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small business tax credits

4 Key Tax Credits for Small Business Owners

By | Tax Credits | No Comments

As a small business owner, it is important that you take advantage of all the tax credits available to your company in order to reduce your tax burden. Yet, you may find yourself asking a lot of questions about small business tax credits if you are not familiar with them and the plethora of tax credits that may be available to your business. To help you save money on your taxes this year, here is a look at what you need to know about tax credits including how you can find tax credits your business may qualify for.

What Is a Tax Credit?

While you likely already know that tax credits and deductions can be helpful in reducing the taxes you owe, you are not alone if you are unsure what the difference between the two is. A tax credit is a dollar amount that can be subtracted from the amount of taxes you owe. For instance, a $400 tax credit would reduce your owed taxes by $400. Alternatively, tax deductions reduce your business’s taxable income, which indirectly lowers your taxes owed. In other words, a $400 deduction would reduce your taxable income by $400, slightly reducing your taxes. Tax credits are then often seen as the superior tax break, as they can significantly reduce your tax burden. The great thing about tax credits is that you can use as many of these credits as you qualify for. Yet, how can you find relevant tax credits for you and your business? Keep reading for a look at 4 of the most common tax credits available to business owners. 

Earned Income Tax Credit

Has this been a bad year for your business? If so, you may qualify for the Earned Income Tax Credit (EITC). This tax credit provides a tax break to people who are employed but earn a low to moderate-income. Just because you are a business owner, this does not mean that you can’t qualify for the EITC, as you are also self-employed. Many business owners who may be eligible for the EITC do not claim it because they believe that it only applies to their employees. However, depending on your financial situation, you may qualify for this tax credit, which can help to ease your overall tax burden. 

Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to businesses that hire employees from certain target groups who have historically faced barriers to employment. Former veterans and long-term unemployment recipients are primary targets of the WOTC. Depending on the employee’s salary and the target group they come from, employers can claim up to $9,600 per employee they hire under the Work Opportunity Tax Credit. 

Credit for Small Employer Health Insurance Premiums

One of the many provisions in The Affordable Care Act (Obamacare) includes a small employer health insurance tax credit aimed at helping small businesses who provide their employees with health insurance. The credit is available to small businesses that pay at least half of the cost of their employees’ health insurance premiums. If you qualify, this tax credit is worth 50% of the amount you paid towards insurance premiums (however, it is reduced to 35% for tax-exempt businesses). In order to qualify for this premium, your business has to have fewer than 25 full-time employees, you must pay an average wage of less than $51,600 per year, and you must have purchased your company’s insurance plans through the Small Business Health Options (SHOP) program. 

Research and Development Tax Credit

In order to encourage domestic research and development, the Research and Development Tax Credit can help to significantly offset your company’s R&D costs. If you spent money developing a patent, building new software, working on a prototype for a new product, or on any other kind of research, you may qualify for this tax credit which can cover up to 20% of your R%D expenses. However, only certain kinds of research qualify, and determining your eligibility can be complicated, which makes it important that you work with a qualified tax professional who can help you make the most of this tax credit. 

Taking advantage of tax credits can be a great way to significantly reduce your company’s tax burden. However, with a multitude of tax credits available, it can be difficult to determine which ones your business qualifies for. Contact us to learn how Incentax’s streamlined process can help you to identify and maximize all the tax credits available to your business.

tax mistakes new business

5 Common Tax Mistakes Businesses Make

By | Tax | No Comments

Filing your taxes is an obligation that, as a business owner, you have to keep to be on the safe side of the law. Having said this, many business owners tend to make mistakes that lead to tax overpayments, penalties, or even audits from the Internal Revenue Service (IRS). Even worse, deliberate or intentional mistakes can compromise your business and your life as well.  

Getting your taxes under control can save you the trouble that results from the avoidable errors people make during the tax season. For a more in-depth insight, here are some common mistakes businesses need to be aware of vis-à-vis taxes. 

Incorrectly reporting income

Over-reporting or under-reporting your income can have negative consequences on your business. Sadly, this is a common mistake that mostly happens when balancing invoices and business payments. For instance, you may receive payments from clients and fail to record them in that pay period, which may cause a tax overlap. 

Although small errors are largely inevitable, it is advisable to keep records of your tax documents and every transaction you conduct. More importantly, keep your financial records updated at all times so that you have evidence in case there are discrepancies in the IRS records.  

Not separating your expenses   

More often, business owners fail to draw a line between business and pleasure expenditures. This usually leads to a failure to make correct deductions when filing taxes. For example, you can make deductions on fuel money spent while delivering a package to a customer. However, you cannot deduct the money used for activities that are not attached to your business. 

To avoid this common mistake, always ensure that you demarcate between business and personal spending. You can do this by keeping a record of both types of expenditures. Failure to do so can attract unnecessary attention from the IRS. 

Bending or breaking deduction rules

The concept of tax deductions is oftentimes confusing due to the technicalities involved. To minimize mistakes, the IRS has outlined how business owners should make deductions; specifically, it provides actual figures and limits to guide people when filing and submitting their taxes. 

Further, deductions vary based on multiple factors, such as whether your business is a startup, the size, and the nature of the activity (say insurance costs and medical fees). Being up to date with deduction rules is crucial in ensuring you make your tax deductions accordingly. 

Misclassifying employees and independent contractors

As a business owner with employees, you can be liable to penalties for failing to classify your employees. The IRS has issued clear tips to differentiate between permanent employees and contractors; for example, an individual becomes an employee if you dictate when, where, and how the person does a task while one becomes a contractor if they work under a different schedule, use their own tools, and are not eligible for defined benefits. 

Your business should also give every employee a W-2 form while contractors who get paid more than 600 dollars should receive a Form 1099-Misc. If you run a business as a self-employed individual, you should also learn how your taxes apply to avoid penalties. 

Filing your taxes late 

Although this common mistake is quite avoidable, many business owners find themselves locked out of the tax season because they failed to do their taxes on time. Failing to file your taxes within the window period provided can earn you penalty fees, which could put your business on the spot. Having a payment arrangement can save you from being penalized. You can even make quarterly payments to make your work less stressful.

As part of business financial management, minimizing room for tax errors can see you save a lot of money in the end. As long as you emphasize accuracy and accountability, you can be sure to avoid these and other mistakes many businesses make. 

At Incentax, we strive to help businesses maximize their tax credits for maximum returns. Please contact us for more on how we can help you maneuver.