For the typical consumer, tax season can be an overwhelming time of year. For small business owners, it may be doubly nerve-racking – and even triple for new business owners still grasping the finer points of tax returns.
Given many business owners will end up paying – and not getting a payout from – the IRS, it’s worth taking the time to learn how to put yourself in the best tax situation. It starts with knowing what tax break options are available and how they can benefit your business.
Understand the difference between tax credits and tax deductions
Tax credits reduce a company’s taxes by allowing it to deduct all or part of certain expenses from its income tax bill. They directly reduce the amount of tax a business owner has to pay. Tax credits allow businesses to recover some of the cost associated with running a company. Alternatively, tax deductions can help lower taxable income by reducing the amount of income subject to tax based on a percentage of the deduction.
Sure, tax deductions help. But, dollar for dollar, tax credits help more. Tax credits come off the top, so they’re withdrawn from income prior to determining gross before-tax income. In other words, tax credits are a dollar-for-dollar reduction in a gross income tax bill, whereas tax deductions lessen net taxable income.
Although tax credits demand more forethought and planning on the business owner’s part, they often deliver a more than cost-worthy outcome. A tax credit, by its very nature, offers a business an incentive to do or not do something. Typically, these incentives benefit the environment, economy or people’s lives.
Businesses benefit from tax deductions by tracking their business related expenses throughout the year. Keep in mind that, rather than provide an official list by industry, the IRS leaves it to small business owners to follow a general rule of thumb for what constitutes acceptable write-offs. So if something is ordinary or necessary for running your business, then it’s a tax-deductible expense—i.e. rent, travel, office supplies.
Learn how to capitalize on tax credits
Before you can take advantage of the tax credits available to your business, you need to know what those tax credits are. Start with the tax credits listed on the IRS website and review them with your tax advisor.
Once you know which credits your business qualifies for, take the steps to claim them. You’ll need to complete forms declaring the current year’s business credits and possibly file a 3800 Form. Remember, tax credit claims call for a bit of heavy lifting on the business owner’s end, but they’re worth it.
For the most part, tax credits serve as a reward to business owners who make impactful changes to their business that benefit society. There are a wide range of options to consider for your business, but here are three examples of tax credits that may be worth pursuing to help reduce your business taxes:
1. Going Green – Running a cleaner, greener business, not only looks good from a PR standpoint, it also just feels good to value environmental sustainability. However, going green may require making an investment in new technologies, including solar, fuel cells, small wind turbines, geothermal systems, microturbines, and combined heat and power (CHP). You can ensure your business qualifies for the investment tax credit by complying with the following requirements:
- you must own or have built the equipment
- he property must be operational the year you intend to take the credit
- the equipment must meet certain performance and quality standards
Complete Form 3468 to claim this tax credit.
2. Disabled Access – Since the enactment of the Americans with Disabilities Act (ADA) in 1990, businesses have been legally obligated to make the workplace accessible to employees and customers with disabilities. Because these accommodations can be costly, the IRS allows small businesses to deduct a portion of the cost of any ADA-compliant upgrades. A qualifying small business must have gross receipts of less than $1 million for the prior year or no more than 30 full-time employees. Property improvements must also meet certain criteria. Qualifying expenses include:
- removing barriers that inhibit a business from being accessible/usable by individuals with disabilities
- providing interpreters and/or readers
- buying or modifying equipment or devices
Complete Form 8826 to claim this tax credit.
3. Small Employer Health Insurance Premiums – No matter where you stand on the Affordable Care Act, you can profit from its tax benefits as a small business owner. This credit lets some small businesses trim down their tax bills if they pay at least half the health insurance premium for their employees. To qualify for the Small Business Health Insurance Credit, you must:
- have less than 25 full-time equivalent employees
- pay an average wage of less than $54,200 (as of 2019)
- pay your health insurance premiums through a qualifying arrangement (where you pay a uniform percentage not less than 50% of the premium cost for each enrolled employee’s health insurance coverage)
Complete Form 8941 to claim this tax credit.
Learn how to capitalize on tax deductions
As with tax credits, it pays to understand which business expenses can serve as tax deductions.
Since you won’t find a master list of which expenses qualify for tax deductions on the IRS website, you should consult with your tax advisor, but here are a few you can count on come filing time:
- Vehicle Expenses – Whether it’s mileage or a lease payment, if it’s for business – deduct it! As long as you provide documentation, you can claim lease payments, loan interest, vehicle depreciation, mileage, tolls, parking fees, etc. Currently, the IRS allows 54.5 cents per mile for mileage deduction.
- Supplies – Don’t toss those receipts! It may seem tedious to file away every receipt for every little supply purchase – especially if it’s from a quick run to the local store for paperclips. But at the end of the year, you’ll find all those little receipts add up to a worthwhile deduction.
- Travel & Meals – Business owners can write off up to 50% of expenses incurred during business travel or outings as long as they aren’t considered excessive or luxurious. This deduction applies to food and lodging, but not entertainment, such as concerts or local sporting events. Note: The standard IRS regulations regarding travel and meal deductions have changed in the past few years. Visit the IRS website to confirm any deductible item.
All tax credits and deductions come with various elements and restrictions every small business owner must adhere to. For optimal success, first make sure you understand the different options for tax breaks and then put in the time for year-round tax planning to fully capitalize on the tax season. And please remember to reach out to a trusted tax professional for assistance.