When you think of tax season, it’s likely you don’t think of you or your business receiving money. This is because, well, that’s kind of the opposite of what taxes are. Of course, there’s always the chance of a refund, but for a business, this likely isn’t the case. Instead, you’ll need to spend tens of hours sweating over old receipts and expense records, filling out unnecessarily complicated forms, and worrying about meeting deadlines, only to be told that you owe some exorbitant amount of money. Oh, and you also need to make sure all the other functions that allow your business to run in the meantime are also taken care of. Who doesn’t love tax season, right?
All this aside, the reality is that tax season is a stressful time for business owners. At Payday HCM, we understand the stress that comes with being a business owner during this time of year, as well as the overwhelming amount of information you need to know. We receive plenty of tax-related questions year-round, whether it be about the kinds of forms you need to submit or the sorts of expenses you should be tracking throughout the year. One question we often receive involves credits and deductions: as a small business, what kinds of deductions or credits do you qualify for, and how can you claim them?
Well, in this article, we’ll be going over the tax incentives available to small businesses for this year’s tax season. We’ll start by covering the importance of tax incentives, as well as the difference between a tax credit and a tax deduction. Next, we’ll go into detail on the credits and deductions that your business may qualify for. After that, we’ll detail the process for claiming these deductions and credits.
In this article, you will learn:
- Why Small Businesses Need Tax Incentives
- Tax Credits and Deductions for Small Businesses
- How Do Small Businesses Claim Tax Credits and Deductions?
Why Small Businesses Need Tax Incentives
If you’re a small business owner, it’s important to understand the different tax incentives available to you and how they can help your business come tax season.
What Tax Season Means for Small Businesses
For small business owners, a tax return isn’t just a tax return. Filing your taxes gives small business owners an overall portrait of the financial health of their business, meaning it’s crucial to understand not only what taxes you’re responsible for paying or withholding, but also the different credits or deductions you’re able to take advantage of.
While the length of time a business can stay open is dependent on several different factors, it’s not a secret that the odds aren’t necessarily in business owners’ favor. This makes tax season especially crucial, as a complete understanding of all the different aspects of tax season can help business owners chart out a complete financial plan for their business to better ensure success in the years ahead.
Tax Incentives: Tax Credits vs. Deductions
When we use the term “tax incentives,” this is a sort of blanket term, meant to encompass a few different types of tax benefits that either an individual or a business is able to take advantage of. The two big types of tax incentives are tax credits and tax deductions. And while they both can be described as tax incentives, the two still have some key differences.
A tax deduction is something that reduces your taxable income, whereas a tax credit is thought of best as a kind of tax discount, directly reducing the amount of taxes owed dollar for dollar. This is a key distinction, as the two can offer vastly different amounts of savings: a $10,000 tax credit would provide a direct $10,000 savings, whereas a $10,000 deduction would provide savings based on the tax rate percentage, say $2,000 for a 20% tax rate.
Tax Credits and Deductions for Small Businesses
Now that we understand the importance of tax incentives, as well as the differences between a tax credit and a deduction, we can dive into the different credits and deductions available to small businesses.
Tax Deductions for Small Businesses
There’s a whole host of business expenses that owners can deduct from their taxes come tax season. These include:
- Home office deduction: If you use part of your home for business, you may be able to deduct certain costs like interest on a mortgage, utilities, and other costs.
- Travel and vehicle expenses: Likely the one you’re most familiar with, businesses can deduct vehicle expenses based on mileage and any business-related travel expenses, including hotels, flights, or transportation.
- Office equipment: Businesses can deduct the costs of things like paper, pens, or computers if they are necessary and ordinary for your business.
- Marketing and advertising expenses: Business cards, promotional swag, and management tools for things like online ads, social media, and website design may be tax-deductible if they are necessary and ordinary for your business.
- Professional services: Fees for a lawyer, accountant, IT professional, or other business services may be tax-deductible.
- Insurance premiums and interest on business loans: insurance premiums for things like general or professional liability, and commercial auto or property insurance can be deducted, as well as interest paid on business loans.
