Small Business Tax Incentives: The SMB Guide to Credits, Deductions, and Real Savings

Small business owners face a common dilemma: financial pressure often limits growth despite strong demand. With rising costs and tighter margins in 2026, business tax incentives can significantly reduce your tax burden. This guide explains the most valuable small business tax incentives and write-offs available so you don’t miss out on the savings your business is entitled to. the savings your business is entitled to.

What Are Business Tax Incentives?

Business tax incentives are exemptions, credits, deductions, or exclusions that reduce your company's tax liability to the state or federal government in exchange for making certain choices (e.g., reducing its environmental footprint, increasing health benefits for employees, supporting minority groups, etc.). You can then use that money to invest in other aspects of business growth and improvement.

The four main types include:

• Exemptions: Remove certain transactions or property from being taxed.
• Deductions: Reduce your taxable income (e.g., Section 179 or operating expenses).
• Exclusions: Keep specific income or benefits out of taxable income entirely.
• Credits: A direct discount that reduces the taxes you owe dollar for dollar.

The difference is significant. For example, a $10,000 deduction saves $2,100 in taxes (at a 21% rate), while a $10,000 credit saves the full $10,000.

What Is the Purpose of Small Business Tax Incentives?

Why does the government offer business tax incentives? Tax credits for small businesses can help federal, state, and local governments make headway in meeting their specific strategic goals. As you'll see in the examples below, tax incentives serve a range of purposes, such as increasing jobs or offering a boost for certain industries. Tax incentives function as targeted economic stimulus, increasing business activity, jobs, and investments while providing financial relief to qualifying businesses.

In 2026, priorities continue to support clean energy adoption and workforce development initiatives tied to the Inflation Reduction Act. These incentives help business owners afford hiring, training, and benefits while investing in expansion — the 2026 Paychex Priorities for Business Leaders report finds that many employers are pursuing growth while inflation squeezes margins and turnover costs rise.

The Big Credits Most SMBs Miss

Many small employers overlook valuable tax incentives, assuming they're only for large corporations or that the rules are too complex. Here are five major incentives you'll want to look at:

• Work Opportunity Tax Credit (WOTC): Up to $9,600 per eligible hire, depending on the target group and hours worked. This tax credit expired at the end of 2025, but if you hired someone from a target group and they started working before Dec. 31, 2025, you are still eligible to apply for credit.
• Section 179 Deduction: Deduct up to $1.22 million in qualifying equipment and software purchases in 2026.
• R&D Tax Credit: Worth 6% to 14% of qualified research expenses for companies developing or improving products, processes, software, or formulas.
• Clean Energy and Commercial Solar Credits: A 30% federal credit for solar installations and additional incentives for energy-efficient commercial buildings and electric vehicle (EV) charging infrastructure.
• Small Business Health Care Tax Credit: Up to 50% of premiums paid for businesses with fewer than 25 employees using the Small Business Health Options Program (SHOP).

Each of these opportunities comes with eligibility rules, documentation requirements, and special forms. But taken together, these five credits alone can save a 50-employee business $50,000 to $150,000 annually.

Section 179 Deduction and Bonus Depreciation

With Section 179, you can deduct the full purchase price of qualifying equipment and software you buy or finance for your business immediately, instead of spreading the depreciation over several years. For 2026, businesses can deduct up to $1.22 million. The deduction begins to phase out once your total qualifying purchases exceed $3.05 million. Bonus depreciation, which sits at 60% for 2026, works alongside Section 179, giving your first-year deduction a boost.

Most tangible business property qualifies: machinery, equipment, computers, off-the-shelf software, and vehicles over 6,000 pounds gross weight. Section 179 doesn't apply to everything — buildings, land, and inventory generally don't qualify. However, if a small business owner buys $500,000 in qualified property, they could deduct the full $500,000 from their taxable income that year.

Research and Development (R&D) Tax Credit

If you test prototypes, refine production methods, build internal software, or improve products, you likely qualify for the federal R&D tax credit. The credit typically offsets 6% to 14% of qualified research expenses (QREs). Startup companies can apply up to $500,000 per year against payroll taxes.

The IRS uses a four-part test: activities must be (1) technological in nature, (2) involve experimentation, (3) relate to a business component, and (4) eliminate uncertainty.

Qualifying expenses might include:

• Wages for employees doing research activities
• Supplies and materials used during development
• Contract research (up to 65%)
• Cloud computing costs

To calculate these expenses, you’ll use IRS Form 6765. Make sure to keep detailed documentation that supports how the research activities meet the four-part test, payroll records, expense receipts, prototypes, and other relevant information.

