying energy-efficient improvements, you may be eligible for:

• Commercial Clean Vehicle Credit: Up to $7,500 for light-duty clean vehicles, up to $40,000 for heavier commercial vehicles
• Energy Efficient Commercial Buildings Deduction (179D): $0.50–$5.00 per square foot for qualifying energy-efficient improvements to commercial buildings
• Investment Tax Credit: 30% credit for solar, wind, and other qualifying clean energy investments

Retirement Plan Startup Costs Credit

If your business starts a new qualified retirement plan (like a 401k, SEP-IRA, or SIMPLE IRA), you can claim a tax credit for 100% of eligible startup costs, up to $5,000 per year for the first three years. Additionally, if you add an automatic enrollment feature, you get an additional $500 credit per year for the first three years. This effectively means the government subsidizes up to $16,500 of your retirement plan setup costs.

Employee Retention Credit (ERC)

If your business was impacted by COVID-19 and you retained employees between 2020 and 2021, you may still be eligible to retroactively claim the Employee Retention Credit. The credit is worth up to $21,000 per employee for 2021 (Q1–Q3), and up to $5,000 per employee for 2020. While the program has officially ended, amended returns can still be filed to claim retroactive credits. Note that ERC claims have faced increased IRS scrutiny, so work only with qualified professionals who specialize in this area.

How to Capture Credits You've Been Missing

Most business owners are missing at least one significant tax credit. The challenge is that credits require proactive planning — you can't retroactively qualify for WOTC after you've already hired someone, and you can't claim R&D credit without proper documentation.

A dedicated tax credit review can typically surface $5,000–$50,000 in unclaimed credits for qualifying businesses. The best first step is a free consultation with a tax specialist who reviews your business activities against the full list of available federal and state credits.