The key to claiming the deductions listed above is the “ordinary and necessary” qualifier. The IRS outlines ordinary and necessary expenses: “An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
In addition to this list, there are some more technical deductions available to businesses. The Section 199A deduction allows sole proprietors or owners of pass-through businesses to deduct up to 20% of qualifying business income. This deduction was recently made permanent in 2025 with the passage of the “One Big Beautiful Bill Act.”
Tax Credits for Small Businesses
On top of the different deductions businesses can take on qualifying business expenses, there also exist a number of credits available to small businesses. These credits include:
- General Business Credit: The IRS’s General Business Credit combines 30 different tax credits related to various activities, with businesses able to claim varying amounts based on the specifications of the individual credits.
- Work Opportunity Tax Credit (WOTC): This tax credit can provide businesses up to $9,600 for hiring individuals from groups who have historically faced barriers to employment, including veterans, formerly incarcerated individuals, or qualified recipients of SNAP or TANF benefits.
- Research and Development credit: A tax credit available to businesses with expenses related to research and development processes, including software development, architectural design, and product design.
- Small Business Health Care Tax Credit: Businesses with less than 25-full-time-equivalent employees that offer SHOP Marketplace health insurance coverage that covers at least 50 percent of employee-only premiums may receive a tax credit for up to 50 percent of premiums paid.
- Tax Credit for Paid Family and Medical Leave: Businesses with a written paid time off policy that offers at least two weeks of paid family and medical leave annually, with a minimum 50% wage replacement, can claim up to 25 percent of wages paid.
- Empowerment Zone tax credit: Businesses in empowerment zones or distressed areas that hire and retain employees within that area can claim up to $3,000 per employee.
Combining any qualifying tax credits with tax deductions can help small businesses to maximize their tax savings. It’s also important for businesses to check for any local tax credits or deductions specific to the state or city in which they operate.
How Do Small Businesses Claim Tax Credits and Deductions?
Of course, these credits and deductions are only helpful if you’re actually able to claim them. Let’s break down the process for claiming these tax credits and deductions.
Claiming Small Business Tax Deductions
Before you actually get to tax season and taking tax write-offs, you’ll need to start with detailed expense management. This means keeping track of and documenting expenses throughout the year, holding onto receipts, and ensuring that you have all the documentation you need to properly write off qualifying business expenses.
Taking tax deductions will depend on your business type:
- Sole proprietorship: Sole proprietors should use Form 1040 in conjunction with a personal tax return to report any expenses or deductions.
- Corporations (S-Corp or C-Corp): Businesses structured as corporations should use Form 1120 or 1120-S for S-Corps to report deductions.
- Partnerships: Partnerships should use Form 1065 to take any deductions.
In addition to this, Form 8829 should be used for any expenses related to using your home for business purposes, and Form 4562 should be used to claim deductions on property assets like business or rental property and vehicles.
Claiming Small Business Tax Credits
Claiming certain tax credits will often involve filing separate forms specifically for those tax credits. This includes:
- Form 3800: General Business Credit
- Form 5884: Work Opportunity Tax Credit
- Form 6765: Research And Development Tax Credit
- Form 8941: Small Business Health Care Tax Credit
- Form 8994: Paid Family And Medical Leave Tax Credit
Other credits might be claimed with the same forms that you would use to take any deductions your business qualifies for. Form 1120 and Form 1065 are both used to report deductions and credits for corporations and partnerships, respectively.
Give Your Business Some Credit This Tax Season
Running a business can be taxing—this includes tax season, where you’ll not only need to file all the appropriate forms and provide all the necessary information, but you’ll also be presented with an overall picture of your business’s financial health. This can be worrying, but it also presents a great opportunity, especially when it comes to tax credits and deductions. These credits and deductions can help you get through tax season without the usual stress and give you the peace of mind you need to run your business smoothly heading into the new year. With this guide, you’ll have all the information you need to ensure your business is able to claim every credit and deduction you qualify for.
Understanding what taxes your business has to pay or withhold, what they go to, how they work, and when they need to either be paid or withheld is crucial to maintaining compliance. Even still, finding concise, detailed information on the taxes employers need to pay remains difficult. Without an accurate understanding of employer taxes, businesses risk running into compliance issues, which may lead to costly penalties or fines. Check out our guide to employer taxes for a full breakdown on what taxes employers pay and how they work.
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