As a small business owner, you likely spend a lot of time thinking about how to reduce your tax bill. While tax deductions are a fantastic way to lower your taxable income, they are only one part of the equation. The other, more powerful tool in your tax-saving arsenal is the small business tax credit.
Understanding the difference is simple but crucial. A deduction reduces the amount of your income that is subject to tax, while a credit reduces your actual tax liability dollar-for-dollar. Think of it this way: a $1,000 deduction might save you $240 (if you are in the 24% tax bracket), but a $1,000 tax credit saves you the full $1,000.
For the 2025 tax year, several valuable credits are available to small businesses, yet many go unclaimed simply because owners don’t know they exist or assume they won’t qualify. This guide will shine a light on the most significant tax credits you may be eligible for, helping you keep more money to reinvest in your business.
To get a full picture of your tax obligations and opportunities, check out our complete 2025 Small Business Tax Season Toolkit.
What Is a Tax Credit?
A tax credit is a direct incentive offered by the government to encourage specific business behaviors, such as investing in research, hiring from certain demographics, or promoting energy efficiency. Because credits directly subtract from the tax you owe, they are far more impactful than deductions of the same amount.
There are two main types of tax credits:
- Nonrefundable Credits: These can reduce your tax liability to zero, but you won’t get any money back beyond that.
- Refundable Credits: These are paid out in full, even if your tax liability is zero. If you owe $500 in taxes and have a $1,000 refundable credit, you will receive a $500 check from the IRS.
Now, let’s explore some of the most valuable credits for small businesses in 2025.
1. Research & Development (R&D) Tax Credit
Many business owners hear “Research & Development” and immediately picture scientists in lab coats. The reality is much broader. The R&D Tax Credit is designed to reward businesses of all sizes for investing in innovation and improving products or processes.
If your business has worked to create a new product, enhance an existing one, develop new software, or make your internal processes more efficient, you might qualify.
Who is eligible?
Your activities must pass a “four-part test”:
- Permitted Purpose: The work must aim to create a new or improved product or process, resulting in enhanced performance, function, reliability, or quality.
- Technological in Nature: The work must rely on principles of hard sciences, like engineering, computer science, biology, or physics.
- Elimination of Uncertainty: You must demonstrate that you attempted to eliminate uncertainty about the development or improvement of a product or process.
- Process of Experimentation: You must show you went through a process of experimentation, such as modeling, simulation, or systematic trial and error.
For startups, a key benefit is the ability to apply the R&D credit against payroll taxes, making it a valuable source of cash flow even for pre-profit companies.
How to claim it:
Claiming the R&D credit involves documenting your qualifying research expenses (such as wages for employees involved, supplies used, and costs for contractors) and filing Form 6765, Credit for Increasing Research Activities.
2. Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit is a federal incentive that rewards employers for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment.
Who qualifies as a targeted hire?
The WOTC is available for hiring individuals from groups such as:
- Qualified veterans (including unemployed and disabled veterans)
- Ex-felons
- Recipients of SNAP benefits (food stamps)
- Long-term unemployment recipients
- Individuals living in Empowerment Zones or Rural Renewal Counties
What is the potential savings?
The credit amount varies depending on the targeted group and the number of hours the employee works. It can be worth up to $9,600 per eligible employee, making it a substantial benefit for businesses that are actively hiring.
How to claim it:
To claim the WOTC, you must first request certification by filing IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, within 28 days of the eligible employee’s start date. Diligent bookkeeping and HR processes are essential to capture this credit.
3. Energy Efficiency Credits
Driven by initiatives like the Inflation Reduction Act, a wide range of tax credits are available for businesses that invest in clean energy and energy-efficient property. These credits help lower your operating costs while also reducing your tax bill.
Common Energy Credits for 2025:
- Commercial Clean Vehicle Credit: Businesses that purchase a qualified electric vehicle (EV) or fuel cell vehicle may be eligible for a credit of up to $7,500 for vehicles under 14,000 pounds or up to $40,000 for heavier vehicles.
- Energy Efficient Commercial Buildings Deduction (Section 179D): While technically a deduction, its impact is significant. It rewards businesses for making energy-efficient improvements to commercial buildings, such as upgrades to lighting, HVAC, or the building envelope.
- Business Energy Investment Tax Credit (ITC): This provides a credit for businesses that install, develop, or finance certain renewable energy projects, including solar, geothermal, and wind power systems.
How to claim them:
Each energy-related credit has its own specific form and qualification requirements. For example, the Commercial Clean Vehicle Credit is claimed using Form 8936. You must keep detailed records of purchase dates, costs, and in-service dates.
4. Small Employer Health Insurance Credit
If you are a small business owner who provides health insurance coverage for your employees, you may be eligible for a credit to help offset the cost. This credit is specifically targeted at smaller, lower-wage employers.
Who is eligible?
To qualify, you must meet all of the following criteria:
- Have fewer than 25 full-time equivalent (FTE) employees.
- Pay average annual wages of less than a certain threshold (adjusted annually for inflation, around $62,000 for 2025).
- Pay at least 50% of the health insurance premiums for your employees.
- Offer coverage to all full-time employees through the Small Business Health Options Program (SHOP) Marketplace.
What is the potential savings?
The maximum credit is 50% of the premiums you paid (35% for tax-exempt organizations). It’s a powerful way to make offering health benefits more affordable.
How to claim it:
You must file Form 8941, Credit for Small Employer Health Insurance Premiums, with your business tax return.
Don’t Leave Money on the Table
While deductions are essential, tax credits are the true power players in reducing your tax bill. The key to leveraging them is knowledge and preparation. Without organized bookkeeping and a clear understanding of your business activities throughout the year, it’s nearly impossible to identify and claim the credits you’ve earned.
Start by reviewing your 2025 activities. Did you hire a new employee? Did you work on improving a product? Did you invest in new equipment? Each of these actions could be tied to a valuable tax credit.
Feeling unsure about where to begin? The best place to start is with a solid financial foundation. Accurate, year-round bookkeeping ensures you have the data needed to identify opportunities and substantiate your claims.
Discover more ways to prepare for a successful filing season by visiting our 2025 Small Business Tax Season Toolkit.