Small Business Tax Credits: Maximize Savings

Most small businesses miss out on tax credits they legally qualify for—leaving thousands of dollars on the table every year. While day-to-day operations take priority, valuable credits often go unclaimed simply because business owners don’t know they exist or assume they don’t apply.

Here’s the difference: a deduction lowers taxable income, but a tax credit directly reduces the tax bill—dollar for dollar. For example, if a business owes $10,000 in federal tax and qualifies for a $3,000 credit, the amount owed drops to $7,000. Simple and powerful.

Many of these credits are designed specifically to support small businesses. The challenge is knowing what’s available—and when to act. Below are some of the most overlooked credits, updated with the latest changes from the 2025 tax law.

Research and Development Credit: Not Just for Tech Companies

The misconception: Only big tech firms with research labs qualify for the R&D tax credit.

The reality: If a business is developing new products, improving processes, or solving technical problems, it may already qualify—without realizing it.

Under the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, businesses can now fully expense domestic R&D costs in the year they’re incurred, rather than spreading them over five years. (Note that foreign R&D costs still generally need to be amortized over 15 years.) 

Real example: Sarah runs a small bakery and spent $8,000 developing a new gluten-free recipe—testing different flour blends and baking methods. Her Town advisor flagged these activities as qualifying R&D, and she claimed the entire $8,000 as an immediate deduction. Her tax bill dropped by roughly $2,000. 

While this allowed her an immediate deduction for the expense, certain qualified R&D activities can also generate a direct tax credit—further reducing the tax bill dollar-for-dollar. Businesses can often benefit from both, depending on how the R&D costs are structured.

Common qualifying activities:

• Developing or improving products or formulas

• Creating software or apps—even simple internal tools

• Experimenting with new manufacturing or packaging techniques

• Tackling technical challenges with trial-and-error testing

Your next step: Review any 2025 spending tied to product development, process improvement, or technical problem-solving. Keep records of what was tested, how, and why—it doesn’t need to succeed to qualify.

Bonus opportunity: Under OBBBA, eligible businesses may even be able to retroactively apply immediate expensing rules to R&D costs from prior tax years—potentially generating refunds for 2022, 2023, and 2024. Ask a tax advisor whether amended returns make sense for your situation.

Work Opportunity Tax Credit: Get Paid to Hire

The misconception: This credit is only for large employers with dedicated HR teams.

The reality: Small businesses can earn up to $9,600 per eligible hire through the Work Opportunity Tax Credit (WOTC) — available through December 31, 2025. While most credits are $2,400, some categories, such as disabled veterans who were long-term unemployed or long-term family assistance recipients, qualify for more.

The WOTC rewards businesses for hiring individuals from groups that have historically faced employment barriers. It’s one of the fastest, most accessible credits available—and the paperwork takes less time than most people think.

Real example: Mike owns a small auto repair shop and hired a veteran who had been unemployed for six months. By getting the veteran certified before the hire date, he qualified for a $2,400 credit. Total time invested? About 20 minutes.

Who qualifies:

• Veterans unemployed for at least six months

• Individuals with felony convictions (within one year of conviction or release)

• People receiving SNAP (food stamp) benefits

• Long-term unemployed workers

• Certain young adults aged 18–24, especially in summer or designated zones

• Designated Community Residents (DCRs) living in specific empowerment zones or rural renewal counties.

Your next step: If hiring is on the horizon, check whether the candidate fits any of these categories. Certification must be requested before or on the hire date—no retroactive applications. 

Note that to qualify for the credit, the employee must generally complete at least 120 hours of service in their first year of employment, with higher credits available for those working 400 hours or more.

Equipment Purchases: Write Off Everything Immediately

The misconception: Equipment must be depreciated slowly over several years.

The reality: Thanks to the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, small businesses can now write off 100% of equipment costs immediately, with increased limits under both Section 179 and bonus depreciation.

Under OBBBA:

• The Section 179 expensing limit increased to $2.5 million, with a phase-out starting at $4 million

• 100% bonus depreciation is now permanent for assets purchased after January 19, 2025, meaning most equipment can be fully deducted in the year it’s placed in service.

Real example: Janet bought a $15,000 commercial printer for her marketing agency in December. Instead of depreciating it over seven years, she wrote off the full amount right away, saving about $4,500 in taxes. Because she purchased before year-end, she locked in the deduction a full year earlier.

