Small Business Tax Incentives for Employers: Tax Credits, Grants, and More
Small-business owners often find themselves in a dilemma: they want to grow their business to meet demand, but tight financial circumstances can make it difficult to expand. Or if they do have adequate resources, uncertain situations, such as the one created by the COVID-19 pandemic, can make expansion a risky proposition for a small business. Even if it may not seem like the time to expand, the opportunity may exist. There are several tax credits, grants, and incentives that can encourage growth. Read on to learn how small business incentives can help you create jobs, train staff, and even open a new location.
What are Business Tax Incentives?
Tax incentives are exemptions, credits, deductions, or exclusions that reduce a company's tax liability to the state or federal government in exchange for making certain choices (e.g., reduce its environmental footprint, increase health benefits for employees, support minorities, etc.). Business owners can then use that money to invest in other aspects of business growth and improvement.
Are business incentives taxable? Exemptions, deductions, and exclusions can reduce taxable income, but the most desirable is a tax credit, which is a set amount of money that a business can subtract from the total amount of taxes owed.
What is the Purpose of Small Business Tax Incentives?
With the potential for a significant amount of money available for employers, why does the government give tax incentives for businesses? 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. So while the businesses that benefit from the incentive receive financial help, tax incentives in turn stimulate the economy by way of increasing businesses, jobs, and investments.
Examples of Small Business Tax Incentives
There are a number of federal government tax incentives in the form of business tax credits or tax breaks for small business. Three examples include the Small Business Health Care Tax Credit, Work Opportunity Tax Credit, and the Employee Retention Tax Credit.
The Small Business Health Care Tax Credit
A particularly lucrative federal tax credit is the Small Business Health Care Tax Credit, which is available to eligible small employers that provide healthcare coverage to their employees.
In general, this small-business incentive benefits companies that have fewer than 25 full-time equivalent (FTE) employees, pay average annual wages per FTE of less than $56,000 for tax year 2021, and pay at least half of employee health insurance premiums. To qualify for the credit, businesses must pay premiums for employees enrolled in a qualified health plan offered through a Small Business Health Options Program Marketplace (or qualify for an exemption).
Work Opportunity Tax Credit (WOTC)
The federal Work Opportunity Tax Credit (WOTC) applies when you hire people from certain groups, such as veterans, ex-felons, or food stamp recipients. There is no limit on the number of qualified employees you can claim and companies can receive a credit of up to $9,600 per employee. The WOTC is authorized through Dec. 31, 2025, and is a credit you should consider taking advantage of if it makes sense for your business. Determine your potential savings through WOTC with our Work Opportunity Tax Credit calculator.
Employee Retention Tax Credit
As part of the CARES Act, the Employee Retention Tax Credit encourages businesses to keep employees on their payroll by offering a tax credit in 2020 of 50 percent of wages paid up to $10,000 annually. In 2021 the law changed and provided a tax credit of 70 percent of paid waged up to $10,000 per quarter, for the first three quarters. The credit is available to eligible employers whose business has been financially impacted by COVID-19. Learn more about the ERTC, including important dates and how you may be able to retroactively claim the credit.
Incentives Through Financial Grants for Small Businesses
A grant is a designated amount of money given by an organization for a designated purpose. Small-business grants can come from municipal, state, or federal governments and corporations. Grants are not loans. Financial grants to small businesses do not have to be repaid. 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 Small Business Grants
The Small Business Administration (SBA) points out that the federal government tends to focus its grants on nonprofits, educational institutions, and state and local governments. However, opportunities for federal small-business grants may exist if your business is involved in research and development or wants to expand training for employees. These grants can help cover employee training expenses, often for both new and existing employees. Each training program is different — some will reimburse companies for a percentage of their trainer fees while others will also cover space rental expenses. A few programs will even cover the wages of the employees being trained. Reach out to the U.S. Department of Labor and state economic-development agencies to find out which opportunities might be available for your business.
Local Small Business Grants
Local municipalities may offer grants to help businesses grow programs that can benefit their region. Grants may be targeted to help a region increase its appeal by encouraging certain types of businesses. There can be grants for startups, grants to improve environmental practices, or grants for small businesses trying to expand into a particular field such as optics, renewable energy, or manufacturing. 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, a women's clothing company committed to sustainability could offer a grant to small businesses that are pursuing activities that bolster women and girls in environmental justice issues. There are grants for forward-thinking ideas, providing kids' camps, or for businesses that are owned by at least 50 percent veterans, among many others. Corporate grants can be competitive, but they are worth researching.
Other Incentive Programs for Startups and Small Businesses
Outside of 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.
State Hiring Incentives
If your company is ready to grow, state hiring incentives can help offset your expenses, but make sure you understand a program's requirements before bringing on new hires. These may include:
- Are employees part-time or full-time?
- Will you be providing benefits?
- What is the expected wage?
- Are you hiring minorities or members of underserved communities?
Whether you're a startup, expanding your current business, or relocating your operations, a government agency will want to know details on how your business will improve the region. The particulars may include:
- Will your business improve the appearance of the surrounding area?
- Is your business part of a region's targeted industry?
- Are you relocating to an area that is distressed or needs redevelopment?
- Do you have other sources of funding for your startup or an expansion?
Because local, state, and federal governments want to strengthen the economy, you'll also likely need to discuss how many new job positions your business will be providing along with:
- How many jobs will your business create versus how much incentive money you will receive?
- What is your anticipated timeline for filling these positions?
- What happens if the economy falters outside of your control and you aren't able to create the agreed-upon number of jobs?
Use Tax Incentives to Grow Your Business
Tracking down a small-business tax credit can be tricky, so be prepared to make a lot of calls and fill out a stack of paperwork. But the rewards are often significant for securing small-business financing, and can help your business grow even more than you may have anticipated.
Even during times of great uncertainty, small business owners and entrepreneurs with startup dreams have the advantage of being able to design their own version of a new status quo. It starts with finding the array of small business incentives available to help give you a financial boost. Connect with an expert to understand how tax incentives work, identify tax incentives that you may be eligible for, and claim these lucrative tax breaks.