Are you running a business that is earning a profit this year? If this sounds like you, you’re likely pretty happy with the financials of your company. After all, being profitable means you have created a thriving entity and are doing well. But don’t kid yourself if you think you are the only one excited about the performance of your business.
Enter in, the IRS. Owning and operating a profitable business means that you must pay taxes. And no one likes your tax dollars more than the IRS—no one except you.
So unless you like the idea of the IRS doing a Scrooge McDuck dive into the tax dollars you have to pay out, it’s in your financial interest to take advantage of the tax breaks that are available to reduce the amount of taxes your business owes.
This Is How Tax Credits And Tax Deductions Are Different
While both tax credits and tax deductions can help minimize a company’s income tax liability, there are differences between the two. Tax credits are 1:1 reduction of taxes, whereas tax deductions are a percentage of dollars spent based on the tax rates and cut down your taxable income.
There are many tax credits your businesses may be able to take advantage of, below we have selected a handful you might not know about:
1. Federal Research and Design Tax Credit
Your business may be performing research and design (R&D) qualifying activities without you realizing it. The R&D tax credit (not to be mistaken with the R&D Tax Deduction) is a 1:1 reduction against taxes owed or paid.
Nearly every state also has its own R&D credit programs, most resemble federal rules and come in varying incentive amounts. So if your company is developing new or improved products or technologies, you could qualify for substantial tax savings.
Common industries we see qualify for these types of credits include manufacturing, engineering, IT, medical device, biotechnology, software development, and more. Reach out to us if you want to know if your business qualifies.
2. Alternative Motor Vehicle Credit
If your business has purchased vehicles with fuel cells (e.g., electric cars that use fuel cells with, or instead of, a battery), you could qualify for this tax credit. Many of these credits have been reduced since their initial rollout, with phase-out rules based upon the vehicle’s model and year. So even if your business has purchased alternative fuel vehicles, automatic eligibility for this credit is not guaranteed. Keep in mind, there are a many other benefits to driving clean in CA.
3. Employer-Provided Child Care Facilities and Services
Did your company acquire, construct, rehabilitate, or expand property that is used as part of a qualified childcare facility for your employees? Or maybe you chose to begin a scholarship program or provide employees with higher levels of childcare training some kind of compensation. If any of these circumstances sound like something your business was part of this year, be sure to check out the Form 8882 or ask your tax advisor about the rules for claiming this credit.
What Deductions Are Right For My Business?
Like tax credits, there are various tax deductions available for small and midsize businesses to claim. The key is to research which ones your company is eligible for to ensure you take full advantage of them.
Tax deductions help to lower your taxable income and then can reduce your taxable liability. These activities can be anything from purchasing new assets or having various benefits to offer employees. The amount of the tax deduction will be taken from your income, therefore lowering your taxable income, and in turn, lowering your tax bill.
Tax deductions your business could be able to take advantage of:
Employee benefit programs and retirement contributions
Setting up your employees with retirement accounts is a great way to maximize tax savings for your company. Other qualifying employee benefits include education assistance and dependent care assistance programs.
Make charitable contributions
Any individual or company can make a charitable contribution, but there may be limitations on these deductions under the Tax Cuts and Jobs Act (TCJA). Your business can still deduct cash contributions and gifts, but can no longer deduct the time spent volunteering.
Hire contract (or fractional) employees
If your company hires contract labor (1099 employees), this cost could be deductible for your business.
Not only can contract, or fractional employees, reduce your tax liability, it can also reduce overhead costs for things like payroll, benefits, training, and other additional employee expenses. Hiring fractional employees also offers your company flexibility and greater cost control during slow months or ramping up staff during times of growth.
Save by spending
The cost of business-related supplies such as new equipment, software, and technologies, or furniture for the office, are deductible expenses that can reduce your company’s tax liability.
Business interest expenses
If your business makes a profit, there are expenses you may be able to write off. For an expense to qualify as a deductible, your business expenses must be ordinary and necessary, as defined by the IRS. Meaning, if the expense applies directly to running your business, it may be ordinary and necessary. In any case, it’s best to save your receipts for every expense you deduct on your taxes.
As a business owner, it benefits you to see what you can do to reduce your potential tax liability now instead of waiting until the end of the year when it may be too late to do anything. For instance, how much money will your company bring in at the beginning of the year? Forecasting can help your company develop a tentative plan to maximize your expenses, which can be adjusted as the year progresses.
Your taxes can have a severe financial impact on your business – but with some proactive planning – they shouldn’t. Contact us today to find out how our services can help your team reduce your tax liability for your business.