What qualifies:

• Computers, software, and servers

• Office furniture and business equipment

• Vehicles used primarily for business

• Tools, machinery, and manufacturing equipment

• Leasehold and business property improvements (in some cases)

Your next step: Planning a large purchase? Timing matters. Buying in December offers the same deduction as January—but a full year sooner. And if you bought equipment in 2025, make sure it's properly documented and placed in service by year-end to qualify.

Small Employer Health Insurance Credit: A 50% Boost to What You're Already Paying

The misconception: Health insurance is just a cost of doing business.

The reality: For eligible small employers, it can also come with a tax credit worth up to 50% of premiums paid—with the largest credits going to the smallest businesses—if coverage is purchased through the Small Business Health Options Program (SHOP). Note: The full 50% credit is available only to businesses with 10 or fewer full-time equivalent employees and average wages around $30,700 or less (2025 threshold). The credit phases out gradually as employee count and wages increase, and ends entirely above 25 FTEs or $66,600 in average wages.

Real example: David runs a 10-person consulting firm and pays $60,000 per year in employee health premiums. Because he bought coverage through SHOP and met all the eligibility criteria, including the average wage requirements, for the full credit, he qualified for a $30,000 tax credit.

Requirements:

• Fewer than 25 full-time equivalent employees

• Average annual wages below $66,600 (2025 cap; phaseout begins around $30,000)

• Employer pays at least 50% of premiums

• Coverage is purchased through the SHOP marketplace

• Credit can only be claimed for two consecutive tax years

• Owner/family exclusion: Premiums paid for owners (e.g., sole proprietors, partners, >2% S-Corp shareholders, >5% C-Corp shareholders) and their family members don’t count toward the credit

Your next step: Already offering health insurance? Check whether the plan was purchased through SHOP. If not, consider switching at your next renewal—it could turn a necessary expense into a meaningful tax credit.

Family and Medical Leave Credit: Becoming Permanent and More Flexible in 2026

Note: The expanded and permanent version of this credit takes effect for tax years beginning after December 31, 2025. For 2025, the existing credit (based solely on wages and a one-year tenure requirement) still applies.

The misconception: Offering paid leave is just a cost with no tax benefit.

The reality: Thanks to the OBBBA, the family and medical leave credit becomes permanent and significantly more flexible—starting in tax years beginning after December 31, 2025.

Beginning in 2026, employers can choose to claim the credit based on either:

• Wages paid directly to qualifying employees during leave, or

• Premiums paid for qualifying family and medical leave insurance—even if no employees actually take leave.

The new law also allows employers to qualify with just six months of employee tenure (instead of one year), and permanently extends the credit into future years.

Real example: In 2026, Tom’s employee took two weeks of paid leave for a family emergency. Tom paid her full salary of $2,000 and had a written leave policy in place. He qualified for a $500 tax credit (25% of wages paid), without relying on any state-mandated program.

Requirements:

• Leave must be for qualifying family or medical reasons (e.g., parental, caregiving, medical)

• Employer must pay at least 50% of regular wages, or pay for qualifying insurance

• Written policy must offer at least two weeks of leave

• Employee must be employed for at least six months (for 2026 and beyond)

• Credit excludes state- or locally reimbursed amounts, but those can still help satisfy policy minimums

• Employee’s prior-year compensation must not exceed 60% of the highly compensated employee threshold (e.g., $96,000 for 2025, based on a $160,000 HCE limit)

Your next step: If there’s no paid leave policy in place, even a simple one can unlock this credit in 2026. Consider whether direct wage payments or insurance coverage would be more cost-effective for the business—and get ready to document eligibility for next year.

Employer-Provided Childcare Credit: Big Enhancements Coming in 2026

Note: The expanded version of this credit takes effect for amounts paid or incurred after December 31, 2025. For 2025, the existing 25% credit with a $150,000 cap still applies.

The misconception: Only large corporations can benefit from childcare-related tax breaks.

The reality: Starting in 2026, small businesses can claim a credit of up to 50% of qualified childcare expenses, with a maximum annual credit of $600,000, thanks to enhancements under the OBBBA. Businesses that don’t meet the small business criteria can still claim a 40% credit, up to $500,000 per year.

Note: This is a nonrefundable credit—it can reduce your federal tax liability to zero, but won't generate a refund beyond that.

