Top Tax Credits Every Business in the USA Should Know About in 2024

Understanding USA Business Tax Credits: A Path to Financial Efficiency

Starting and running a business in the USA demands your determination, leadership, and innovation. Competing in the American market can be challenging, but many entrepreneurs like yourself begin with enthusiasm, vision, and substantial capital. However, managing your finances and capital effectively is crucial, including navigating the complex tax landscape. While taxes are often seen negatively, the U.S. government offers you various credits and deductions to support your business and stimulate economic growth. These incentives help you thrive in a competitive environment and contribute to the overall economy.

Tax Credits vs. Tax Deductions: What’s the Difference?

A tax credit is an amount that you can directly subtract from the total tax you owe to the government. This differs from a tax deduction, which lowers your gross income before calculating taxes. For instance, if you owe $4,000 in taxes and qualify for a $1,500 tax credit, your tax liability decreases to $2,500. On the other hand, a tax deduction reduces the amount of income that is subject to tax. If your gross income is $60,000 and you claim a $2,000 deduction, your taxable income drops to $58,000. The actual savings in your tax liability depends on your tax bracket. Tax credits can be particularly beneficial because they provide a direct dollar-for-dollar reduction in your tax bill, unlike deductions which simply lower your taxable income.

Tax credits can be refundable and non-refundable

Tax credits come in two types: refundable and nonrefundable. A refundable tax credit gives you the chance to receive a refund if the credit amount exceeds your total tax liability. This means you could actually get money back from the government. On the flip side, a nonrefundable tax credit only reduces your tax liability to zero; any leftover credit can't be refunded and is lost. Understanding these distinctions is crucial because they directly impact your potential tax savings.

Different tax credits available for businesses in USA

1 . Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) is a tax break for employers who hire people from specific groups that have a hard time finding jobs, such as qualified IV-A recipients, veterans, ex-felons, designated community residents (DCR), vocational rehabilitation referrals, and qualified summer youth employees. This helps promote workplace diversity and gives more people access to good jobs. The credit is a federal tax credit and is limited to the amount of the business income tax liability or Social Security tax owed. A taxable business can apply the credit against its business income tax liability and, if not fully used, can carry the unused credit back one year or forward up to 20 years. The credit has been extended and will be available until the end of 2025.

2.  Empowerment Zone Employment Credit

The Empowerment Zone Employment Credit gives businesses in struggling urban and rural areas (called Empowerment Zones or EZs) a tax break for hiring local residents. Companies can get up to $3,000 per employee, which is 20% of the first $15,000 they pay in wages. Both full-time and part-time workers qualify if they work at least 90 days a year. This is a federal tax credit that can be renewed every year, and there’s no limit to how many employees can be claimed, as long as they live in the EZ. However, wages used for this credit can’t be used for other tax credits like the Work Opportunity Tax Credit. This program aims to boost these communities by encouraging business investments and job creation.

3. Small Business Health Care Tax Credit

The small business health care tax credit benefits employers with fewer than 25 full-time equivalent employees who pay average wages of less than $50,000 per year and offer a qualified health plan through the Small Business Health Options Program (SHOP) Marketplace. Employers must pay at least 50% of the cost of employee-only health coverage. If the business doesn't owe tax during the year, the credit can be carried back or forward to other tax years. The credit is refundable, so tax-exempt employers without taxable income may receive it as a refund, up to their income tax withholding and Medicare tax liability.

4. New Market Tax Credit

The NMTC federal Program aims to bring private investment into disadvantaged communities by offering tax incentives to investors who support Community Development Entities (CDEs). Investors, which can range from large corporations to individuals, receive a tax credit equivalent to 39% of their investment spread over seven years. This means they get 5% back each year for the first three years, followed by 6% annually for the next four years. These investments help fund projects that benefit local economies, creating opportunities for growth and renewal where they are needed most.

5. Clean Vehicle Tax Credit

A $7,500 full credit or a $3,750 partial credit is available for purchasing an electric vehicle,

plug-in hybrid electric vehicle, or fuel cell vehicle, depending on the vehicle's battery and critical mineral requirements. To qualify, the vehicle’s MSRP must be $80,000 or less for pickup trucks, vans, and SUVs, and $55,000 or less for all other passenger vehicles. Additionally, the vehicle must be assembled in North America. At the time of sale, the dealer will provide a report containing information such as the dealer's name, address, VIN, make, model, placed in service date, and the maximum credit available.

The IRS offers tax credits to encourage businesses like yours to invest in sustainable practices. These credits cover areas such as employer-provided childcare, low sulfur diesel fuel production, energy-efficient homes, alternative vehicles, and more. They aim to reward responsible choices that benefit both the environment and the economy. Taking advantage of these credits can lower your tax bill while supporting sustainable business operations.

Besides federal tax credits, you should note that states often offer their own incentives based on local laws. These state-level credits can vary widely, covering areas such as renewable energy, job creation, research, historic preservation, and more. Exploring both federal and state opportunities can help your business maximize savings and support while aligning with local regulatory and environmental objectives.

Optimize Your Business Tax Benefits with Water and Shark

At Water and Shark, we handle everything with precision. We maintain meticulous records of your expenses and employee details, ensuring you qualify for the maximum tax credits available.

We take care to apply for credits in the correct sequence and use the appropriate IRS forms, adhering closely to IRS rules to avoid missing any opportunities. Additionally, we assist you in utilizing carryforward and carryback options effectively, allowing you to apply unused credits to future or past tax years as needed.

Choose Water & Shark to navigate these complexities and optimize your tax benefits. Contact us at usa@waterandshark.com.