Back
You can use tax credits to reduce your business taxes in a meaningful way in order to maintain business health and growth.
Running a business comes with many expenses, and paying taxes is one of the most significant. However, many business owners overlook one of the most effective tools available for minimizing their tax burden—tax credits. If you’re looking for smart ways to improve your bottom line, learning how to use tax credits to reduce your business taxes is a great place to start.
What Are Tax Credits?
Tax credits are direct reductions of the amount of tax your business owes. Unlike tax deductions, which lower your taxable income, tax credits reduce your actual tax bill dollar for dollar. That means a $5,000 tax credit reduces your tax liability by $5,000.
Tax credits can come from federal, state, or even local governments, and they’re designed to incentivize businesses to act in ways that promote economic growth, sustainability, innovation, or social good.
Types of Business Tax Credits
To effectively use tax credits to reduce your business taxes, you need to know what types of credits are available. Some of the most common and valuable include:
Research and Development (R&D) Tax Credit
If your company develops new products, improves processes, or invests in innovation, you may qualify for this substantial credit—even if you’re a small business or startup.
Work Opportunity Tax Credit (WOTC)
This federal credit encourages businesses to hire individuals from certain target groups, such as veterans, long-term unemployed individuals, and ex-felons.
Disabled Access Credit
Businesses that make their premises more accessible to people with disabilities can qualify for this credit, which covers up to 50% of eligible expenses.
Energy Efficiency Credits
There are several federal and state tax credits for businesses that invest in energy-saving upgrades, such as solar panels, energy-efficient HVAC systems, and electric vehicle charging stations.
How to Claim Business Tax Credits
To use tax credits to reduce your business taxes, follow these steps:
Identify Eligible Credits
Work with a tax professional or financial advisor to review your business activities and see which credits you may qualify for. IRS Form 3800 is a good starting point for identifying general business credits.
Keep Detailed Records
Tax credits often require documentation. Maintain thorough records of your expenses, employee information, and improvements made to qualify for the credits.
File the Correct Forms
Each tax credit typically requires its own form in addition to your regular business tax return. For example:
- Use Form 6765 for R&D credits
- Use Form 5884 for the Work Opportunity Tax Credit
Stay Up to Date
Tax laws change frequently. Credits available this year may not exist next year, and new credits may be introduced. Subscribe to IRS updates or consult your accountant regularly.
Why Use Tax Credits?
The ability to use tax credits to reduce your business taxes can mean the difference between surviving and thriving. These credits can:
- Lower your effective tax rate
- Free up cash for reinvestment
- Support your business goals (such as hiring or energy efficiency)
- Improve financial performance
For small businesses and startups especially, tax credits can provide essential relief during growth phases or uncertain times.
Tax Credits Feed Business Growth
Understanding how to use tax credits to reduce your business taxes is a powerful way to take control of your company’s financial future. From innovation to hiring to sustainability, there are numerous opportunities to reduce what you owe and put money back into your business.
Always consult a tax professional to make sure you’re maximizing available credits and complying with current regulations. With the right strategy and expert guidance, you can significantly cut your tax bill—and use those savings to fuel your business’s continued growth.
Trust the Professionals at the Harding Group
Unlike other accounting firms, The Harding Group, located in Annapolis, MD, will never charge you for consultations and strive for open communication with our clients.
Are you interested in business advising, tax preparation, bookkeeping and accounting, payroll services, training + support for QuickBooks, or retirement planning? We have the necessary expertise and years of proven results to help.
We gladly serve clients in Annapolis, Anne Arundel County, Baltimore, Severna Park, and Columbia. If you are ready to take the stress out of tax time, contact us online or give us a call at (410) 573-9991 for a free consultation. Follow us on Facebook, Twitter, YouTube, and LinkedIn for more tax tips.