What qualifies:

• Operating an on-site childcare facility

• Contracting with licensed childcare providers to serve employees

• Offering childcare resource and referral services

• Participating in shared or jointly operated childcare arrangements with other businesses

Eligibility note: To claim the higher 50% credit and $600,000 cap, the business must meet a simplified small business test—generally defined as having average annual gross receipts of $25 million or less over the previous five years. This amount is indexed for inflation and is $31 million for 2025.

Your next step: If you're looking to improve retention or attract working parents, childcare support could be a powerful benefit—and starting in 2026, the tax credit makes it far more affordable. Even small contributions could unlock big savings.

Energy Tax Credits Set to Expire—What to Know for 2025

The OBBBA made sweeping changes to energy-related tax incentives—accelerating phase-outs or repealing many popular credits for businesses and individuals. If your business is planning to invest in solar, EVs, or energy-efficient upgrades, 2025 may be the last full year to claim several major incentives.

Real example: Lisa installed a $20,000 solar system on her warehouse roof in 2025. Between the federal credit and local incentives, she received $6,000 in direct tax credits, plus long-term electricity savings. Under OBBBA, that same system wouldn’t qualify after 2025 unless it met stricter placed-in-service or begin-construction rules.

What’s phasing out:

• Commercial Building Energy Efficiency Deduction (Section 179D) ends for construction beginning after June 30, 2026.

• Investment Tax Credit (ITC) and Production Tax Credit (PTC) face accelerated phase-outs under OBBBA.

  • For many technologies—including solar and wind—benefits generally terminate for facilities placed in service after December 31, 2027, unless construction begins by July 4, 2026, or other criteria are met.

  • Other technologies (e.g., geothermal, energy storage) follow different phaseout schedules or remain eligible longer.

• Energy-efficient building upgrades under residential credits like Section 25C (e.g., lighting, HVAC, windows) expire after 2025.

• Clean Vehicle Credits Repealed:
  Credits for new, used, and commercial electric vehicles are repealed for vehicles acquired after September 30, 2025

Your next step: If you're planning energy-related upgrades, act before year-end to lock in eligibility. Even a few months' delay could mean missing out on thousands in credits.

OBBBA’s Impact on Employee Benefits (and What It Means for Your Business)

Looking beyond credits, the OBBBA introduced several major updates to how employees—and employers—can benefit from workplace compensation and fringe benefit programs starting in 2025. While some changes provide direct savings for employees, others unlock tax benefits for the business.

New Employee Deductions for Tips and Overtime (2025–2028)

Starting in tax year 2025, employees can deduct:

• Up to $25,000 in cash tips

• Up to $12,500 in qualified overtime pay
  (Doubled to $50,000 and $25,000 for joint filers)

Income phaseouts apply: Deductions begin phasing out at $150,000 for single filers and $300,000 for joint filers.

Employers are responsible for tracking and reporting these amounts separately on Forms W-2 and 1099. The IRS will publish an official list of occupations where tipping is customary and update withholding guidance for 2026 and beyond.

Expanded FICA Tip Credit for Employers

The FICA tip credit, previously available only to food and beverage businesses, now includes:

• Beauty and personal care services (barbering, hair, nail, spa, esthetics)

This allows eligible employers to recover the employer share of FICA taxes paid on reported tips—just as restaurants have done for years.

Dependent Care Assistance Exclusion Increased

For 2026 and beyond, the annual pre-tax exclusion for employer-sponsored dependent care assistance increases from $5,000 to $7,500 (or $3,750 for married individuals filing separately). This improves the value of dependent care FSA programs and offers a stronger retention tool for working parents.

Student Loan Repayment Exclusion Made Permanent

Employers can continue to pay up to $5,250 per year toward an employee’s qualified student loans, with no federal income tax owed by the employee. Under OBBBA, this benefit is now permanent and indexed for inflation, increasing its value over time.

Why this matters: These aren’t just employee wins. They signal a shift in how fringe benefits can drive both retention and tax savings. If your workforce includes hourly, tipped, or caregiving employees, now is the time to revisit your benefit mix and reporting systems ahead of the 2026 changes. Note, these changes apply in 2025 unless otherwise noted (e.g., dependent care starts in 2026).

Qualified Business Income Deduction: Bigger Benefit for Small Businesses in 2026

Under the OBBBA, the Qualified Business Income (QBI) deduction, which was previously set to expire after 2025, is now permanent—providing long-term tax planning certainty for pass-through businesses and sole proprietors.

