Austin Tax Blog


Whether you are an individual or a business owner, refundable tax credits are definitely a crucial consideration for taxpayers to be fully aware of when filing their tax returns. As a business owner or entrepreneur, you can claim tax credits that lower the amount of tax that you pay to the IRS. Businesses, regardless of their size, often file for refundable tax credits (and tax deductions) as part of their yearly tax filing process.

You should keep in mind that tax credits and tax deductions for your business are two very different things. Although both tax credits and tax deductions can save you considerable money on taxes, tax credits will usually save you more. Tax credits are much better than tax deductions. Also, note that some tax credits for businesses are better than others as they are refundable.

All credits for your business lower the amount of tax that you owe, dollar for dollar. For example, a $4,000 tax credit could lower the amount of tax you owe by $4,000. And if that $4,000 tax credit is refundable, and the tax bill for your business is only $3,000, you can get $1,000 back. This is how refundable tax credits help and benefit your business.

Tax Deductions vs. Refundable Tax Credits

For businesses, both tax credits and tax deductions are great tax incentives as they reduce your business tax liability. However, the terms tax credits and tax deductions aren’t interchangeable. As a business owner, you have probably heard about deductions. Businesses are entitled to receive a tax deduction for all business-related expenses they claim on their taxes, such as supplies, rent, travel, and business-related subscriptions.

Business tax deductions can lower your total taxable income. In contrast, a tax credit is the sum of money that businesses can deduct from taxes owed to the IRS. So, what does it mean?

Here is a simple example. If you have $100,000 in taxable business income, then a deduction of $2,000 would reduce your taxable business income to $98,000. On the other hand, a tax credit can directly slash your business tax bill by $2,000. 

Purpose of Refundable Tax Credits

Most governments “reward” both individuals and business organizations with tax credits for acts and initiatives that help strengthen the economy, employ and improve other people’s lives, and fight climate change. Although the most important purpose of imposing taxes is to raise more revenue for the government, note that the tax law in the US is also guided by many other objectives. Some of these objectives include promoting expenditures that benefit the economy and making taxation more equitable. Tax credits offer a very specific means of achieving many of these objectives.

For instance, your business may claim tax credits for performing research and development activities, offering benefits for your employees, and purchasing electric vehicles. So, the key purpose of tax credits is making the tax code more equitable or motivating desirable behavior by businesses.

How Refundable Tax Credits can Benefit your Business

You can use some common refundable tax credits to lower your tax bills.

Tax Credit for Health Insurance

Under the Patient Protection and Affordable Care Act, there is a tax credit that encourages small business owners in the country to provide health insurance to their employees for the first time or maintain insurance coverage they already have.

Small business owners that have fewer than fifty full-time equivalent employees can choose to offer health insurance to their employees by enrolling in SHOP (The Small Business Health Options Program). Many employers that enroll in this program qualify for the Small Business Health Care Tax Credit and reduce their tax bill.

It is worth noting that this tax credit is available to employers that pay at least 50% the cost of single coverage on behalf of their employees. You may get a tax credit of up to 50% of the total health insurance premiums that you paid for your employees, provided your business, and your insurance plan meet the qualifications.  Also, your employees’ average salaries must be $50,000 a year or less for this to work.

Tax Credit for Hiring Disabled Employees

If a business makes changes to their location in order to accommodate workers and customers with disabilities and incurs expenses, then it may qualify for disabled access tax credits. According to Section 44 of the Internal Revenue Code, an annual tax credit to make a business accessible to people with disabilities is now available to small businesses in the US that earned $1 million (maximum) in revenue or have thirty or fewer full-time workers in the past year. 

So, updating your facilities and removing barriers serves two purposes. You can increase access and decrease your business taxes, making it a win-win situation for your business.

Alternative Fuel Credits

Note that the alternative fuels credit is mentioned in the Internal Revenue Code (IRC). This tax credit for businesses originated from the notion that the US should embrace advanced fuels and new vehicle technologies and lower its dependence on imported oil. Keep in mind that these niche credits are often calculated from the costs of production of various alcohol-based fuels, like ethanol, methanol, and some other alternative fuels, such as renewable diesel or biodiesel. 

The idea behind the tax credit is to encourage business owners in the country to invest in other fuels and help reduce the US dependence on expensive imported oil. Before claiming this tax credit keep in mind that the IRS considers the following as alternative fuels: 

  • Liquefied petroleum gas (LPG)
  • Liquefied natural gas (LNG) 
  • Compressed natural gas (CNG) 
  • Liquefied hydrogen
  • Liquid hydrocarbons extracted from biomass
  • P-Series fuels
  • Liquid fuel extracted from coal (such as peat) via the Fischer-Tropsch process 

You may use IRS Forms 88496478, 4136, or 8864 in order to make a claim or a tax refund for biodiesel, alcohol, or renewable diesel or any alternative fuel used for producing a mixture.

Tax Credit for Childcare Services and Facilities

An important tax provision that can help US employers offer child care services for their workers is in the Sec. 45F. This is a great tax credit for business organizations that directly pay the various child care expenses for their employees or help employees in securing child care. This credit will reduce your tax bill. The tax credit is for 25% of total expenses, plus 10% of child care resources as well as referral expenditures, up to $150,000 each year. 

It is worth noting that qualified child care expenditures aren’t just operating costs of an eligible child care facility of, or under contract with, the taxpayer but also includes amounts paid to construct, acquire,  rehabilitate, or expand any property used as a care facility of the taxpayer. Your business can claim this tax credit on IRS Form 8882.

Tax Credit for Research and Development

It is no secret that these business tax credits incentivize domestic research and development. Although sometimes the calculation of these tax credits can be a little complex, it can offer your business substantial tax savings by reducing your tax bill. In 2015, the PATH Act introduced some increased incentives for businesses that use R&D—in the form of a tax credit. 

You might qualify for this credit for other types of research, even if your business does not conduct traditional scientific research. Some eligible activities include:

  • Developing new or improved processes, products, or formulas
  • Model or prototype development
  • Certification testing
  • Developing or applying for a patent
  • Developing new and improved technology
  • Developing or enhancing software technologies
  • Environmental testing
  • Building or improving a manufacturing facility
  • Streamlining internal processes

You should check out the instructions on Form 6765 or consult your tax specialist to determine if your research activities are eligible.

Final Thoughts 

These are some ways your business can use tax credits to lower its tax bill while helping the US economy.