A Guide for Small Businesses & Tax Incentives in United States

Tax Incentives: A Guide for Small Businesses to Save Money in the United States

Tax incentives are reductions and concessions in taxes that will help companies enjoy greater earnings after tax. For early-stage startups, or businesses operating in highly competitive industries, incentives like these are pivotal in survival. After successfully applying for the credit, businesses have greater disposable income which they can spend on acquiring assets and covering day-to-day running expenses.

 Forms Of Different Tax Incentives:

  • Tax exemptions: these types of tax incentives allow businesses not to pay certain taxes
  • Tax reductions: As the name suggest, the payable amount of tax is reduced for a business
  • Tax refunds & rebates: When a business already paid the balance of their taxes, they get back a part of their taxes from the balance
  • Tax credits: It allows credits can be accumulated and used as required, in the current tax year or a year later

Tax exemptions, very briefly mean that businesses simply do NOT have to pay extra or certain taxes. Such incentives can also be offered by providing refunds and rebates. In addition, companies also enjoy tax credits meaning if they owe $500 and there are eligible for an equal amount, their net amount payable is zero. 

Why Do Governments Offer Tax Incentives To Businesses? 

There are a variety of reasons behind the Tax incentives to businesses. Governments would typically offer incentives to generate employment opportunities, facilitate exports, or encourage growth within a certain industry or group of industries. Generally, with tax incentives, we can expect a suppression in unemployment and overall a healthy GDP. 

Who Receives These Incentives?

Business at the receiving end will essentially belong to industries that the government wants to facilitate and encourage business activity. Such incentives can be offered to boost IT exports which can directly lead to job creation and a healthy foreign currency account.  

Tax Incentives for Small Business Owners:

Tax credits directly reduce the amount of tax you owe, giving you a reduction of your tax liability. credit will reduce for total tax payable by simply netting out total payable less accrued tax credit. Separate forms are available depending on the industry. For example, Form 8834 is available for the electric vehicle industry. Credit limits largely depend on whether you claim your business income on your tax return (self-proprietorships, partnerships, etc.).

Where Do We Download Forms? 

All relevant forms can be downloaded from www.irs.gov. A variety of forms are available depending on the industry and the nature of your business. 

If you have a small business or a startup, you may want to download Form 3800 to claim your business credits. 

Small Businesses In The United States Can Reduce Their Tax Burden By: 

– Form 8881 can be downloaded that categorically covers Small employer pension plan startup costs. Employers will have to share essential details including qualified startup costs, the number of employees eligible for the pension plan. 

– PTC: Premium Tax credit is a refundable credit that enables eligible individuals and families to cover the premiums for their health insurance purchased through the Health Insurance Marketplace.

– R&D Credit: R&D is typically intended in aiding and abetting research-related activities. Businesses can claim the R&D credit by filing IRS Form 6765. 

– Family and medical leave credit. Businesses providing paid family & medical leave that meets the requirements can take advantage of a general business tax credit.

Also, read Startup Business Scaling Strategy

Frequently Asked Questions: 

Why Does the Government Use Tax Incentives?

Tax cuts are incentives that form part of virtually any political party. The intention to provide tax reliefs, typically in the form of tax credits, means more jobs and greater business activity. This is especially true in unprecedented times of crisis, such as during the Covid-19 pandemic. The IRS is offering tax help for individuals, families, businesses, tax-exempt organizations, and others – including health plans – affected by a coronavirus.

Are Employee Incentives Taxable?

Any prize or award that an employee receives from the employer is taxable as part of their wage. It will be included on their W-2 (federal tax withholdings), social security, and Medicare taxes. Taxable employee incentives include:

– Bonus in the form of cash benefits

– Any kind of a gift certificate that can be exchanged for cash OR redeemed for merchandise 

– Various types of achievement awards may be in the form of cash or cash equivalents such as vacation, meals, lodging, theater, or sports tickets. 

Non-taxable employee incentives: 

Non-taxable benefits generally are not taxed or only partially taxed. Some benefits are completely taxed free such as:

– health insurance

– deferred compensation plan

– gifts, 

– meal money

– snacks

– Items given on special occasions. 

How Is Incentive Pay Taxed?

Incentive pay may be included or excluded from taxation. Incentives received by the employee form a part of taxable salary. This should be included in Form W-2 in box #1 “wages, tips or other compensation.” Any other incentive pay can be included in box #14 “other.” 

Bonuses are generally taxed at around 40%. However, people often make strategies to counter this by:

– Pay Medical Expenses

– Request a Non-Financial Bonus

– Defer Compensation

– Contribute to a Health Savings Account

– Make a Retirement Contribution