Tax time can be confusing, especially when it comes to tax credits vs deductions. How do these financial tools benefit business owners? In this article, you’ll find that both credits and deductions are essential for businesses large and small.
Keep reading to learn more about credits, deductions, and how you can pay less in taxes.
What is the Difference Between Credits and Deductions?
The IRS states that a credit reduces the amount of tax due while a deduction reduces the amount of taxable income. While they are different entities, these tools can both lower how much you’ll pay in taxes.
Individuals may deduct qualified contributions of up to 100 percent of their adjusted gross income. A corporation may deduct qualified contributions of up to 25 percent of its taxable income.
The IRS, Charitable Contribution Deductions
Think of deductions as discounts on your bill and credits as coupons. If you’re out shopping and get items on sale, you’ll see those sales percentages immediately on your bill at check out.
Then when it’s time to pay, you use your gift cards to further reduce how much you’ll spend out of pocket. So, as you can see, when it comes to tax credits vs deductions, using both tools in conjunction can serve you extremely well.
What Types of Tax Credits Are There?
There are many types of tax credits in existence. Here are just a few credits that may be available to you:
- Child care tax credit
- Clean vehicle credits
- Work opportunity tax credit (WOTC)
- Research and development (R&D) tax credits
- Opportunity zone credits
Be aware that you can take advantage of tax credits from the state where your business is located as well. For example, the government of Tennessee offers a variety of tax credits.
Businesses operating there could make use of the state’s Standard Job Tax Credit, Industrial Machinery Tax Credit, or Super Job Tax Credit. Of course, not all industries in Tennessee are eligible for these credits.
How can Businesses Find Eligible Credits and Deductions?
If you’re on the hunt for tools to reduce your tax burden, work with a certified tax professional. A tax professional, like a CPA, will have better working knowledge of the credits and deductions designed to help businesses.
Of course, if your company has unique interests, you can ask your CPA to look into specific credit types. For example, if your company invests in new product development or has a veteran hiring program, ask your CPA to look into R&D and WOTC credits.
In Summary: Tax Credits Vs Deductions
When it comes to tax credits vs deductions, both are winning choices for business owners. It’s imperative that you work with a tax professional to ensure that you take full advantage of the deductions and credits available to you.
Remember, business owners can use both Federal and state tax credits to lower their tax bill, but you must make sure you meet the requirements of these incentive programs.
Have questions about R&D tax credits? Contact the Bowers R&D Associates Research and Development Tax Credit Team today for more information.