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Tax Incentives: A Guide to Saving Money for U.S. Small Businesses

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Tax incentives are exclusions, deductions and exemptions from money owed in taxes to the government. According to the Business Dictionary, tax incentives are offered by the government for businesses and individuals to do certain activities such as investing in expensive items like buildings, machinery or equipment and vehicles. 

What are Tax Incentives?

Tax incentives are exclusions, deductions and exemptions from money owed in taxes to the government. Businesses receive tax incentives from the government in order to invest back in their businesses, support minorities, make environmentally sound choices or disadvantage business owners. 

According to central Arkansas, tax incentives appears in few forms:

  • Tax exemptions: a business does not have to pay certain taxes
  • Tax reductions: the amount of tax business has to pay is reduced
  • Tax credits: these credits can be accumulated and used as desired, in one tax year or the next
  • Tax refund and rebate: these pay back a business part of their taxes after they have already paid the balance. 

To claim the tax incentive, a business has to meet the following government requirements:

  • Reaching a minimum payroll
  • Being a part of specific industry
  • Creating a certain number of jobs
  • Investing a certain minimum amount in a project

Tax incentives have different purposes according to what the government wants such as more jobs, more private  investment, more research and development. The government may target specific industries they want to foster and see them grow such as agriculture, biotechnology and information technology.

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Tax Incentives for Small Businesses:

  • Tax Credit:

The IRS has a number of tax credits available for small business and self-employed individuals. You can also carry forward credits in the past year and add them to the total credits allowed in the current tax year. To claim business tax credits, use form 3800. There are other numbers of forms business owners can use to calculate different parts of the general business credit such as the biodiesel and renewable diesel fuels credit and investment credit. Form 8834, is separately used to claim electric vehicle credit. 

Your allowable credit limit depends on whether you claim your business income on your personal tax return ( partnership, sole proprietorship and some LLCs) or whether you’re a corporation. These limit also depend on the outcome of Form 1040 (individuals) or Form 1120 Schedule J (Corporations) 

  • TAX CREDITS SPECIFIC TO SMALL BUSINESS:

According to Small Business Administration, the following are the tax credit which are specific to small businesses in the U.S. and can prove to be valuable write-offs to reduce your tax burden:

  • Increased research activities credit:

You can get back 20% of your research related expense. For further infor use Form 6765

  • Small Employer Pension Plan startup costs:

In this, there has to be one participant other than the owner. The credit is half your costs upto $1,000 For more information use Form 8881

  • Small Employer Health Insurance Premium Credits:

Credit 50% of premiums paid for your employees’ health coverage. Use Form 8941 for more information. 

  • Family and Medical Leave Credit:

This includes maternity leave. You need to pay at least 50% of the employee’s normal wages. The tax credit covers 25% of the paid leave. For more information, use Form 8994

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Why does the Government use Incentive?

The government uses tax credit in order to improve economic development. Tax incentives make it less expensive and more profitable for a business to function. According to Central Arkansas, States can use tax incentives to encourage businesses to operate in their state. 

In a nutshell, tax incentives help decrease taxes for the small businesses that have to pay to the government. This helps them to decrease the cost of doing business and be more profitable. The government required this to create jobs or businesses must invest more in their state. Tax incentives is a popular tool by politicians to increase the economy. 

Are employee incentives taxable?

According to the IRS, some employee incentives are taxable. Taxable employee incentive includes:

  • Cash benefits like bonus
  • Gift certificates that can be redeemed for merchandise or exchanged for cash
  • Achievement awards that are cash equivalents, meals, vacations, lodging, theater, securities or sports tickets 

Non-taxable employee incentives includes the following:

  • Holiday Gifts
  • Occasional Snacks
  • Special occasion books, flowers, fruit etc.
  • Occasional tickets for entertainment events
  • Occasional transportation fare or meal money when working overtime
  • Achievement awards as longs as they don’t fit on the taxable categories listed above
  • Group-term life insurance for dependent or spouse, face value couldn’t exceed $2,000

How is Incentive Pay taxed?

If incentive pay is excluded from taxation, then it doesn’t need to report on individual taxes. If the incentive pay is taxable, you need to include it in your wages on Form W-2 wages, tips or other compensation. The employee is then on these incentives as part of their income tax return.

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