It’s a no-brainer that every business wants to reduce its tax bill and save more money. However, to do that, it’s crucial to pay attention to your taxes. You must know if you are eligible for reductions and credits and how to claim them. In this blog post, we’ll help you better grasp the basics of deductions and credits and the various tips on how to make the most of them. Read on!
Learning the Basics: What are Tax Deductions and Tax Credits?
There are numerous ways to reduce your fiscal charges, but tax deductions and credits are the two most notable ones. Thus, while these terms may seem similar and both serve the general purpose of helping your SME company save some money on taxes, they are actually two different methods.
To elucidate further, deductions lower your tax bill by trimming down your taxable income, enabling you to earn some tax-free income. On the other hand, credits provide you with a dollar-to-dollar reduction of the tax you owe and may even increase your refund.
Examples of Tax Deductions
Below you’ll find a list of available deductions you should be aware of as business owners:
- Startup and Organisational costs
- Business Property Rent
- Rent and depreciation on equipment and machinery
- Office Supplies
- Office Furniture
- Software Subscription
- Advertising and Marketing
- Business Entertainment
- Travel Expenses
- Bad Debt
- Employee Gifts
- Employee Benefits Programs
- Employee Salaries
- Contracted Labor
- Auto Expenses
- Legal and Professional Fees
- Retirement Contributions
Examples of Tax Credits
Moving on, here’s an overview of the most common tax credits utilised by business owners like you:
- Earned Income Tax Credit (EITC)
- Credit for Small Employer Health Insurance Premiums
- Work Opportunity Tax Credit
- Research and Development Tax Credit
- Plug-in Electrical Drive Vehicle Credit
- Retirement Plan Startup Costs Tax Credit
Making the Most of Your Deduction and Credits
In order to determine tax deductions and credits you may be entitled to take, it’s essential to do some research and planning. Preparing early on and integrating your tax considerations into your regular bookkeeping procedures is a good idea since this will make tax season more manageable. That said, here are the different tips to make the most of your deductions and credits, particularly ahead of tax season:
Keep Track of Your Expenses
Ensure you keep records and make an organised list of all expenses you incur in your business, including travel, office supplies, advertising and research costs. This will help you claim the appropriate deduction and reduce your fiscal pressure.
Postpone Your Income
Note that taxes revolve around the calendar year, and any expenses you deduct must transpire within the applicable year. Thus, you are not bound to pay taxes on the income you have yet to receive. With that in mind, you can choose to delay your income from the current year to the next. By doing this strategy, you can minimise the amount of taxes you have to pay for the current year, which can have a salient effect if you’re right on the border of a tax bracket.
Contribute to Charities
Donating to an organisation with a worthy cause will not only help you improve the community at large and make a difference – it can also lower your taxable income and claim various tax deductions and credits. That said, if you’re a regular donator, some charities may provide you with an end-of-year statement, but of course, it’s still a good practice to document your donations yourself.
Make 401(K) and HSA Contributions
Understanding the significance of saving for a retirement plan or 401K is vital because this offers two benefits—growing your savings and maximising your tax deductions. However, keep in mind that the IRS sets annual limits on how much of your retirement contributions you can retrench from your taxes. In that case, you must contribute the maximum amount to procure the most benefits. Likewise, another good option is to contribute to a health saving account (HSA), which according to the IRS, are tax-free if they’re applied for qualified medical expenses.
Reach Out to a Tax Professional
It’s only normal not to know every tax deduction and credit available, so you must also consider consulting with a tax professional. While you may be aware of some basics, it’s still nice to have another perspective from experts in this field. These people can help you identify the specific deductions and credits relevant to your macro or micro business. They can also help you understand how those deductions and credits work.
In hindsight, your business can take advantage of many deductions and tax credits to reduce fiscal burdens. Make sure you do your research and follow the guidelines outlined in this blog to maximise the benefits your business receives and achieve the best possible financial future!
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