Clean Energy and Commercial Solar Tax Credits

Clean energy upgrades lower both your tax bill and utility costs. Retail locations, office buildings, warehouses, and manufacturing facilities benefit most, especially in states with high electricity costs.

Key programs include:

• Investment Tax Credit (ITC): A 30% commercial solar tax credit extended by the Inflation Reduction Act through 2032 that also applies to battery storage, geothermal heat pumps, and small wind systems. A $50,000 solar panel system, for example, can mean a $15,000 tax credit. To qualify for the 30% ITC under recent legislation, projects must begin construction by July 4, 2026 or be placed in service by December 31, 2027. Battery storage remains eligible through 2032.
• Section 179D Deductions: Allows $0.50 to $5.00 per square foot for energy-efficient improvements to commercial buildings.
• Alternative Fuel Infrastructure Credit: Provides an additional 30% credit, up to $100,000 per location, for installing equipment such as electric vehicle (EV) chargers for company or customer vehicles. To qualify, the property must be placed in service by June 30, 2026, in accordance with new legislation enacted in 2025.

Small Business Health Care Tax Credit

A particularly lucrative federal tax credit is the Small Business Health Care Tax Credit, available to employers providing health care coverage through the SHOP Marketplace (unless exempt).

This credit targets very small businesses: fewer than 25 FTE employees, average wages under approximately $64,000, and employers covering at least 50% of premiums. It covers up to 50% of premiums paid (35% for tax-exempt employers), with the full amount available to businesses with fewer than 10 FTEs and average wages under roughly $31,000.

The credit phases out as FTE count and wages rise and is limited to two consecutive years. For qualifying businesses, it typically ranges from $20,000 to $40,000.

Paid Family Leave Credit

Offering paid family or medical leave attracts and retains talent, but costs often deter small businesses. The employer-paid family leave credit helps make it more affordable. If you have a written policy that provides staff with at least two weeks of paid leave at 50% or more of their usual wages, you may qualify.

The credit you earn scales with the payment rate you offer:

• Covering 50% Wages: Claim a 12.5% credit.
• Covering 100% Wages: Claim a 25% credit.

You can claim the credit for up to 12 weeks of leave, which takes some of the financial pressure off when you’re trying to support working parents or employees with medical needs.

One thing to note: this credit is currently available through 2025 unless Congress extends it. If you decide to claim it, the calculation happens on IRS Form 8994.

How To Claim Tax Credits: Step-by-Step Process

Knowing how to claim business tax credits starts with a clear understanding of IRS forms, documentation, and (often) pre-certification requirements. This step-by-step process can help make sure you capture the tax savings your business qualifies for:

1. Check for any pre-certification requirements. Some credits require advance form submission. Start with these deadline-sensitive credits first.
2. Organize your documentation. Gather receipts, equipment purchase contracts, wage records, certification letters, and any other supporting documents. Most credits require keeping documentation for three to seven years.
3. Complete the correct IRS forms. Each credit has its own form (e.g., IRS Form 5884 for WOTC, IRS Form 6765 for R&D, IRS Form 8941 for the Small Business Health Care Credit) to file along with IRS Form 3800 (General Business Credit).
4. Submit with your business tax return. Attach the IRS forms to the appropriate tax return for your entity type (IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or IRS Form 1040 Schedule C).
5. Consider carrybacks and carryforwards. If you can’t use the entire credit this year, you may be able to carry it back one year or forward up to 20 years.
6. Use amended returns for retroactive claims. If you discover missed credits later, you can file IRS Form 1120-X (corporation) or IRS Form 1040-X (sole proprietorship) to recover past savings.

Required Forms by Credit Type

Specific IRS business tax forms are required for each credit, so cross-check your documentation before filing to avoid delays or rejections.

Key considerations for each credit include:

• Research & Development (R&D) Tax Credit: Keep detailed records of project documentation, wage information, and expense receipts for all qualified research activities.
• Section 179 Deduction: This form applies to both Section 179 expensing and bonus depreciation.
• Small Business Health Care Tax Credit: Coverage must be provided through the Small Business Health Options Program (SHOP) or an equivalent state marketplace. Calculate full-time equivalent (FTE) employees and average annual wages carefully. This credit is limited to two consecutive tax years.
• Energy Credits: Different energy investments may require additional supporting documentation depending on the specific technology or improvement. Amounts calculated on Form 3468 typically flow through to Form 3800 (General Business Credit).
• Paid Family and Medical Leave Credit: You must have a written policy in place that provides payroll/leave support. This credit is currently available through 2025 and may require Congressional extension for future years.
• General Business Credit (Form 3800): This summary form consolidates all your individual business credits into a single calculation.

