Top 5 Tax Credits for Startups in 2024

Here's a quick overview of the best tax credits for startups this year:

1. Research and Development (R&D) Tax Credit
2. Employee Retention Tax Credit (ERTC)
3. Work Opportunity Tax Credit (WOTC)
4. Small Business Health Care Tax Credit
5. Clean Vehicle Tax Credit

Credit	Max Benefit	Key Eligibility
R&D	$500,000/year	New product development
ERTC	$28,000/employee	COVID-19 impact
WOTC	$9,600/employee	Hiring from target groups
Health Care	50% of premiums	<25 employees, SHOP plan
Clean Vehicle	$7,500/vehicle	Electric/hybrid cars

These credits can significantly reduce your tax bill and free up cash for growth. To maximize benefits:

• Keep detailed records
• Choose the right calculation method
• Time your applications strategically
• Avoid common mistakes

Talk to a tax expert to ensure you're getting the most from these opportunities.

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What Are Tax Credits for Startups?

Tax credits for startups are government programs that help new businesses pay less in taxes. These credits directly lower the amount of tax a startup owes, which can save them money.

Defining a Startup for Tax Credit Purposes

For tax credits, a startup is usually:

Criteria	Description
Age	Less than 5 years old
Yearly Income	Under $5 million
Profit Status	Not yet making money or just starting to
Focus	Working on new ideas or products

General Eligibility Criteria

To get startup tax credits, businesses typically need to:

1. Be set up as a legal business (like a corporation or LLC)
2. Have filed all required tax forms
3. Do work that fits with the tax credit's goals
4. Meet size and income limits set by each credit

Keeping Good Records

Good record-keeping is key for startups wanting tax credits:

What to Track	Why It's Important
All Activities	Shows what you did to qualify for credits
Employee Pay	Proves who worked on credit-eligible tasks
Expenses	Shows money spent on research and development
Legal Compliance	Ensures you follow all tax rules

1. Research and Development (R&D) Tax Credit

The R&D Tax Credit helps startups save money on taxes for their new ideas and products. It's better than a tax deduction because it directly lowers the tax bill.

Who Can Get It

Startups can use this credit if they:

• Make less than $5 million in a year
• Have been in business for 5 years or less
• Do work to create new products or improve existing ones

How Much You Can Save

Benefit	Amount
Yearly tax savings	Up to $500,000
Years you can claim	Up to 5 years

How to Apply

To get the R&D Tax Credit:

1. Keep good records of your R&D work and costs
2. Fill out IRS Form 6765 with your taxes
3. Also fill out Form 8974 if you're a startup
4. Have these ready:
   • Pay records
   • Work time logs
   • Notes from meetings
   • Emails about solving problems
   • Bills for R&D costs

What's New

The government made some changes in 2022:

Change	Effect
Bigger credit	Now up to $500,000 (was $250,000)
More startups can use it	Easier to qualify
Can lower payroll taxes	Helps even if you don't owe income tax

2. Employee Retention Tax Credit (ERTC)

The Employee Retention Tax Credit (ERTC) helps startups that kept workers during COVID-19. It can save businesses a lot of money on taxes.

Who Can Get It

Startups can use the ERTC if they:

• Had to stop or slow down work because of government rules
• Made less money compared to 2019
• Started after February 15, 2020, and make $1 million or less per year

How Much You Can Save

The ERTC can lower your taxes by:

Year	Money Back Per Worker	Most You Can Get
2020	50% of pay up to $10,000	$5,000 per worker
2021	70% of pay up to $10,000 every 3 months	$7,000 per worker every 3 months

In 2021, you could save up to $28,000 for each worker for the whole year.

How to Apply

To get the ERTC:

1. Check if you qualify for each 3-month period
2. Figure out how much credit you can get
3. Fill out Form 941-X for the right time periods
4. Keep these papers:
   • Pay records
   • Money you made
   • Proof you had to stop work (if needed)

What's New

Recent changes to the ERTC:

• You can use it until December 31, 2021
• More new businesses can use it
• You can get more money back in 2021
• You can still ask for money back until 2024 (for 2020) and 2025 (for 2021)

It's a good idea to talk to a tax expert to get the most from the ERTC and follow the rules.

3. Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit (WOTC) helps startups lower their taxes by hiring people who often have trouble finding jobs. This credit supports both businesses and workers.

Who Can Get It

Startups can use this credit if they hire:

• Veterans
• People out of work for a long time
• Former prisoners
• People getting government help
• People living in certain poor areas

New hires must work at least 120 hours in their first year for the startup to get the credit.

How Much You Can Save

The WOTC can lower your taxes based on how much you pay the new worker:

Hours Worked	Tax Savings	Most You Can Save
120-399 hours	25% of pay	Up to $1,500
400+ hours	40% of pay	Up to $2,400

For most new hires, the credit is based on the first $6,000 you pay them. Some groups, like some veterans, might get you a bigger credit.

How to Apply

To get the WOTC:

1. Fill out Form 8850 when you offer the job
2. Fill out ETA Form 9061 or 9062 for each new hire
3. Send both forms to your state's job office within 28 days of the start date
4. Wait for the state to say yes
5. Use IRS Form 5884 with your taxes to get the credit

Keep all your papers in case the IRS asks to see them.

What's New

You can use the WOTC until the end of 2025. The IRS has made it easier to ask for the credit.

