Individuals and businesses have to prepare during the annual tax filing period, whether with the help of a tax expert or by themselves. However, many may not be fully aware of how they can avail of tax-reduction solutions such as tax credits and deductions.
Before the year ends, it pays to review your business expenses and financial statement for proper tax planning. Read this article to find out about the tax-reduction opportunities that your business may be missing out on.
How Businesses Can Save Tax On Tax Payments
Tax laws in most countries can be complicated. Hence, it’s best to hire tax experts like the ones from HKMP’s business accounting services or similar specialists near you. Generally speaking, there are two ways that your business can save on taxes: through tax deductions and tax credits. These two concepts work differently and impact your tax costs in distinct ways.
Business tax credits reduce the tax you owe by the dollar. For instance, if your business is eligible for USD$1,000 and your final tax liability amount is USD$4,000, your tax burden will only be USD$3,000.
On the other hand, business tax deductions reduce a taxpayer’s taxable income. They’re directly dependent on the tax bracket in which the business belongs. For example, if an entity’s tax burden is at USD$10,000 and the company belongs in the 20% bracket, the deduction is only worth USD$2,000.
Business Tax Credits And Deductions Your Business May Qualify For
For centuries, tax collection is often used to fuel government expenses that provide better services to taxpayers. However, governments of different levels offer tax credits and deductions to stimulate more economic activities. In the US, businesses can avail of tax savings through the following:
1. Tax Deductions on Business Expenses
Most business expenses may qualify you for specific tax deductions. For instance, advertising and promotion costs are 100% deductible. In addition, some food and beverage expenses may lower your tax liabilities under this category by half, except for office event meal expenses, which are wholly deductible.
Other business expenses that may qualify for business tax deductions include:
- Insurance and permit costs
- Use of vehicles for business purposes
- Hiring contractual employees and consultants
- Depreciation costs for business assets
- Employee training
- Education expenses
Home-based business owners may also claim these deductions as long as personal and company expenses are clearly defined and accounted for.
2. Research and Development Tax Credit
Research and development take a considerable chunk of a business’s capital expenses, including countless staffing hours. To encourage companies to make their products more globally competitive, the government offers tax credits for companies that improve products, processes, and software.
The Internal Revenue Service (IRS) lists all qualified business expenses and requirements in the Internal Revenue Code Section 41. Businesses may have to present financial records and documents to avail of this tax incentive.
3. Work Opportunity Tax Credit (WOTC)
Another federal tax credit program, the Work Opportunity Tax Credit (WOTC) is available to businesses that employ individuals from target groups such as veterans, former felons, and cash-strapped individuals. There’s no limit to the number of employees a company can hire, and any type of job arrangement, whether full-time, part-time, or on-call is eligible.
The business has to apply for and receive certification before being qualified to claim. Both the employee and employer may qualify for business and personal tax credits under WOTC.
4. Fuel Tax Credit
This program allows particular businesses to save on their tax liabilities if they’re engaged in eco-friendly practices in transporting goods and services. Examples include using electric vehicles and alternative fuel for farming, commercial fishing, and other business purposes. Some businesses that may operate pieces of industrial machinery may qualify for this tax-reducing program. The Department of Energy (DoE) spearheads the Fuel Tax Credit program.
5. Investment Tax Credits
Big-ticket investments for new business property such as vehicles, buildings, pieces of industrial equipment, or major office renovations may qualify your business for a tax credit. This government tax benefit allows companies to get a rebate from these high costs.
Tax rebates are also applicable in some solar panel installations for buildings, also called Solar Tax Credit. Investments in economically-challenged communities may also qualify companies to avail of the New Markets Tax Credit. This program allows entities to claim five percent of the total investment amount for the first three years, increasing to six percent from the fourth to seventh year.
6. Health Insurance Tax Credits
There are two ways that businesses can save on a health insurance tax credit. Also known as a premium tax credit, companies may claim discounts every month through reduced insurance premiums or a federal income tax refund. This tax credit is only available if businesses purchase a federal or state-backed insurance plan. By getting a Health Savings Account, a highly deductible health plan, employers and employees can reduce tax costs and medical fees.
7. Childcare Facilities And Services Expenses Tax Credit
Businesses that pay for their staff’s childcare expenses are eligible for this tax-saving program that offers a 25% refund on child care expenses, alongside a 10% reimbursement for childcare resource and referral costs, granting that the state accredits these facilities. Availing of this tax incentive can reduce your business liabilities by up to USD$150,000 annually.
8. Disabled Access Tax Credit
The Americans with Disabilities Act (ADA) requires businesses with at least 15 workers to make their premises more accommodating to differently-abled employees. Doing this will undoubtedly entail costs, but your company can apply for tax relief. This program allows small organizations with total earnings not exceeding USD$1,000,000 to apply for a 50% rebate for their ADA-related expenditures with an annual cap of USD$5,000.
9. Carryforward Tax Deductions
Sometimes, businesses may have deductions, losses, and credits that they can’t fully claim during the current year. This happens when your business tax claim exceeds the amount set by the IRS and the state. In these cases, companies may file these refunds over the next year. Such tax provision is otherwise known as a carryforward.
With the help of your accountant, take note of these tax-deductible claims so you can claim them the following year. You’ll also need a tax expert to qualify which tax credits and deductions are allowed under the carryforward provision in your state.
Tax filing can be a highly stressful activity, particularly for small business owners. Without knowing these tax-saving opportunities, a business that qualifies for tax credits and deductions may end up paying more than it’s supposed to. With the help of an accountant or a tax specialist to do the heavy lifting, you’ll be able to breeze through the filing process and enjoy lower tax liabilities.
I am Tristan who loves to ride and spend time with my jenny (horse) and my love Mark. After completing my graduation, I have been working as an accountant in a private firm in Cologne.