Best Tax Incentives for Minority-Owned Businesses

The most satisfying kinds of business success can sometimes be found in discovering opportunities in systemic problems.

And if any businesses certainly need every available advantage when it comes to success, its minority-owned businesses. Federal laws have been created to protect minority businesses and ensure equality in business resource access.

Even though minority-owned businesses have been making increased strides in industry access and parity, there is still a long way to go.

A 2021 office of advocacy data released by the U.S. Small Business Administration reveals that there are over 32.5 million individual businesses operating in the United States. 

Over 99.99% of businesses located in the United States are small businesses. A small business can have anywhere between 100 to 1,500 employees and annual revenue generation between $1 million and $40 million.

And now, businesses owned by white males are in the minority. About 41% of the small businesses in the United States, or just under 13 million, are now owned by white males.

Over 18.7% of American businesses, or 1.1 million businesses, are minority-owned businesses. Almost 21% of businesses in the United States, or 1.2 million businesses, are women-owned. And about 5.7% of American businesses are owned by military veterans.

African Americans own about 134,500 American businesses. Indigenous, Native Americans, Native Hawaiians, and Pacific islanders collectively own about 33,000 businesses in the United States.

However, despite so much progress, minority-owned businesses are still hampered by systemic prejudicial bureaucracy, unequal opportunities to business loans and fundraising capital, and business development opportunities.

Industry Obstacles for Minority-Owned Businesses 

Over 40% of minority-owned businesses have reported bureaucratic obstacles, runarounds, and difficulty in getting business loans, difficulties that most white companies don’t encounter. Statistically speaking, minority-owned businesses were 20% less likely to be approved for business loans than white-owned businesses.

After the Paycheck Protection Program was offered to businesses in the aftermath of the coronavirus outbreak, over 65% of the federal business funds went to white-owned businesses. 

Minority-owned businesses reported difficulty applying for PPP loans, and a third of them didn’t receive the full loan amount requested.

Some minority-owned businesses reported a hesitancy to identify themselves as such in some situations to ensure a chance at funding access.

But that would be a mistake. There are many tax incentives and credits available for minority-owned and certified minority-owned businesses.

But first, who can legally call themselves a minority-owned business?

Contact Parachor today to find every tax credit available that your company could be qualified to receive.

Related: Learn Your Tax Liability and How to Calculate It

What is a Minority-Owned Business?

According to American federal law, there are about seven officially recognized categories designating who can be referred to as a minority. These groupings include:

  • Asian Americans
  • Arab Americans and Middle Eastern Americans
  • Black or African American
  • Hispanic and Latino Americans
  • Native Americans and Alaska Natives
  • Native Hawaiians and Pacific Islanders

The federal tax code does not have any specific credits or benefits for minority-owned businesses. However, numerous federal agencies, local governments, and corporations allot a portion of their budgets to work with minority-owned businesses.

Certified Minority Business Enterprises are more likely to qualify for some tax credits than a minority-owned business. The business must be majority-owned by 51% or more by an American citizen from a minority group to be eligible as an MBE. 

The business must be for-profit, and the majority stake owner must solely manage the majority of operational responsibilities.

Now that we understand what comprises a minority-owned business and an MBE let’s explore available tax credits and incentives available for such.

Tax Incentives for Minority-Owned Businesses

As previously mentioned, there are no specific federal tax code benefits for minority-owned businesses.

Many tax incentives in such endeavors are indirect, whereas other businesses working with minority-owned businesses would receive the tax credit. 

Such tax incentives are available to all, but minority-owned businesses located in specific areas may have a better chance of getting them.

While such benefits are indirect in most cases, minority-owned businesses gain more entry into the business industry and closer access to local resources. Minority-owned businesses also gained irrefutable business associations that can be vetted for future loan applications.

New Markets Tax Credits

New Markets Tax Credits are direct and indirect tax credits that minority-owned businesses can benefit from if they are located in disadvantaged, low-income areas or community development entities (CDEs.)

Local businesses and individuals who invest in a minority-owned business can get tax credits against their federal taxes via investing in the CDE-designated minority-owned business. Minority-owned MBEs and enterprises can also invest in themselves or through their own investors.

New Market Tax Credit investors can claim 39% of their tax credit seven years after their initial investment. 

The federal government first established the New Market Tax Credits in 2000 and was set to discontinue it in 2021. 

However, the U.S Department of the Treasury announced a $5 billion infusion in the New Markets Tax Credits program in September 2021 that should keep the program going for a while.

Minority-Owned Businesses Located in Empowerment and Economically Distressed Areas

Suppose you are a minority business owner and operate a business located in an economically distressed or empowerment area. In that case, you can qualify for specific tax breaks as specified by the Department of Housing and Urban Development (HUD) and as well as the Department of Agriculture.

Any qualifying business can apply for such tax breaks. However, minority business owners who live in or regularly do business in CDEs have an inherent competitive advantage when applying.

Your business can qualify for special capital-gain exclusion tax credits, additional first-year expense write-off, and empowerment zone employment tax credits. Your business must hold small-business stock options within applicable zones for at least five years to qualify for a tax credit.

Additional first-year expense write-offs can offer tax credits for business equipment costing up to $35,000. And your business can receive tax credits up to $3,000 per qualified employee for being located in an empowerment employment zone.

Empowerment-zone employment credit: For hiring workers in these locations: $3,000 per eligible employee.

Get Help With Tax Credits

There are numerous online resources you can utilize to find tax credit opportunities for minority-owned businesses. However, the viability and availability of such tax credits vary according to local laws, qualifying standards, and expiration periods.

Minorities comprise 32% of the American population, yet only collectively account for 18% of the business owners in the country. Minority business owners know that discrimination and bureaucratic obstacles exist to disadvantage them. Don’t try to find every tax credit that applies to you on your own.

Contact Parachor today to find every qualifying tax credit that benefits your business.

Related: Employee Retention Credit (ERC): Complete Guide

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