The past two years have been a rollercoaster for small business owners working to keep the doors open. First, an international pandemic turned the world upside down for business operations. Then, added frustrations with employee shortages, wholesale price increases, supply deficiencies, recession impacts, venture capital stalemates, and small businesses struggling to survive and thrive in a new norm.
But if you’re looking for ways to save on your small business financials in 2023, tax credits may be the answer. In this blog, we’re outlining tax credits you probably haven’t heard of, the biggest mistake small businesses are making with tax credit filings, and how you can file your tax credits (and all your business accounting needs) with confidence.
What are Tax Credits?
Tax credits are dollar-for-dollar reductions in your income tax. They reduce the income tax your small business owes the state and federal government. Generally speaking, tax credits compensate for small businesses practicing economically beneficial activities, including hiring workers with employment barriers, keeping employees on the payroll during COVID-19, or investing in research activities. In some cases, tax credits cover expenses paid out throughout the year; for these tax credits, there's generally a list of requirements you'll need to complete to claim them.
How Much Are We Talking About?
With up to $26,000 available per employee for Employee Retention Credits (ERC) and $250,000 per year against payroll taxes for Research and Development (R&D) Tax Credits, growing businesses can make the most of their resources with dollar-for-dollar reductions that can make all the difference for 2023.
So how much are we talking about for a typical small business? Consider this — A mom-and-pop restaurant employs five full-time W-9 workers. During COVID-19, they were able to keep their doors open by offering take-out and contact-free delivery options. If they retroactively file for the ERC tax credit, they could get back up to $130,000 for keeping their employees on the payroll for 2020 and 2021. Now that's some serious cash back that could be used for payroll, rent, mortgage interest, utilities, or any other business expense.
Small Business Tax Credits to File for in 2023
Are you wondering which tax credits your small business could benefit from? We've gathered the most significant tax credits you have yet to hear of and reviewed all the essential information you'll need in order to take advantage of these significant opportunities. But don't miss out! Keep an eye out for essential deadlines and top mistakes to avoid while filing for these tax credits.
Employee Retention Credit
The Employee Retention Tax Credit, or ERC for short, is a refundable United States government tax credit for small businesses who suffered with operational challenges during the COVID-19 pandemic. It was established in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and has helped thousands of small businesses to keep their business open and cover operational expenses incurred during the 2020 and 2021 fiscal year(s).
General 2020 & 2021 ERC Qualifiers:
- You carried on a business or tax-exempt organization.
- You had at least one full-time W-2 employee.
- COVID-19 directly impacted your business's revenue and caused interruptions for your supply chain or equipment accessibility.
Important ERC Deadlines for Filing an Amended Tax Return:
- 2020 Q2 (April-June): July 31, 2023
- 2020 Q3 (July-September): October 31, 2023
- 2020 Q4 (October-December): January 31, 2024
- 2021 Q1 (January-March): April 30, 2024
- 2021 Q2 (April-June): July 31, 2024
- 2021 Q3 (July-September): October 31, 2024
- 2021 Q4 (October-December): January 31, 2025
Research & Development Tax Credit
The Research and Development (R&D) tax credit is another U.S. government-sponsored tax initiative that results in a dollar-for-dollar reduction in small business tax liabilities. Initially enacted in 1981, U.S. Representative Jack Kemp and U.S. Senator William Roth added it to the Economic Recovery Tax Act. It was made during an economic slowdown, and job outsourcing to protect Americans, encourage development investments, and increase activities involving research. Since its enactment, the R&D tax credit has expired eight times and been extended 15 times.
Over 60 industries in more than 30 states can qualify for the R&D credit to offset tax liabilities. For example, your small business could be eligible for R&D tax credits if you manage the following employee types: technicians, operators, drafters, engineers, fabricators, machinists, designers, drafters, or machinists.
Additionally, if your small business is managing these projects, you could qualify for the following:
- Updating existing products
- Developing more efficient software
- Building new techniques, processes, or prototypes
- Creating new or innovative products
- Collaborating with contractual research workers
The Biggest Mistake Small Business Owners are Making with Tax Credits
The biggest mistake? Going it alone. Unfortunately, it’s not uncommon for small businesses that are just getting started, whether investor-funded or bootstrapping, not to recognize the various accounting needs that a business has. At Profitwise Accounting, we specialize in the tax and accounting services of small businesses. Our accountants have worked with many small businesses and startups with varied needs, and we’ve seen most of the pitfalls that new small businesses fall into. By working with us to help manage your accounting needs, tax filing services are available to you.
File Tax Credits Accurately With Us
Profitwise Accounting is a full-service accounting and consulting firm that provides bookkeeping, taxation, payroll, and CFO-level services to small businesses like yours to maximize their true earning potential with tax credits and additional accounting services.
Including helping you identify eligible tax credits for your business, we'll help you organize your books, help you file your tax credits with confidence, keep you compliant, and offer advice to help you better manage cash flow and increase efficiency.
Schedule a consultation with our team to learn how we can help you with your accounting needs, make the most of tax credits and ensure compliance.
About the Author
David Heistein, CPA
Dave is co-founder and managing partner at Profitwise Accounting. Dave is a Certified Public Accountant in the state of California, as well as an advanced QuickBooks Pro Advisor and Instructor. As a small business owner, he is dedicated to educating and informing other business owners on bookkeeping and accounting matters.