In addition to making the deduction permanent, OBBBA introduced key enhancements that take effect starting in 2026, with a focus on supporting small, actively run businesses.

What’s changing in 2026:

• A new $400 minimum deduction for eligible active businesses

• A minimum of $1,000 in qualified business income (QBI) is required to claim the deduction

• Income thresholds have increased:
  
  
  

  • Up to $75,000 for single filers (previously $50,000)

  • Up to $150,000 for joint filers (previously $100,000). Above these thresholds, the deduction phases out as before

To receive the minimum deduction, the business must qualify as an active trade or business, meaning the owner must materially participate in operations (based on IRS standards).

What stays the same: The deduction remains up to 20% of qualified business income, subject to wage, capital, and income limits. Specified Service Trades or Businesses (SSTBs)—like health, law, consulting, and financial services—are still subject to phaseout rules, but benefit from the expanded thresholds, allowing more owners to qualify.

Your next step: For 2025, the QBI deduction remains under current rules. But if your business is actively operated and below the new thresholds, you may see a larger deduction starting in 2026. It’s a good time to evaluate owner involvement, income projections, and business structure with these upcoming changes in mind.

Don’t Miss the Window: Credit Deadlines Matter

Many tax credits are time-sensitive—and once the window closes, they’re gone. Some must be claimed in the year the expense occurs, while others can be carried forward (or back), but only if the proper elections are made on time.

Key deadlines to know:

• Work Opportunity Tax Credit: Expires December 31, 2025

• Energy efficiency credits (solar, HVAC, lighting): Most expire after 2025, and many require that systems be placed in service by that date

• R&D credit elections: Must be made on a timely filed return (including extensions); late elections are often not allowed

Your next step: If any of these credits might apply to expenses in 2025, flag them early—especially before year-end purchases, hires, or project decisions. Don’t let paperwork timing or eligibility rules get in the way of a credit the business already qualifies for.

Getting Help: When to Bring in the Experts

The strategies that save small businesses the most money often aren’t complicated—but they are easy to miss without the right guidance. Tax rules change frequently, especially with recent legislation like the OBBBA, and what applies to a consulting firm might not help a retail business—or vice versa.

Town's tax advisors focus specifically on small and midsize businesses, with deep expertise in industry-specific credits and deductions that generalists often overlook. That means fewer missed opportunities, better compliance with IRS rules, and timely insight into changes that affect your business.

Whether it’s a second look at your 2024 return or a plan to capture 2025 credits before they expire, working with a specialist who understands your industry can uncover savings you didn’t know you qualified for—while keeping you ahead of the curve.

Your Action Plan

Right now (mid-2025):

• Review 2024–2025 business expenses for potential R&D activities (some may qualify retroactively)

• Check if any current employees qualified for the Work Opportunity Tax Credit (WOTC) at the time of hire

• List any equipment purchases made so far in 2025 and ensure they were placed in service

Planning for 2026:

• Set up systems to track business mileage, meals, and product development activity

• If hiring, screen for WOTC-eligible candidates before making offers

• Revisit your leave policy to prepare for the expanded paid family and medical leave credit

• Evaluate whether childcare assistance or insurance-based leave coverage makes sense under the new rules

• Review business structure and owner involvement to prepare for enhanced QBI deduction thresholds

Before December 31, 2025:

• Consider accelerating equipment purchases—buying before year-end secures the deduction a full year earlier

• Complete any energy-efficient improvements, such as solar or HVAC upgrades, before the credits expire

• Ensure you’ve captured all time-sensitive credits, including WOTC, R&D elections, and 179 deductions

The bottom line: Every dollar in tax credits is a dollar that stays in the business. These aren't aggressive tax maneuvers—they're built into the law to help small businesses grow. With several major credits expiring or changing after 2025, timing and documentation matter more than ever.

Tax credits don’t last forever. Taking a closer look now could lead to savings the business won’t get next year.

Disclaimer: This article provides general information about tax credits and is not intended as personalized tax advice. Tax laws are complex and change frequently. The credits and requirements discussed here are based on federal law as of July 2025, including provisions from the One Big Beautiful Bill Act (The Act of 2025, P.L. 119-21).

Eligibility rules, income thresholds, and credit amounts may vary based on your specific situation and are subject to future changes. Before claiming any tax credits, consult with a qualified tax professional who can assess your circumstances and help ensure compliance with current IRS rules.

For official guidance, visit: irs.gov/businesses/small-businesses-self-employed/business-tax-credits