Helping to minimize a business’ income tax liability, tax credits and tax deductions are useful, but different. While tax credits reduce taxes, deductions are calculated as a percentage of dollars spent based on the tax rates, and help to cut down your taxable income. Still confused? Let’s look at tax deductions in a little more detail:
What type of tax deductions are right for my particular business?
Taking full advantage of eligible tax deductions is vital, but it’s not always easy to know which ones you’re entitled to, and with so many available for small and midsize businesses to claim, it can be a bit of a boggle.
Below are just some of the tax deductions that might help your business to reduce its taxable income. For more detailed advice and guidance, consult with an entity management firm who will have all the latest information related to taxes, including deductions:
- Employee benefit programs and retirement contributions
A fantastic way to maximize savings for your business, you can set up retirement accounts for your employees, along with education assistance and dependent care assistance programs.
- Charitable contributions
While it is possible for any business or individual to make a donation to a charity, the Tax Cuts and Jobs Act (TCJA) may have limitations on these deductions. Check with a tax specialist to find out if you can benefit from charitable donations.
- Hire contract employees
Potentially deductible for your business, hiring contract labor (1099 or fractional employees), can reduce your tax liability while also reducing overhead costs for things such as payroll, benefits, training and several other types of employee expenses. Your company can also achieve greater flexibility and better cost control during slower months by hiring such employees, or when times are thriving and the need for employees is greater.
- Save money by spending money
When you purchase supplies related to your business, such as new equipment, software, technologies or office furniture for example, these can be registered as deductible expenses, and can help to reduce your company’s tax liability.
- Business interest expenses
Profitable businesses may be able to write off certain expenses, such as those classified as ordinary and necessary by the IRS. If they relate directly to running your business, that may mean they are deemed ordinary and necessary, and saving any receipts related to expenses that you deduct on your taxes, is wise.
It’s never too early to get ahead of the tax game and find out what you can do to reduce your potential tax liability with tax deductions, and working with an outsourced tax planning and management third party can greatly help you determine which deductions are right for your business, and where any tax savings might be made.