Tax deductions and tax credits are two confusing tax terms that sound the same but affect a business’s tax return differently. While both are deductions on a tax return, how they reduce the tax due is different. So how do they differ?
Tax Deductions
Tax deductions are dollar amounts on a tax return that reduce the taxable income, which is used to calculate the income taxes due. Examples of business tax deductions include:
- Standard mileage on vehicles
- Salary and payroll taxes
- Contractor labor
- Depreciation on assets
- Benefits (insurance premiums, retirement plans, educational payments, gym memberships)
- Travel expenses
- Advertising expenses
- Operational costs (rent, utilities, supplies, subscriptions, materials, maintenance and repairs, etc.)
- Third-party fees (bank charges, merchant fees)
- Donations
- Gifts
- Home office expenses
- Child and dependent care deductions
Tax Credits
Tax credits are dollar amounts on a tax return that reduce the income taxes due dollar-for-dollar. Examples of business tax credits include:
- Employee Retention Credit (ERC)
- Employer Tax Credit
- Disaster Relief Tax Credit
- Research and Development Tax Credit
- Retirement Plan Start-up Tax Credit
- Small Business Health Care Tax Credit
- Work Opportunity Tax Credit (WOTC)
- Disabled Access Credit
- New Markets Tax Credit (NMTC)
- Paid Family and Medical Leave Tax Credit
- FICA Tip Credit
Note: Due to its dollar-for-dollar tax deduction ability, tax credits are more valuable than tax deductions. This does not imply that a business’s tax deductions are not important to the business. A company should aim to find all of its deductions and applicable credits.
If you are unsure if certain deductions or credits apply to your business or have any further questions regarding business deductions and credits, do not hesitate to get in touch with your CPA.
Navigating the labyrinth of tax regulations can be a daunting task. Many business owners find themselves overwhelmed by the intricacies of tax law. This is where professional guidance becomes invaluable. At NaRfula Financial Solutions, we help businesses make sense of their tax-related matters. Don’t hesitate to reach out to us today for personalized tax advice and assistance tailored to your specific needs.