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4. Small Business Health Care Tax Credit

This tax credit helps startups and small businesses pay for employee health insurance. It can lower your taxes and make it easier to offer good benefits.

Who Can Get It

You can get this credit if your business:

• Has fewer than 25 full-time workers (or the part-time equal)
• Pays workers less than $55,000 a year on average
• Offers health insurance through the SHOP Marketplace
• Pays at least half of the insurance cost for workers

Remember, part-time and seasonal workers count when figuring out your full-time worker number.

How Much You Can Save

The most you can save is 50% of what you pay for insurance. But you get the full 50% only if you have:

• 10 or fewer full-time workers
• Pay $26,000 or less on average

You get less if you have more workers or pay more.

Workers	Average Pay	Most You Can Save
10 or fewer	$26,000 or less	50%
11-24	$26,001-$54,999	Some, but not 50%
25 or more	$55,000 or more	Nothing

How to Get It

To get this credit:

1. Sign up for a SHOP Marketplace plan
2. Count your workers and figure out average pay
3. Add up what you spend on insurance
4. Fill out IRS Form 8941
5. Send Form 8941 with your tax return

You can only get this credit for two years in a row.

What's New

In 2024:

• More businesses can get the credit (average pay can be up to $62,000 now)
• It's easier to figure out if you can get the credit
• The IRS made the math simpler

This credit can help your startup save money while taking care of your workers.

5. Clean Vehicle Tax Credit

This credit helps startups save money on taxes when they buy eco-friendly cars. It's for electric, plug-in hybrid, and fuel cell vehicles.

Who Can Get It

You can get this credit if:

Requirement	Details
Vehicle type	Electric, plug-in hybrid, or fuel cell
Where it's made	Final assembly in North America
Car price	$80,000 or less for big cars, $55,000 or less for others
Your income	Not more than $300,000 for married couples, $225,000 for heads of household, $150,000 for single filers

How Much You Can Save

You can save up to $7,500 on taxes. The credit has two parts:

1. Up to $3,750 for using certain minerals
2. Up to $3,750 for using certain battery parts

This works for cars bought after April 18, 2023.

How to Get It

To get this credit:

1. Get a report from the car dealer when you buy
2. Fill out Form 8936 with your taxes
3. Write down your car's ID number

Starting in 2024, you can use the credit right when you buy the car.

What's New

For 2024:

• You can use the credit when you buy the car
• New rules about where car parts come from:
  • 60% of battery parts must be made in North America
  • 50% of important minerals must come from the US or friendly countries

How to Get the Most from Tax Credits

To make the most of tax credits for startups, try these tips:

Keep Good Records

Good record-keeping is key. Save these things:

• Pay info for workers doing R&D
• Reports showing R&D costs and supplies
• Papers for outside workers
• Proof of research work (test results, plans, emails, meeting notes)

Pick the Right Way to Calculate

For the R&D tax credit, choose the best way to figure it out:

Way	What It Is	Why It's Good
Regular Credit (RC)	20% of R&D costs over a base amount	Can be more if you spend on R&D regularly
Alternative Simplified Credit (ASC)	14% of R&D costs over half of last 3 years' average	Easier to figure out, good if R&D costs change a lot

Time It Right

1. Do it early: Start working on your R&D tax credit math as soon as you close your books for the year.

2. Work with payroll: Talk to your payroll person to claim the credit on Form 941 in the quarter after you file your yearly taxes.

3. Plan ahead: Think about your R&D work for next year to get more tax credits later.

Don't Make These Mistakes

• Don't say workers spent more time on R&D than they really did
• Make sure you're using the right rules based on who owns your business
• Know the difference between regular R&D and R&D that counts for tax credits

Wrap-up

Let's review the top 5 tax credits for startups in 2024:

Tax Credit	Key Benefit
R&D Tax Credit	Up to $500,000 yearly in payroll tax savings
Employee Retention Tax Credit	Can be applied retroactively for payroll tax savings
Work Opportunity Tax Credit	Up to $9,600 per eligible employee
Small Business Health Care Tax Credit	Up to 50% of health insurance premium contributions
Clean Vehicle Tax Credit	Up to $7,500 per electric vehicle

These credits can help startups:

• Pay less in taxes
• Have more money to use
• Put money back into the business
• Look better to investors

To use these credits well:

1. Keep good records
2. Choose the best way to calculate credits
3. Plan when to apply for credits
4. Avoid common mistakes

It's smart to work with tax experts or use services like Fondo to get the most from these credits and follow the rules.

Don't miss out on these chances to save money. Look into these tax credits to help your startup do well in 2024 and later.

FAQs

Is there a credit for starting a business?

Yes, new businesses can get tax credits. The main one is the Research and Development (R&D) Tax Credit. Here's what you need to know:

Feature	Details
Credit Amount	Up to $250,000 per year off payroll taxes
Who Can Get It	New businesses that: - Make less than $5 million a year - Have been open for 5 years or less
What It's For	To help pay for worker taxes
How to Get It	Fill out these forms: - Form 6765 with your tax return - Form 8974 with your payroll tax return

This credit helps new businesses that are working on new ideas or products. It's good for companies that aren't making money yet.

Remember: It's a good idea to talk to a tax expert before you try to get this credit. They can help make sure you qualify and do everything right.

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