June 16, 2021
Small businesses have a number of advantages at tax time, namely tax credits and deductions. They are eligible to claim both, depending on the circumstances and the specific credit or deduction. The tricky part lies in knowing which ones to claim, as well as understanding the difference between the two. When it comes to saving money at tax time, using the small business tax credits and deductions that your company qualifies for is the key to paying less. While both do the job in this capacity, it leaves business owners wondering: which one is better, tax credits or deductions? Here, we’ll explore both in some depth to answer this question and a few others.
Tax Credits
In general, tax credits are designed as an incentive to get you to offer certain things to your employees, such as health insurance. It’s a reward for giving your employee’s benefits, as well as a way for you to save on your taxes at the end of the fiscal year. These tax credits count as a whole dollar amount, so for every single one dollar in tax credits that your business is eligible for, you can subtract that entire amount from your final tax bill. For example, if your business owes the IRS $7,500, but you have $5,000 in tax credits, your bill is cut down to only $2,500. This can be a monumental help to small businesses that operate on tight budgets.
Tax Deductions
On the other hand, tax deductions are designed to help you with the cost of running your business. These deductions also cut down your taxable income, albeit in a different way than tax credits. For example, you can receive a tax deduction for purchasing business supplies – the very things that help your company run, such as printers, ink, packaging, and more. The main difference is that these amounts are subtracted from your income as a percentage rather than a whole dollar amount. If your company is in the 10% income bracket, meaning that you would have to pay 10% of your profits (after credits and deductions, of course) to the IRS, then that particular tax deduction would take 10 cents per dollar off of your taxes due. As you can see, this is very different from how tax credits operate.
Which is Better?
So, which one is better, tax credits or tax deductions? While both serve a very important purpose and work together in tandem to cut down your IRS tax bill, one should be better than the other, right? Your line of thinking here is correct – tax credits are better. Since they take off whole dollar amounts instead of percentages and directly affect the amount of your tax bill by coming off of the bottom line, they are a better method of saving money and owing less to the IRS. With that said, tax deductions also serve an important purpose and shouldn’t be overlooked. Even though they only take a percentage off of the top, they can help you cut back on your tax bill as well.
Tax Credits and Deductions for Small Businesses
There are a number of tax credits and tax deductions out there for small businesses. Which ones does your company qualify for? It all depends on several factors, including which benefits you offer your employees, as well as your overall yearly activities, such as purchasing office supplies. While a professional tax preparer can help you determine which ones to deduct or subtract from your income and taxes owed, these common and popular credits and deductions can help you start out the new fiscal year on the right foot – and owing less in taxes to the IRS. Here are some of the most common credits and deductions.
Disabled Access Tax Credit
Companies that have a total revenue of less than $1 million, as well as fewer than 30 full-time employees can qualify for the disabled access tax credit, as long as they have upgraded their facilities in the last year. This credit covers physical building upgrades that make the space accessible for people with disabilities. Things like signs in braille, as well as wheelchair ramps and accessible bathroom spaces all qualify. With the credit, companies can receive up to $5,000 back on the money spent on the upgrades, or 50% of the total cost, whichever is smaller. For example, if the business spent $4,000, then $2,000 of that may be eligible to include in the tax credit.
Work Opportunity Credit
The work opportunity credit is designed to entice employers to hire people from particular segments of society, such as those recently released from prison. Other groups of people, like disabled veterans, those who have been on family assistance for a long period of time, and even teenagers who currently reside in an empowerment zone, among others, also qualify for the credit. Small businesses who choose to employ people who have to deal with barriers, like childcare, their health, and other economic circumstances that would normally bar them from working, can take part of the amount of salary paid to these employees as a tax credit.
Employer Health Insurance Premium Credit
Offering health insurance to your employees is an important way to keeping them healthy and on staff. Most people looking for work or to switch jobs state that the company offered health insurance is a critical thing that they look for. Not only does offering a partially paid insurance plan for employees help entice new workers and keep existing ones around, but it also pays off for you at tax time. The IRS offers an employer health insurance premium credit that can be as high as 50% of the part of the premiums that you paid for your workers. (At a non-profit, tax-exempt company, the amount is 35%.) This means that if you had less than 25 employees, purchased your employee’s insurance plans through the SHOP Marketplace, and your yearly annual wages were less than $56,000, then you may qualify for this credit. Of course, since everything changes on a yearly basis, it helps to see a professional tax preparer to ensure that you’re deducting the correct amount of the credits from your amount of taxes due.
Alternative Fuel Credits
In order to entice companies to use vehicles that operate on alternative fuel, like biodiesel or hydrogen power, the U.S. government has created alternative fuel credits. There are two different ones that a small business may qualify for. The first is an alternative fuel credit that only companies that produce these fuels, like renewable diesel or biodiesel can use. The other is a tax credit of up to $8,000 for companies that use alternative fuel source vehicles as company cars. There are only a certain number of these vehicles that qualify for the credit, and those that use either electric power or a combination of electricity and conventional gas do not qualify. With that said, the credit is available for companies who think that their vehicles may fall under the requirements.
Education Costs
As far as deductions are concerned, any money that the company spent on employee knowledge enrichment and training, such as admissions to seminars and conferences, professional trade subscriptions, and books, can be deducted from the company’s taxes. This deduction was designed to help businesses shoulder the expense of providing further on the job training to their employees in order to keep them updated on the industry or have them train to move up in the company.
Home Office Expenses
Small businesses that have a home office can deduct part of their expenses on their yearly tax returns. There are several qualifications that must be met in order for this deduction to count, such as proof that the space is used as a home office exclusively. In addition, there are several different types of expenses that can be deducted, such as a $5 per square foot of the office space as a simplified method of determining this amount.
Professional and Legal Fees
Some fees, such as those spent on professional and legal help, like tax preparation, can be deducted from a small business’ yearly taxes. The IRS is determined to help small businesses by partially absorbing the cost of online bookkeeping services, as well as other fees charged by in-person bookkeepers, accountants, and more. If you have any questions about this deduction and others, please reach out to your professional tax preparer as they can answer them and ensure that your tax return is submitted correctly and accurately.
Contact Us Today
If you run a small business and are wondering which tax credits and deductions you qualify for or have any general questions about your taxes, please reach out to the tax advisors at Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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