Carryforward and Carryback Rules

Unused tax credits aren't lost — most can be carried back one year or forward up to 20 years. This gives your business some flexibility to use up your credit as your business grows. For example, if you earn a $50,000 credit but only owe $30,000 in taxes this year, the remaining $20,000 can carry forward to reduce future tax bills.

Exceptions exist — some credits don't allow carryforward/carryback or have expiration dates. It’s worth checking the specifics to strategically plan the timing of large purchases and hiring decisions, ensuring you maximize the credit available to you.

State and Local Tax Incentives

Beyond federal credits, state and local governments offer tax incentives to businesses that support regional economic development. Programs vary significantly by location, so research the specific opportunities available in your area.

Common incentives include:

• Property Tax Abatements: These programs reduce or freeze property taxes when you invest in qualifying areas. Cities and counties use them to draw employers into enterprise zones or distressed areas.
• Sales Tax Exemptions: States may waive sales tax on specific purchases, such as manufacturing equipment, data-center hardware, or construction materials for approved projects. On big-ticket items, this can trim thousands off your up-front costs.
• State Hiring Credits: If your company is ready to grow, state hiring incentives can help offset your expenses. Programs like the New York Excelsior Jobs Program, the Texas Enterprise Zone Program, and California Competes reward employers for creating jobs in specific industries or regions.
• Film and Production Credits: States may offer tax credits or rebates to film, TV, and digital media projects that spend a certain amount locally and hire in-state crew. To qualify, you typically need to apply in advance, meet specific spending thresholds, and submit detailed cost and payroll reports.
• R&D Grants: Some state economic development agencies, along with a few federal programs, offer grants or matching funds for research, product development, or technology adoption. These funds can help cover prototype costs, lab work, or university partnerships.
• Workforce Training Reimbursement: Training costs for bringing on new employees or upskilling your team may be reimbursable, especially in high-demand industries. Programs will likely require preapproval, so check with your state workforce and labor department first.

Since rules differ by jurisdiction, your best first stop is your state’s economic development agency or local Small Business Administration (SBA) office. They can help you understand the requirements, so you actually qualify for the incentives you’re counting on.

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

Tax credits and deductions both reduce tax liability but work differently. A tax credit offers direct savings because it cuts your tax bill dollar-for-dollar. A tax deduction lowers your taxable income, which only reduces your taxes by your effective tax rate.

Most businesses get the best results by maximizing credits first, then applying deductions to whatever income remains. Here's a quick comparison to help you prioritize tax credits vs. deductions:

Examples of Small Business Tax Incentives

Section 179, R&D credits, health care credits, and clean energy incentives provide the most value to small businesses. While federal tax incentives reduce what your company owes, many business owners also look to grant programs. The following sections walk you through grants and other financial programs that provide up-front funding.

Incentives Through Financial Grants for Small Businesses

A grant is money provided by an organization for a specific purpose. Small business grants can come from municipal, state, or federal governments and corporations. Unlike loans, grants don't require repayment. Through a grant, a small business can secure funding to advance a specific program or initiative. The following list of different types of grants highlights what each may offer.

Federal and State Business Grants

The SBA points out that federal small business grants tend to focus on nonprofits, educational institutions, and state and local governments. However, opportunities for Small Business Innovation Research (SBIR) grants may exist if your business is involved in R&D or wants to expand training for employees. Reach out to the U.S. Department of Labor and your state economic-development agency to find out which opportunities might be available for your business.

Local Small Business Grants

Local business grants can help companies grow programs that can benefit their region. Municipal grants or city small business grants may be targeted to help a region increase its appeal. Michigan’s Match on Main grant program, for example, provides up to $25,000 to new or expanding businesses in specific communities and districts. Check with your city or county for opportunities.

Corporate Small Business Grants

Motivated by a desire to give back to the community or help a small business grow in a way that highlights its own mission or marketing message, large corporations can be a source for small business grants. For example, the Amex Shop Small Grants Program launched in 2025 and provides up to $20,000 to small business owners, while the Lenovo Evolve Small Initiative offers up to $25,000 to small businesses in specific large metro areas. Private business grants or corporate grants for small businesses can be competitive, but they are worth researching.

Other Incentive Programs for Startups and Small Businesses

Outside of finding small business grants and tax credits for business owners, other small business incentives do exist. These programs can ease your tax burden or provide financial assistance in exchange for helping a city, county, or state achieve its goals of stimulating its economy and improving the lives of residents. Pay attention to the specifics of each program so you can align your growth plan accordingly.