What Are Tax Credits & How Can Businesses Benefit?

Introduction

Tax credits directly reduce the amount of tax a business owes, making them one of the most effective ways to lower tax liability. Unlike deductions, which lower taxable income, tax credits provide a dollar-for-dollar tax reduction.

Understanding available business tax credits ensures companies maximize savings and comply with IRS regulations. This guide explains how tax credits work, the top business tax credits for 2025, and how to claim them.

What Are Tax Credits?

Tax credits reduce the amount of taxes a business owes.

Formula:

Final Tax Due = Total Tax Liability – Tax Credits

There are two types of tax credits:

• Refundable Tax Credits – Can reduce a company’s tax liability below zero, meaning businesses may receive a refund.
• Non-Refundable Tax Credits – Reduce taxes owed but do not result in a refund if the credit exceeds the tax bill.

Top Business Tax Credits in 2025

1. Research & Development (R&D) Tax Credit (IRC § 41)

• Designed for businesses investing in innovation, technology, or software development.
• Startups can use the credit to offset payroll taxes.

2. Work Opportunity Tax Credit (WOTC) (IRC § 51)

• Available to businesses that hire individuals from targeted groups, including veterans, ex-felons, and long-term unemployed individuals.
• Credit amount ranges from $1,200 to $9,600 per employee.

3. Small Business Health Care Tax Credit (IRC § 45R)

• Available for businesses with fewer than 25 full-time employees.
• Covers up to 50% of employer-paid health insurance premiums.

4. Employee Retention Credit (ERC) (IRC § 3134)

• Helps businesses that retained employees during economic downturns.
• Applies to wages paid during eligible periods.

5. Disabled Access Credit (IRC § 44)

• Provides up to $5,000 in tax credits for businesses making accessibility improvements under the Americans with Disabilities Act (ADA).

6. Energy-Efficient Commercial Buildings Deduction (IRC § 179D)

• Offers tax credits for installing energy-efficient lighting, HVAC systems, and building improvements.

7. New Markets Tax Credit (NMTC) (IRC § 45D)

• Available to businesses that invest in low-income communities.
• Provides a 39% tax credit over seven years.

8. Family and Medical Leave Credit (IRC § 45S)

• Businesses that provide paid family leave to employees can claim a credit of up to 25% of wages paid.

How to Claim Business Tax Credits

Step 1: Determine Eligibility

• Review IRS rules for qualifying expenses and employee requirements.
• Ensure business activities align with credit qualifications.

Step 2: Complete IRS Forms

• Form 3800 – General Business Credit.
• Form 6765 – Research & Development Credit.
• Form 5884 – Work Opportunity Tax Credit.
• Form 8941 – Small Business Health Care Credit.

Step 3: File Business Tax Returns

• Report credits on Form 1120 (corporations), Form 1120-S (S corporations), or Schedule C (Form 1040) for sole proprietors.

Step 4: Maintain Proper Documentation

• Keep employee records, receipts, and tax filings for at least three years for IRS audits.

Common Mistakes to Avoid

• Not claiming eligible credits – Many businesses miss out on tax savings.
• Failing to track qualifying expenses – IRS requires detailed records.
• Incorrectly filing forms – Can delay or reduce credit benefits.
• Ignoring IRS phase-out limits – Some credits are income-dependent.

IRS Forms & Compliance Checklist

• Form 3800 – General Business Credit.
• Form 6765 – R&D Tax Credit.
• Form 5884 – Work Opportunity Tax Credit.
• Form 8941 – Small Business Health Care Credit.
• Payroll and expense records – Maintain for at least three years.

Conclusion

Business tax credits provide a powerful way to reduce tax liability and boost cash flow. By identifying eligible credits, maintaining proper documentation, and working with a CPA, businesses can maximize tax savings and remain IRS-compliant.

For expert tax credit guidance, schedule a meeting with our CPA Anshul Goyal by clicking at https://calendly.com/anshulcpa/ now.

Frequently Asked Questions (FAQs)

1. What is the difference between tax deductions and tax credits?
Deductions reduce taxable income, while tax credits directly lower the amount of tax owed.

2. Can small businesses qualify for multiple tax credits?
Yes, businesses can combine multiple tax credits, but some may have limits or phase-outs.

3. Are tax credits refundable?
Some credits, like the Employee Retention Credit, are refundable, while others can only reduce taxes owed.

4. What happens if I don’t claim a tax credit I qualify for?
Businesses may miss thousands of dollars in tax savings if they do not claim eligible credits.

5. Can a CPA help identify business tax credits?
Yes, a CPA ensures all eligible tax credits are claimed and properly documented.

About Our CPA

Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant and an IRS Enrolled Agent (EA). He specializes in business tax credits, IRS compliance, and corporate tax planning.

Schedule a consultation today with Anshul Goyal, CPA, to ensure your business maximizes tax savings.