Minority-owned businesses play a critical role in strengthening our nation's economy. Over the past decade, minority businesses accounted for more than 50% of new U.S.-based businesses and created 4.7 million jobs. In total, there are more than 4 million minority-owned businesses in the country, accounting for nearly $700 billion in sales. However, despite this, minority entrepreneurs still often face disparities in access to capital and other opportunities.
Although the federal tax code does not include special incentives for minority-owned businesses, entrepreneurs who belong to minority groups may be better positioned to take advantage of certain tax credits and incentives. Here's what you need to know about minority-owned business tax relief.
[Read more: 4 Things Every Minority Business Owner Can and Should Do Today ]
How are minority-owned businesses defined at the federal level?
The following minority and indigenous groups are federally recognized in the United States.
- Hispanic/Latinx (including Puerto Ricans).
- Black/African American.
- Asian American.
- Native American/Alaska Native.
- Native Hawaiian/Pacific Islander.
To support minority entrepreneurs, federal agencies and other companies often set aside a portion of their budgets to work with these companies. Companies that are affiliated with a certified minority enterprise (MBE) may be eligible for certain tax benefits.
To qualify for an MBE, a company must meet the following criteria:
- At least 51% of the business must be owned and operated by one or more minority Americans, and these individuals must have held ownership and directorships for at least six months.
- Minority shareholder members must have at least one-fourth of the shares coming from one of the minorities listed above.
- Management and day-to-day operations are carried out by minority shareholder members.
- This business is a commercial enterprise and is physically located in the United States or the Trust Territories.
[Read more: How to Get Certified as a Minority-Owned Business]
Minority women entrepreneurs in particular may be eligible for two additional national certifications.
Minority women entrepreneurs may meet all three of these certification criteria because the Federal Reserve recognizes that minority households often have lower mean and median net worth than white households.
Who does not qualify as a minority entrepreneur?
Although many people are typically considered non-white in the United States and other Western countries, people of Middle Eastern and North African descent are considered white for U.S. Census purposes. Furthermore, entrepreneurs who belong to religious minority groups do not qualify as minority business owners at the federal level, as do LGBTQ+ entrepreneurs and women entrepreneurs who do not belong to racial or ethnic minority groups.
Although not considered minority entrepreneurs at the federal level, private grants and other opportunities are available to individuals in these groups.
What tax breaks are provided to minority-owned businesses?
There are no federal tax benefits specifically provided to certified minority-owned businesses, but if they collaborate with other minority-owned businesses or operate in low-income areas with large minority populations. has tax benefits. These indirect tax benefits provide significant incentives for minority-owned businesses to support minority entrepreneurs while providing economic benefits.
[Read more: 10 Resources for Minority-Owned Businesses]
Companies that are affiliated with a certified minority enterprise (MBE) may be eligible for certain tax benefits.
There are multiple tax benefits available to minority business owners, depending on the location and nature of their business.
New Markets Tax Credit
The New Markets Tax Credit (NMTC) program is designed to encourage private investment in low-income areas and promote minority-owned businesses in these areas. This program allows taxpayers to receive a federal income tax deduction by investing in designated community development organizations (CDEs). Investors can claim tax deductions of up to 39% over a minimum period of seven years. The first 3 years of his investment is 5% of the investment amount, and the remaining 4 years of his investment is 6% of the project.
Minority companies that qualify for the CDE designation can be investors in their own company, but they can also find outside investors, typically regulated financial institutions. Any organization or individual is eligible to claim these credits. The credit was originally set to expire in 2021, but Congress has extended it several times since its inception, most recently through December 31, 2025. The bipartisan proposed New Markets Tax Credit Extension Act of 2023 could make the NMTC permanent.
Breaking companies in difficult and empowering regions
Several tax breaks are available to encourage businesses to operate in economically distressed areas. These are not limited to a small number of companies; any eligible organization can participate. However, if minority entrepreneurs have lived in or are familiar with these designated areas, they may have a competitive advantage when starting a business and becoming successful. .
One of the most common tax breaks is for companies operating in empowerment zones. Empowerment Zones (EZs) are areas designated for government assistance by the Department of Housing and Urban Development (urban areas) and the Department of Agriculture (rural areas) to create jobs and revitalize the local economy. These empowerment zone designations are currently in effect until December 31, 2025. Businesses operating or investing in these locations are eligible for the Empowerment Zone Employment Credit, which encourages local businesses to employ individuals residing in his EZ. Businesses can receive a credit of up to 20% of the first $15,000 in annual wages paid to an eligible employee (up to a maximum of $3,000).
Work Opportunity Tax Credit
Although not limited to minority-owned businesses or minority employees, the Work Opportunity Tax Credit (WOTC) provides incentives for hiring employees from groups that have historically faced significant barriers to gainful employment. This is a federal tax credit that encourages companies to do this. This credit has been extended into 2021 and can now be applied to wages paid through December 31, 2025.
Eligible individuals include first-year employees in any of the following eligible groups:
- Individuals residing in EZ or rural renewal countries. Note that when calculating WOTC wages, it is not possible to calculate the same wages for the Empowerment Zone Tax Credit.
- Individuals who receive state assistance or supplemental nutrition assistance, or whose families receive this assistance.
- Individuals who have previously been incarcerated and/or convicted of a felony.
- An individual who is referred to an employer after completing a rehabilitation program.
- Those who have experienced long-term unemployment.
State-specific tax benefits and programs
In addition to federal tax breaks, certain states have additional tax incentives to encourage the growth and development of minority-owned businesses. For example, Georgia has a tax incentive program that reduces wages by 10% (up to $100,000) for businesses that hire certified minority subcontractors.
Although the MBE designation is nationally recognized, some states offer their own minority recognition designation to facilitate participation in local contract funding. One such opportunity is the Oklahoma Diverse Business Certification. It is intended to streamline the vendor registration process and provide companies with a repository of eligible minority-owned businesses.
Please contact your local tax professional or state tax authority for the latest information on available state-level programs and eligibility requirements.
Additional resources for minority-owned businesses
Beyond tax benefits, there are several resources for entrepreneurs who belong to certain minority groups.
- Resources for Black-owned businesses, including a directory of Black-owned businesses and national initiatives designed specifically for Black entrepreneurs.
- Resources for Hispanic and Latino business owners, including professional networks and government-backed initiatives that support Hispanic and Latino business owners.
- Resources for women-owned businesses, including organizations and qualifications belonging to minority groups.
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Do I need to file a claim with ERC?
Small businesses considering taking advantage of the Employee Retention Credit (ERC) should carefully evaluate all eligibility requirements and closely follow IRS guidance. It is essential to choose the right advisor who will evaluate your eligibility, understand the eligibility limitations, and educate you on the income tax implications. Trust Experian's tax experts to help your business navigate the complex ERC environment.