Saving money is a good goal in business. Knowing the difference between tax deductions vs. tax credits for businesses is a good example of how doing a little math up front may save you more later.
What’s a tax deduction?
For starters, let’s look at what a tax deduction is. A tax deduction reduces your total taxable income. For instance, your new business has a taxable income of $70,000.
A small business tax deduction of $1,000 would bring your taxable income to $69,000.
What’s a tax credit?
On the other hand, a tax credit is a dollar-for-dollar discount. A tax credit directly lowers your tax bill by the specified amount.
For example, if you owe $35,000 in taxes, but you apply a $1,000 tax credit, your tax bill will then be $34,000.
There are certain tax credits that refundable, which can also help increase your tax refund.
What’s the difference?
In a nutshell, both tax deductions and tax credits can lower what you owe on a business tax return. The difference is in how they do it.
To simplify, a tax deduction saves you indirectly while tax credits are direct savings. The credit will save you instantly by lowering what you owe. Deductions save you by lowering what can be taxed.
Which is better?
Unfortunately, there is no cut and dry answer here. It depends. You can claim a tax credit. You can claim a tax deduction. In fact, you can do both.
But you can’t make two claims for the same expense. Thus, understanding tax deductions vs. tax credits for businesses will help you decide which will save you more.
A quick example would be in the case of education expenses. You can look at a variety of education-related tax credits that could reduce your tax bill by about $2,000 to $2,500.
Or, consider a tuition and fees tax deduction that could lower your taxable income by up to $4,000. This option could result in more money back on your refund.
Bottom line, it may help to talk to an expert when it comes to figuring out which tax deductions vs. tax credits for businesses are best for your business. If you are ready to crunch some numbers, start by calling us at 704.919.3226. Meanwhile, discover more small business tax tips and other industry news by reading our blogs.