What are Tax Incentives? A Beginner’s Guide

What do all businesses have in common? 

Taxes.

Mention the word, and many business owners grimace. You can’t escape taxes. They are something every business must pay to keep its doors open. How much a company pays to the IRS varies greatly. But if you’re not careful, they can be money-draining. 

Fortunately, there’s a light over the horizon called tax incentives. 

Today’s post breaks down tax incentives, why they exist, and seven tax incentives you could use for your business.

We make the paperwork easy with a straightforward, hassle-free process. Get a free quote to learn how to maximize your tax credit. 

What Are Tax Incentives?  

Tax incentives are exclusions, exemptions, or deductions from taxes owed to the government. There are different types of incentives, but they all revolve around reducing the amount of taxes paid. 

It helps to be familiar with the following terms to understand tax incentives better:

  • Tax exemption: when a business does not have to pay certain taxes
  • Tax reduction:  a reduced amount of taxes owed
  • Tax refund and rebate: a return of a portion of a tax payment after a business has already paid the balance
  • Tax credit: an amount that is accumulated and used as desired in one tax year or the next

Businesses of all sizes and industries can qualify for tax incentives as long as the criteria are met. 

But why would the government allow a tax break in the first place? What part do they play in the economy?

RELATED: Best Tax Incentives For Minority Business Owners

What Is the Purpose of Tax Incentives?

Tax incentives increase economic activity. Incentives encourage the taxpayer (aka business owner) to use that money for the desired purpose by reducing tax payments. 

The government uses the money earned from tax incentives for different reasons. Usually, developmental goals are the momentum behind tax incentives. For many communities, tax incentives are used for the following:

  • Shelter
  • Job creation
  • Food
  • Employee training
  • Research and technology development

The government also uses tax incentives to promote growth in a particular area. 

Here’s an example of this strategy in action. Suppose we want to see more businesses nationwide use solar energy. In that case, the government will provide a tax break for any business using solar panels to power their store. 

Tax incentives promote a specific action because the desired result is what many business owners want- a tax break. 

Many people see their tax incentives as an adequate means of spending taxpayer money. Why? 

Because incentives give people a choice in their actions rather than abiding by policy. 

Advantages of Tax Incentives for Business

Besides helping the country- and helpful tax breaks- incentives leverage other advantages for business. 

Inflation

It’s no secret that inflation skyrockets every year, and it’s not slowing down. The Bureau of Labor Statistics reported that in 2021, inflation rose to 6.8%, the most significant 12-month increase since 1982. 

Opening and running a business can be expensive. Tax incentives soften the blow of inflation through financial forgiveness, exemptions, and credits. 

Investments

Investing in your business is nothing short of cheap. With investment tax credits, you can save money while spending money on your business. 

Investment tax credits are federal tax incentives that allow businesses to deduct a percentage of investment costs from their taxes. These credits mean enterprises have more money to spend on their business to improve sales and thus contribute more to the economy. 

Competition

The idea that tax incentives create healthy, fair competition is debatable. But it’s worth mentioning. 

Tax incentives give a financial break to businesses. Here’s why that’s important. Incentives allow businesses to grow and compete with large companies, adding more diversity to the marketplace. Without incentives, small businesses may not be able to compete against major corporations or survive a crisis. Incentives give people a choice in their actions rather than abiding by policy. 

So now that we’ve discussed the meat of tax incentives, let’s walk through a handful of examples to give you an idea of what’s available. 

RELATED: Form 8974: Everything You Want To Know [FAQ]

7 Tax Incentives for Businesses

This list is not comprehensive. Dozens of tax credits exist in the United States. Hence why it’s crucial to hire a professional who knows what he’s doing so, rest assured, you are earning a handsome amount on your tax credit return. 

  1. Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) is a tax credit allotted to businesses that hire minorities or those who have difficulty finding work.

  1. Disabled Access Tax Credit

The Disabled Access Tax Credit is a tax credit given to businesses that spend money to make their building disability-accessible. 

  1. Credit for Employer-Provided Child Care Services

This credit is straightforward. The government will give a business credit for providing child care services or facilities to its employees. 

  1. Renewable Electricity, Refined Coal, and Indian Coal Production Credit

This credit is an energy incentive allotted to businesses that sell these products. 

  1. Small Employer Pension Plan Startup Costs Credit

The Small Employer Pension Plan Credit is for startup costs accumulated from beginning an eligible employer plan. 

  1. R&D Tax Credit

Research and Development Tax Credits are credits designed to encourage companies to invest in research and development. 

  1. Employee Retention Tax Credit

The Employee Retention Tax Credit encourages businesses to keep people on their payroll. This tax credit is one of the most powerful ever since this benefit is fully refundable. 

RELATED: Tax Breaks For Hiring Felons: How They Work

Final Thoughts On Tax Incentives

Taxes are daunting and even a little scary. But they don’t have to be. 

The right professional will carefully guide you through the process, ensuring you don’t miss out on any vital information.

Don’t be bothered by tax jargon. It shouldn’t get in the way of what’s important- your business. That’s why Parachor Consulting is here to help! We believe in providing a large-firm experience with small-firm care every time. 

Taxes can be costly. Our team at Parachor has helped hundreds of businesses with their tax credits, and you’re next! Contact us today for a free quote.

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