All About Business Tax Credits and Tax Deductions

By September 29, 2020Tax Credits
business tax credits and deductions

Are you looking to reduce your taxable income? Then you must leverage on your business tax credits and deductions. However, this is easier said than done.

In the U.S., some businesses fall behind their tax filings for various reasons. And they eventually pay huge penalties depending on how late they file them. So, as a savvy entrepreneur, you should file and pay your tax returns punctually.

Remember every business is liable for taxes for one key reason — taxes spur economic growth and development. It is through tax revenue that governments fund vital public investments and social for the larger society’s benefit.

But to maximize your tax savings, you should understand the differences between business tax credits and tax deductions.

Comparing Business Tax Credits and Tax Deductions

Business tax credits and tax deductions are the most rewarding elements of preparing tax returns. Both help to alleviate your business’ tax bill.  

So, when looking to offset your firm’s qualifying expenses, you can claim a tax credit or tax reduction, or both.

But how do business tax credits differ from tax deductions?

Business Tax Credit

A business tax credit is a dollar-for-dollar reduction of the outstanding income tax.

A business tax credit directly lowers your tax liability by its stated amount. So, if your tax bill amounts to $25,000, a $2,000 tax credit would reduce it to $23,000.

Below are the three most common types of business tax credits:

Small Employer Health Insurance Tax Credit

Also known as the Small Business Health Care Tax Credit, the Small Employer Health Insurance Tax Credit applies to businesses that successfully enroll in the SHOP (Small Business Health Options Program).

To qualify for the SHOP, you must have less than 25 full-time employees receiving an average annual salary of up to $50,000. Additionally, you must provide no less than 50% of your full-time workers’ premium and offer coverage to your entire full-time workforce.

The Small Employer Health Insurance Tax Credit is refundable and counteracts up to 50% of your premium costs.

Disabled Access Credit

Have you ever spent on offering disabled individuals pertinent accommodations in your business? Well, you might qualify for the Disabled Access Credit.

Better still, if you meet the IRS’s definition of small businesses, you can also claim the Disabled Access Credit. But you must have other qualifying expenses like the removal of barriers to ease accessibility.

As a small business owner, you can claim up a maximum Disabled Access Credit of $5,000. This credit is worth half of your total eligible access expenses.

FMLA Tax Credit

In case you willingly offer your workforce paid family and medical leaves, you might qualify for the nonrefundable FMLA Tax Credit.  

You can claim at least 12.5% of FMLA Tax Credit if you foot 50% of your workers’ wages. If you bear 100% of their wages, you qualify for up to 25% of the FMLA Tax Credit.

Other common types of business tax credits include the Work Opportunity Tax Credit, New Employment Credit, Federal Empowerment Zone Tax Credit, and Research & Development Tax Credits.

Business Tax Deduction

A business tax deduction alleviates your total taxable income.

For instance, if your taxable income is $100,000, a $1,000 business tax deduction would reduce it to $99,000. But it will not reduce your tax bill by $1,000.

So, while a business tax credit reduces your tax bill directly, a business tax deduction reduces the amount upon which your tax bill is based.

Here are the most common business tax deductions:

Charitable Contribution Deduction

If you donate your business time, property, or funds to 501©(3) status organizations, consider claiming the Small Business Charitable Donations Deduction.

To claim the charitable contribution deductions, you must be eligible to donate to a qualifying nonprofit.

Business Mileage Deduction

Do you have to drive for business? Consider claiming the Business Mileage Deduction for the miles covered on business-related errands.

You can use the actual expense method or the standard mileage rate when claiming the Business Mileage Deduction.

Home Office Deduction

If you use a part of your home for business, you deserve the Home Office Tax Deduction.

To attain the Home Office Tax Deduction eligibility, you must regularly use a dedicated part of your home for business purposes. And your home must the main workplace.

Using the IRS’s simplified method, you can qualify for up to $1,500 in Home Office Deductions.

Which is better between a business tax credit and a tax deduction?

Alleviating your tax liability does not always entail an either-or decision. Luckily, you can claim both business tax credits and deductions to optimize your tax savings.

But here is the rub — you cannot claim both for the same expenses. Also, tax credits generally offer more significant tax relief than tax deductions.

Note: If you must decide between a tax credit and a tax deduction, first compute both to determine which gives you the highest tax savings.

Wouldn’t you like to relieve your business of tax liabilities?

Contact us today and our tax credit experts will take you through the baby steps towards attaining business tax compliance.