We’ve all just survived another tax season. You may be tempted to heave a sigh of relief until next spring, but this is the perfect time to do a little reflecting on your overall tax picture, including any tax credits or tax deductions you or your business may be eligible for. Planning now to take advantage of any applicable tax breaks will help you be ready when tax time comes next year.
A good place to start is knowing the difference between a tax credit and tax deduction. Simply stated, a tax deduction will reduce your taxable income while a tax credit is a dollar for dollar reduction in the actual tax you owe.
Think of it this way – a tax deduction of $1,000 will reduce your taxable income by that amount, so the actual amount of your tax savings will depend on your tax bracket. If that bracket is 24%, your $1,000 credit will save you $240 in the taxes you owe the IRS.
In the case of a tax credit, a credit in the amount of $1,000 will directly reduce taxes you owe by that same amount, so $1,000 would be deducted from your tax bill.
If you’re running a business, both tax deductions and tax credits can help lessen the impact at tax time. Typically, companies are able to claim tax deductions for any business expenses that are determined to be ordinary and necessary to run the business. Some key expenses that generate tax deductions are found in areas such as business meals, work-related travel, car use, business insurance, home office expenses, office supplies, phone/internet, depreciation, salaries and benefits, and charitable contributions.
Businesses can also qualify for certain tax credits. Examples of potentially qualified expenses for tax credits include paying family and medical leave for employees, small business health insurance premiums, and work opportunity credit.
One key to maximizing any tax deductions or credits that your business may be able to use is to identify those that apply. But the single most important factor is to have comprehensive and accurate monthly bookkeeping that captures and categorizes all your expenses as they occur. If your accounting is thorough, your tax advisor will be able to identify those costs that could be claimed as a deduction or expense.
Sadly, the fact is that many business owners find it difficult to stay on top of their expense accounting and often find themselves scrambling at tax time to capture months-old data. It doesn’t have to be that way. This could be the perfect time to position yourself for tax time next year by implementing needed bookkeeping and accounting systems or reviewing your existing processes. If the professionals at LifeLine can help in any way, please let us know. We’re experts in helping businesses with their accounting and tax strategy needs.