Opportunities for Small Businesses

Small businesses have unique characteristics and needs. Hence, the IRS has some tax provisions that are designed for or may be particularly beneficial to smaller companies.

Small-Business Research Credit

This special tax credit allows companies that engage in research and development activities to offset their business’s tax liability. It’s meant to encourage smaller companies to innovate, create, and perform research useful to society. Small businesses may use it to further reduce payroll taxes and several other business expenses by up to $500,000 annually.

ACA Tax Credit

Take advantage of the premium tax credit that supports Affordable Care Act (ACA) healthcare plans. The ACA Marketplace is a vital coverage source for many small business owners and self-employed adults. This credit is scheduled to end in 2026.

Small Business Tax Credits

The Inflation Reduction Act included provisions to help small businesses reduce energy costs. Small businesses can receive a tax credit that covers 30% of the cost of switching to solar power, 30% of purchase costs for clean commercial vehicles, including electric and fuel cell models, and up to $5 per square foot tax credit for energy efficiency improvements.

Pass-Through Income

Owners of some pass-through businesses can now take a deduction of up to 20% of qualified business income—plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This tax break phases out for single taxpayers at $191,950 of taxable income and for married taxpayers at $364,200—not including the qualified business income deduction. Above these thresholds, the deduction is based on whether you’re a specified service trade business (SSTB). There is a caveat: The pass-through provision will expire in 2026 unless Congress votes to make it permanent.

Net Operating Losses

No business wants to lose money. But if your corporation did in 2023, those net operating losses that couldn’t be claimed last tax year or remain unclaimed from earlier years can be carried forward indefinitely.

Section 179

Section 179 lets you take an immediate expense deduction for purchases of depreciable business equipment instead of capitalizing and depreciating the asset over a period of time. For 2024, the limit for Section 179 expensing on eligible property is $1,220,000 and phases out at $3,050,000. In 2023, the limit was $1,160,000 and phased out at $2,890,000.

Bonus Depreciation

Bonus depreciation must be claimed unless a taxpayer actively opts out. For qualified property placed in service during 2024, the amount of bonus depreciation you can claim has dropped to 60% (from 80% in 2023). This percentage will continue to phase out through 2026. Your tax professional can fill you in on all the specifics.

When bonus depreciation was increased to 100% in 2017, it made 179 expensing an afterthought in many cases. Now that it’s decreasing, you should consider your options. Section 179 expensing can be used to pick and choose which depreciable assets can be deducted entirely in the year placed in service but is subject to limitations.

Hire Family Members

Consider adding your spouse or children to your payroll to help maximize business tax deductions. A spouse who is an employee may be entitled to make IRA contributions or participate in your company’s retirement plan. The family business can also provide all employees, including spouses, with other benefits, such as health insurance, the premiums for which would become a business deduction. If you’re self-employed, wages paid to children under age 18 aren’t subject to Social Security or Medicare taxes. Of course, your kids must work to earn the wages.

Home Office Deduction

Self-employed business owners who use their home as their principal place of business and use a portion of their residence as a dedicated office (or warehouse/storage) space can claim the home office deduction. There are two ways to take a deduction:

• Deduct a portion of your mortgage interest, property taxes and insurance, and utilities equal to the percentage of your home’s square footage dedicated to business use


• Use the simplified method, which allows a maximum $1,500 deduction depending on the square footage used

Work Opportunity Tax Credit

The Work Opportunity Tax Credit has been extended through 2025. This credit provides an incentive for you to hire long-term unemployed individuals. Generally, the credit is equal to 40% of up to $6,000 wages paid or incurred with a maximum credit of $2,400 for an employee who is in their first year of employment, is certified as being a member of an eligible group, and works at least 400 hours of services for that employer.

This is a one-time credit for each new hire, and an employer cannot claim the credit for rehired employees. A 25% rate applies to wages for individuals with 120 to 399 hours of service. Up to $24,000 in wages may be considered in determining the WOTC for certain qualified veteran targeted groups.

Exit Planning

The sale of a small business can significantly impact the transaction’s profit due to potential taxes. One way to reduce the tax impact is to conduct an installment sale, especially if the buyer lacks sufficient cash or will pay a contingent amount based on the company’s performance.

Of course, tax consequences are only one of many important considerations when planning to sell your business.

Installment sales spread the gain over the length of the contract, which may help avoid triggering the Net Investment Income Tax or short-term capital gains. However, there can be drawbacks, including the recapture of depreciation in the year of the sale or increasing tax rates in future years.

If you’re gifting your business to family members during your lifetime you’ll need to file a gift-tax return. You’ll have the option of paying an immediate gift tax, or you can use your lifetime gifts and estate-tax exemption (currently $13.61 million). Unless the value of your business exceeds the exemption, you shouldn’t owe any tax on the gift.

You have another option if you plan to eventually give your business to a family successor but the business’s value exceeds the exemption. You can use the annual gift-tax exclusion ($18,000 in 2024) to gradually give an ownership interest each year without incurring taxes.

Rental Real Estate Tax Benefits

Certain interests in rental real estate qualify for the 20% pass-through income deduction. These enterprises are generally defined as owning real estate to generate rental income. To claim the deduction, you’ll need to meet these requirements:

• Keep separate books showing income and expenses for each rental real estate enterprise.


• Complete 250 hours or more of rental services each year if your rental real estate enterprise is less than four years old. For properties you’ve owned longer, 250 or more hours of rental services must have been performed in at least three of the past five years. Rental services include advertising the property for rent, collecting rent, and completing routine repairs or maintenance on the property.


• Maintain meticulous records, including time logs for hours of all services performed, description of all services performed, dates on which such services were performed, and who provided the services. Attach this report to your tax return.

The formula to figure out your tax liability with the pass-through income provision is complex, so work with your tax professional. They can help you calculate your pass-through income and its tax.

SALT Tax Workaround

The IRS now allows a pass-through entity tax (PTE tax) that would enable partnerships and S-corporations to pay state income taxes, without limitations, at the entity level rather than on the personal returns of the partners or owners. These taxes become deductible for the business, lowering taxable income. While the PTE tax may be deductible for federal income tax purposes, states may have different rules. Be sure to chat with your tax professional to see if this workaround makes sense for you and your business.