Thanks to tax credits, tax season doesn’t have to be as scary as it once was. While many people are still in the “deduct” mindset, there are many advantages to finding tax credits over deducting expenses from your income. This is especially true for businesses that need to save money. Surprisingly, many businesses fail to take advantage of tax credits that they are eligible for or can benefit from.
Tax Credits vs Deductions
So what makes tax credits better than deductions?
The main advantage is that tax credits are dollar-for-dollar benefits. They cut your actual tax, so you can look at every dollar of credit as cutting your tax by one dollar. The credit is applied to your IRS bill so that you either don’t have to pay Uncle Sam as much, or you get money returned to you. Tax deductions, on the other hand, simply reduce your taxable income that your final tax bill is figured upon.
Know What You Can Claim
Both tax credits and deductions work together to lower your tax bill, and ultimately, what you owe to Uncle Sam. The key is knowing what you can claim. As a business owner, it’s critical that you are as detailed as possible with your taxes, as you need to keep as much money as you legally can. Working with a tax credit agency is a smart decision because these professionals are experienced in tax credits and how they can benefit businesses of all sizes.
Popular Tax Credits for Small Businesses
Here’s a peek at some of the small business credits that every business should be familiar with.
- Work Opportunity Tax Credit (WOTC)
- Alternative Motor Vehicle Credit
- Alcohol Fuels Credit
- Disabled Access Credit
- Employer-Provided Child Care Credit
- Qualified Research Expenses Credit
- Rehabilitation, Energy and Reforestation Investments Credit
- Small Employer Pension Plan Startup Costs Credit
Refundable vs Nonrefundable Credits
The purpose of tax credits is to lower tax bills and reward regular taxpayers. Some credits have been added to the tax code temporarily while others are permanent. Popular core credits include those for having children or caring for them, saving for retirement or furthering a family member’s education.
It’s also important to note that some credits are refundable while others are not. A refundable credit basically means that you will get money back from the IRS, even if your tax bill is zero. If the credit is nonrefundable, you will only be able to use the credit to zero out your bill, but nothing more. Most tax credits are nonrefundable.
Working with a tax credit professional will help you determine which credits and deductions your small business is eligible for, putting more money in your pocket.