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Small Business Incentives: Tax Credits, Grants, and More

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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 exists. There are several tax credits, grants, and incentives that can encourage growth. These small business incentives can help you create jobs, train staff, and even open a new location.

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Tax incentives for small business owners

Tax incentives can come in the form of 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. 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.

There are a number of federal government tax incentives for small business. Two examples include the Small Business Health Care Tax Credit and Work Opportunity Tax Credit (WOTC).

The Small Business Health Care Tax Credit

In general, this small business incentive benefits companies that have fewer than 25 full-time equivalent employees, pay average annual wages per FTE of less than $55,200 for tax year 2020, 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, 2020. However, it has been renewed since its inception and it's worth keeping your eye on it.

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 even corporations. Grants are not a loan. 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 that can help it grow. 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 business grow programs that can benefit their region. For instance, some cities are helping restaurants in the wake of the COVID-19 pandemic by covering the cost of outdoor patio heaters. By doing so, restaurants get help meeting consumer demand while abiding by health guidelines for eating outdoors during the pandemic, even during cold weather. Other 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 of 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% veterans, among many others. Corporate grants can be competitive, but they are worth researching.

Other incentive programs for startups and small businesses

Outside of tax credits and grants, other small business incentives do exist. Small business incentive 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 specifics before bringing on new hires.

  • 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?

Expansion incentives

Whether you're a startup, expanding your current business, or relocating your operations, a government agency will want to know details on various ways your business will improve the region:

  • 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 expansion?

Job creation

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:

  • 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?

Tracking down small business incentives 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, and can help your business grow even more than you may have dreamed.

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. Consider using Paychex Tax Credit Services to help you identify and claim these lucrative incentives.

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* Este contenido es solo para fines educativos, no tiene por objeto proporcionar asesoría jurídica específica y no debe utilizarse en sustitución de la asesoría jurídica de un abogado u otro profesional calificado. Es posible que la información no refleje los cambios más recientes en la legislación, la cual podrá modificarse sin previo aviso y no se garantiza que esté completa, correcta o actualizada.

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