Small Business Tax Credits 2026

The R&D tax credit rewards businesses for investing in innovation. Qualified research expenses include: wages paid to employees doing R&D, supplies used in R&D, and 65% of contract research expenses. The "four-part test" for qualifying R&D: (1) technological in nature (must rely on hard sciences), (2) new or improved functionality, (3) process of experimentation was used, (4) uncertainty existed about whether/how the result could be achieved.

Startups: Businesses with less than $5 million in annual gross receipts and less than 5 years of revenue can apply the R&D credit against payroll taxes (up to $500,000/year) — making it valuable even when there's no income tax liability yet. This is the "payroll tax offset" for qualified small businesses.

Common qualifying activities: Software development, product design and testing, process improvement, formulation development, prototype development, and cloud/data platform engineering. Activities must meet the four-part test — routine product testing or market research does not qualify.

WOTC is one of the most valuable and underutilized tax credits for small businesses. It reduces your federal income tax liability by $2,400–$9,600 for each new employee hired from a qualifying target group. The credit is 25–40% of first-year wages depending on hours worked (at least 120 hours / at least 400 hours).

Target groups (2026):

• Veterans (including disabled veterans — up to $9,600)
• Individuals receiving SNAP (food stamps)
• Ex-felons (hired within 1 year of conviction or release)
• Supplemental Security Income (SSI) recipients
• Long-term unemployment recipients (27+ consecutive weeks)
• Designated Community Resident (in Empowerment Zones)
• Vocational Rehabilitation referrals
• Qualified Summer Youth employees
• TANF recipients

Process: The employer must pre-screen the new hire on or before the day a job offer is made (Form 8850) and submit Form 8850 to their State Workforce Agency (SWA) within 28 days of the employee's start date. Missing the 28-day window forfeits the credit for that hire.

If your business has fewer than 25 full-time equivalent employees, pays average wages under $56,000/year, pays at least 50% of employee premium costs, and offers coverage through a SHOP Marketplace plan, you may qualify for this credit — which can cover up to 50% of what you pay in premiums.

Key limitation: The full credit only applies to employers with 10 or fewer FTE employees and average wages under $28,000. The credit phases out gradually as employee count and wages increase. It can only be claimed for 2 consecutive tax years.

Section 179 lets businesses deduct the FULL purchase price of qualifying equipment in the year it's placed in service — rather than depreciating it over 5, 7, or 15 years. On a $100,000 equipment purchase, a business in the 21% tax bracket would save $21,000 in taxes in year one (vs. $3,000 per year over 7 years under standard depreciation).

Qualifying property: Machinery and equipment, office furniture and fixtures, computers and peripherals, most vehicles (cars are limited; heavy SUVs and trucks over 6,000 lbs GVWR have higher limits), software, and qualifying real property improvements (HVAC, fire protection, security systems, etc.).

Key rule: The deduction is limited to your business's taxable income — it can't create a loss. Any excess carries forward to future years.

Bonus depreciation allows businesses to deduct a percentage of the cost of qualifying property in the first year — on top of Section 179. Unlike Section 179, bonus depreciation can create a loss (no income limitation) and applies automatically unless you elect out. Used together, Section 179 and bonus depreciation can allow 100% immediate expensing of many equipment purchases.

Phase-out schedule (under current law): 80% in 2023 → 60% in 2024 → 40% in 2025 → 20% in 2026 → 0% in 2027. Note: Congress has periodically extended bonus depreciation; consult a tax advisor for the most current status.

Eligible small businesses can claim a credit for costs incurred to make their business accessible to disabled individuals. Qualifying expenses: removing architectural barriers, providing sign language interpreters, providing written materials in accessible formats, and acquiring adaptive equipment.

Example: A small business spends $11,000 installing a wheelchair ramp and accessible restroom. Credit = 50% × ($11,000 − $250) = $5,375 — but capped at $5,000.

The SECURE 2.0 Act (passed 2022, implemented 2023–2025) dramatically enhanced the retirement startup credit. Employers with 50 or fewer employees can now receive a 100% credit on plan startup costs (vs. 50% previously), up to $5,000/year for the first 3 years. An additional $500/year credit is available for plans with automatic enrollment.

Plans covered: 401(k), SEP-IRA, SIMPLE IRA, 403(b), defined benefit plans. This credit effectively eliminates the cost of starting a retirement plan for most small businesses.

Solar Investment Tax Credit (ITC): 30% of the cost of installing a solar system on a commercial property, extended through 2032. A $100,000 solar installation generates a $30,000 federal tax credit. Includes battery storage if installed with solar.

Commercial EV Credit (Section 45W): Up to $7,500 for commercial plug-in electric vehicles under 14,000 lbs; up to $40,000 for larger commercial vehicles. Applies to new vehicles placed in service after December 31, 2022. Not subject to the MSRP or income limits that apply to the consumer EV credit.

Section 179D — Energy Efficient Commercial Buildings: Deduction of up to $5.65 per sq ft for energy-efficient improvements to commercial buildings (HVAC, lighting, envelope). Available to building owners and designers of tax-exempt building systems.

The NMTC program incentivizes investment in low-income communities by providing a 39% tax credit to investors who invest in Community Development Entities (CDEs), which then use the capital to lend to qualifying businesses. Small businesses don't claim the credit directly — investors do — but the credit enables CDEs to offer below-market financing rates to businesses in qualifying census tracts.

If your business is located in a low-income community (check at cdfifund.gov), you may be able to access NMTC-funded loans with interest rates 2–4 percentage points below market. Contact a CDFI in your area to explore NMTC-funded financing.

Opportunity Zones are low-income census tracts where investment via a Qualified Opportunity Fund (QOF) provides capital gains tax benefits. Investors who reinvest capital gains into a QOF within 180 days can defer paying tax on those gains until 2026 (original gains) and potentially exclude all appreciation on the QOF investment from taxes if held 10+ years.

For small businesses located in Opportunity Zones, this program creates a pipeline of investment capital. If your business is in a QOZ and structured as a QOZB (Qualified Opportunity Zone Business), you may attract QOF investment more easily. Check your census tract at opportunityzones.hud.gov.

Employers who provide paid family and medical leave (at least 2 weeks at minimum 50% of wages) under a written policy may claim a credit of 12.5%–25% of the wages paid during qualifying leave. The credit rate increases by 0.25% for each percentage point that the rate of payment exceeds 50%.

This credit was made permanent by the Consolidated Appropriations Act of 2021. It applies to all qualifying employees, not just full-time workers — which broadens eligibility significantly for small businesses with part-time workforces.

Available in addition to the retirement startup cost credit (#7 above). Employers who include automatic enrollment features in new or existing 401(k) or SIMPLE IRA plans can claim an additional $500/year credit for 3 years. Combined with the startup cost credit, small businesses can receive up to $16,500 in total retirement-related credits over 3 years.