Guide to tax reductions for businesses
Establishing and running a business is everything but easy. Aside from having to deal with all the necessities of your business, you also need to stay ahead of taxes as well. Many businesses choose to talk to some of the top tax debt relief companies once they figure out they need help with their tax situation. But it is always better not to be in that situation in the first place. By utilizing numerous tax reductions for businesses that you have available, it is entirely possible to stay one step ahead of taxes. In this article, we will be covering the most common tax credits and deductions that your business might want to take advantage of.
The difference between tax credits and tax deductions
Every small business in the U.S. has the opportunity to claim tax credits and tax deductions. However, the distinction between the two is slightly confusing. Tax deductions lower the taxable income of a business whereas tax credits directly lower the amount of tax your business needs to pay. To boost your tax refund amount, you will want to utilize tax credits and tax deductions both. One thing to note is that tax deductions become more valuable the higher the taxable income is. The reason is due to how tax deductions work.
Tax deductions reduce your business taxable income by a percentage of the deduction itself. For example, if you are in the 25% tax bracket, every dollar that you deduct will lower your taxable income by 25 cents. The higher the tax bracket, the higher the actual deduction.
Tax credits, on the other hand, are much more simple. Every dollar that comes in form of a tax credit represents a dollar off your total tax. As you might imagine, the lower the tax bracket of your business is, the greater the value of tax credits.
Overall, a business always wants to maximize its tax reductions by choosing the best available options. That usually means utilizing both of the tax reductions for businesses in form of tax deductions and tax credits. Some options are more popular than others, of course. There are hundreds of possible tax deductions and credits, after all.
Notable tax reductions for businesses
Depending on the nature of your business, some tax reductions might be more valuable than others. That being said, there are some that most businesses choose to utilize. Here’s a small list of some of the most popular tax reductions that businesses can take:
- New markets tax credit
- Advertising/promotion tax deduction
- Business meals tax deduction
- Alternative fuel credit
- Education tax deduction
- Work opportunity credit
- Home office tax deduction
- Health insurance premium tax credit
- Interest tax deduction
- Paid family and medical leave credit
- Legal/professional fees tax deduction
- Moving expenses tax deduction
Aside from choosing the relevant reductions, a business also needs to take a look at the overall tax structure. When it comes to federal taxes vs. state taxes vs. local taxes, some reductions might be more valuable than others, after all. In other words, before you can figure out which reductions are best for your business, you need to figure out where to apply them. That being said, let’s explore some of these tax reductions in somewhat greater detail.
New markets tax credit
The new markets tax credit looks to support businesses that are investing in CDEs (Community Development Entities). The entities themselves need to qualify for this tax credit, and the business must be located within a 20% poverty rate area or in an area with a family median income that is not more than 80% of the median income of the greater area.
Most of the time, the eligible projects include building or renovating real estate in such areas. As such, a savvy business may also want to consider a property tax relief guide, as well as a guide on tax reductions for businesses. Some of the notable projects that are eligible for new markets tax credit involve hospitals, community centers, buildings that create jobs, as well as educational facilities.
Advertising/promotion tax deduction
Almost every business needs to advertise and promote itself. Luckily, the costs that are associated with promotion and advertising are completely tax deductible. For example, if you hire someone to design your business logo, you can deduct the cost from your tax burden. Virtually anything that has to do with advertising and promotion can be deducted from your taxes, including sending cards to clients, sponsoring an event, building a new website, etc.
One thing to note, though, is that this tax deduction does not include lobbying or any events or campaigns that are connected to politics.
Business meals tax deduction
Business meals are also tax-deductible, with the amount depending on the situation. Normally, you can deduct 50% of any qualified food and beverage expense, provided that it is a necessary part of doing business. The meals themselves cannot be extravagant (under the circumstances, of course) and at least one business representative (owner, manager, employee, etc.) needs to be present.
