While most small business owners think of deductions as the way to reduce their tax load, many don’t think about tax credits. What many of us don’t realize is that deductions and credits can be used in tandem for the ultimate savings come tax time.
At the core, the difference between tax deductions and tax credits is pretty simple—it all comes down to when in the process of calculating your taxes the savings occur.
Here is a brief rundown of how and when tax deductions and tax credits can help your business:
- Tax deductions reduce your taxable income.The value is taken out before you calculate your tax liability, but you still owe your typical percentage of taxes on every dollar remaining. So, the value of your deductions isn’t actually how much you save. For instance, $5,000 in deductions only saves someone in the 22% tax bracket $1,100 in taxes owed.
- Tax credits reduce your tax liability. Once all the calculations are said and done, you can subtract the amount of your tax credits from your tax bill. This means you save as much in taxes as the credit is worth (with some limitations). So, a $5,000 tax credit generally means you’ll be paying $5,000 less in taxes. Note that tax credits cannot reduce your tax liability to less than zero, and most are non-refundable. In other words, if you owe $10,000 in taxes and have $15,000 worth of credits, you’re most likely just going to lose that extra $5,000.
Many expenses involved in building or running your business are tax-deductible, meaning you can subtract those costs from your taxable income. You’ll want to make sure to track and categorize these expenses carefully throughout the year, keeping receipts (physically or digitally) in case you get audited.
You’ll want to familiarize yourself with all the possible deductions out there to make sure you’re taking full advantage of these savings and talk to your accountant if there’s anything you’re spending money on but aren’t sure if you can deduct, especially in light of the Tax Cuts and Jobs Act (TCJA).
Taking Advantage of Tax Credits as a Small Business Owner
As you can see above, tax credits are powerful opportunities for saving, but are less used by small business owners. Part of this is just a lack of awareness. Another reason is that there are fewer tax credits out there and many of them apply to very specific situations or have lots of limitations. To take advantage of tax credits, you’ll want to make sure you 100% qualify for any given tax credit before claiming it, so it’s usually a good idea to consult with a CPA, such as Goldin Group, for assistance.
Trust the Professionals at Goldin Group
At Goldin Group LLC, we understand that as a self-employed person or business owner, keeping up with accounting and taxes is time-consuming and can even be overwhelming. That’s where we can help! We work with individuals and businesses in Maryland (DC Metro Area), offering a variety of financial services designed to save you time and lower your tax burden. If you are a small business that is looking to outsource your accounting or if you need help managing any aspect of your business’s or nonprofit’s finances, we want to hear from you. Call us at (301) 913-0008 or email firstname.lastname@example.org to make an appointment.