What Small Business Tax Credits Can You Claim?

Small business tax credits are incentives designed to encourage specific business activities that benefit the economy or society. A tax credit provides a dollar-for-dollar reduction of your tax liability, meaning a $1,000 credit cuts your tax bill by the full $1,000.

A tax deduction, on the other hand, reduces your taxable income. The value of a deduction depends on your business’s tax bracket; for instance, if your business is in the 22% tax bracket, a $1,000 deduction results in a tax savings of $220. While both mechanisms reduce your tax burden, a credit provides a more significant financial benefit than a deduction of the same amount.

Common Tax Credits for Small Businesses

Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers for hiring and retaining individuals from certain targeted groups who have consistently faced significant barriers to employment. This program is designed to incentivize the hiring of veterans, ex-felons, and recipients of certain government assistance programs. The credit is calculated as a percentage of the qualified wages paid to an eligible employee during their first year of employment.

The credit is 40% of the first $6,000 of wages for employees who work at least 400 hours, resulting in a maximum credit of $2,400. For employees who work at least 120 hours but fewer than 400, the credit is 25% of the first $6,000 of wages. The wage cap and credit percentage can be higher for certain groups, such as for some qualified veterans, where the credit can be as high as $9,600.

To claim the WOTC, an employer must first obtain certification that the new hire is a member of a targeted group. This requires the employer and applicant to complete IRS Form 8850, which must be submitted to the state workforce agency within 28 days of the employee’s start date. The final credit is calculated on Form 5884 and filed with the business’s tax return.

Credit for Small Employer Health Insurance Premiums

This tax credit is aimed at making health insurance more affordable for small businesses. To qualify, an employer must have fewer than 25 full-time equivalent (FTE) employees, pay average annual wages below an inflation-adjusted amount of $66,600 for 2025, and contribute at least 50% of the premium cost for employee-only health coverage.

The maximum credit is 50% of the premiums paid for small business employers and 35% for tax-exempt employers. The health insurance must be purchased through the Small Business Health Options Program (SHOP) Marketplace. The credit is most beneficial for businesses with fewer than 10 FTEs and average annual wages of $33,300 or less, and it can only be claimed for two consecutive taxable years.

To claim this credit, employers use Form 8941. Completing the form requires detailed records of health insurance premiums paid for each employee and data to calculate the number of FTEs and their average annual wages.

Employer Credit for Paid Family and Medical Leave

Employers who voluntarily offer paid family and medical leave to their employees may be eligible for a tax credit. To qualify, the employer must have a written policy that provides at least two weeks of paid leave annually to all qualifying full-time employees, prorated for part-time employees. The policy must ensure that the leave payment is at least 50% of the employee’s normal wages.

The credit amount is on a sliding scale, starting at 12.5% of the wages paid to employees on leave if the payment rate is 50% of their normal wages. The credit percentage increases by 0.25% for each percentage point that the payment rate exceeds 50%, up to a maximum credit of 25%. The credit applies to wages paid for up to 12 weeks of leave per taxable year and is not available for leave that is required by state or local law.

To claim this credit, employers must use Form 8994. The most important documentation is the written paid leave policy itself, which must be in place before the leave is taken. A business also needs detailed payroll records for each qualifying employee taking leave to calculate the credit.

Research and Development (R&D) Credit

The R&D tax credit is an incentive for businesses that invest in innovation and technical improvements within the United States. It is not limited to companies with dedicated laboratories; any business that develops new or improved products, processes, software, techniques, or formulas can potentially qualify. The credit is designed to reward companies for activities that lead to technological advancement.

Qualified expenses include wages for employees involved in research, costs of supplies used in the research process, and a portion of the costs for contract research. For certain qualified small businesses with less than $5 million in gross receipts, the R&D credit can be used to offset payroll taxes, up to $500,000 per year. This makes the credit valuable for new companies that may not yet have an income tax liability.

The R&D credit is calculated using Form 6765. Substantiating this credit requires maintaining detailed documentation of all qualified research expenses. These records should include payroll information for research employees, invoices for supplies, and contracts for any research conducted by third parties.

Disabled Access Credit

The Disabled Access Credit is available to eligible small businesses that incur expenses to make their facilities more accessible to individuals with disabilities. To be eligible, a business must have earned $1 million or less in the preceding tax year or have had 30 or fewer full-time employees. The credit can be claimed annually for qualifying expenditures.

Eligible expenses include costs for removing barriers, providing interpreters for the hearing-impaired, or modifying equipment and acquiring adaptive devices. The credit is 50% of the eligible access expenditures that exceed $250 but do not exceed $10,250. This results in a maximum possible credit of $5,000 per year.

To claim the Disabled Access Credit, businesses must file Form 8826. Businesses should keep detailed records, such as invoices and receipts, for any expenses related to making their facilities or services more accessible to calculate the credit.

Retirement Plan Startup Costs Tax Credit

To encourage small businesses to establish retirement plans for their employees, the government offers a tax credit to help offset the initial costs. This credit is available for businesses with no more than 100 employees who received at least $5,000 in compensation in the preceding year. The credit applies to the ordinary and necessary costs of starting a new qualified plan, such as a 401(k), SIMPLE IRA, or SEP plan.

For employers with 50 or fewer employees, the credit is 100% of the eligible startup costs, up to a maximum of $5,000 per year for the first three years of the plan. For businesses with 51 to 100 employees, the credit is 50% of those costs. A separate credit is also available for a percentage of employer contributions made to the plan, capped at $1,000 per employee and gradually reduced for businesses with 51 to 100 employees.

The credit for retirement plan startup costs is claimed using Form 8881. A business will need records of the costs associated with establishing and administering a new plan. For the additional credit related to employer contributions, detailed payroll records showing the amounts contributed for each eligible employee are necessary.

The Process of Claiming Credits on a Tax Return

After a business has determined its eligibility for one or more tax credits and has completed the specific forms for each, the next step is to consolidate these credits. This is done using Form 3800, General Business Credit. This form acts as a summary sheet, where the amounts calculated on individual credit forms are brought together, providing a comprehensive overview of all the business credits being claimed.

The completed Form 3800, along with the underlying individual credit forms, must be attached to the business’s main income tax return. For a corporation, this would be Form 1120; for a partnership, Form 1065; and for a sole proprietorship, the credit would be reported on the owner’s Form 1040, often in conjunction with Schedule C.

Once the tax return is filed, the total amount from Form 3800 is used to reduce the business’s tax liability. There are limitations on how much of the general business credit can be used in a single year, which are based on the amount of tax owed. If the total credit is more than the tax liability for the current year, the unused portion is not necessarily lost.

Unused credits can be carried back to the previous tax year to generate a refund. Any remaining credit can then be carried forward for up to 20 years to offset future tax liabilities. This carryback and carryforward provision ensures that businesses can eventually realize the full benefit of the credits they have earned.