A business can also deduct all of the expenses for meals provided for their employees. This is, in fact, one of the many business tax tips for entrepreneurs that you might want to take advantage of. If your team is working late, pizza can do wonders to boost morale. And that pizza would be 100% tax-deductible, too!
Of course, a business needs to document these expenses. The documentation needs to include the amount, date, place, as well as business significance.
Alternative fuel credit
Alternative fuel tax credit might be a “niche” one, but it is gaining relevance quite rapidly. The goal of the alternative fuel credit is to promote tax reductions for businesses that produce biodiesel/renewable diesel and similar fuels. The idea behind the credit is to reduce the overall U.S. dependence on imported oil by encouraging businesses to produce alternative fuels.
A big caveat of this credit is the fact that it only applies to businesses that are involved in fuel production.
Education tax deduction
Many businesses have the goal of further educating their workforce. Any education cost that adds value to the business is 100% tax-deductible. However, the IRS has the “last word” when it comes to deciding whether an education expense qualifies for the deduction or not. For this reason, you may want to protect yourself from common IRS tax scams by choosing a well-established and reliable tax company to work with. Figuring out which education expenses qualify and which ones do not can be a complicated process, after all.
That being said, some educational costs are usually accepted by the IRS, such as webinars and seminars, workshops, field classes, and subscriptions to professional publications. The expenses that never qualify include any costs that are tied to a new career outside of the scope of your business.
Work opportunity credit
As far as tax reductions for businesses go, work opportunity credit is perhaps the most common. This tax credit applies to any business that employs individuals that face employment barriers. There are numerous categories of workers that fall within the employment barrier category, including disabled veterans, ex-felons, recipients of long-term family assistance, etc.
To apply for this credit, a business needs to file Form 5884. There’s room for optimizing the form, which is why it is usually advisable to hire a tax professional. The credit itself can provide up to $9,000 in tax reductions and is calculated based on the wages of qualifying employees.
Home office tax deduction
If you are running your business from your home, some of the housing expenses may be tax-deductible. There are two ways of taking advantage of these deductions: Standard and simplified.
The standard method takes into account all of the expenses that a home incurs (mortgage, utilities, landscaping, repairs, homeowners association fees, etc.) and then multiplies them by the percentage of the home that is dedicated to business purposes. This is a great option for large home offices, where most of your home is dedicated to your business.
The simplified method is much easier to calculate. A business can deduct $5 per square foot of the home that is used for business purposes, up to 300 sq. ft. This method is one of the few great tax breaks for homeowners, as well as businesses. It is extremely easy to calculate, after all.
To qualify for the home office tax deduction in the first place, your home office either needs to be your principal place of business or you need to use it regularly and exclusively for the needs of your business. The best way to ensure that your home office qualifies is to set distinct boundaries between personal and business use. A kitchen desk doubling as an office desk is not going to help you qualify.
Health insurance premium tax credit
Any business that provides health insurance coverage to its employees can take advantage of these tax reductions for businesses. The health insurance premium tax credit goes up to 50% of the premiums you pay for your employees’ health insurance. To be eligible, a business needs to fulfill all of the following:
- Fewer than 25 full-time employees in any given tax year
- Average annual employee wages lower than a certain amount (was $56,000 in 2020)
- Pay for a minimum of 50% of the full-time employees’ premium costs
- Offering SHOP coverage to all full-time employees
The business also needs to file Form 8941 before it can take advantage of this credit.
Interest tax deduction
Any interest that a business pays to a lender or a credit card company is tax-deductible. However, the business needs to satisfy certain criteria. First, the business needs to be legally liable for the debt itself. Second, both parties (business and lender) agree that the debt needs to be paid. Otherwise, it’s a gift. Lastly, the business needs to have a professional debtor/creditor relationship.
The IRS is really careful with any interest tax deductions, especially if lenders happen to be family members. The best way to ensure the qualification is to ensure that there is no personal part when it comes to your loans. However, it is possible for a loan to be part-business and part-personal. In that case, you need to divide the interest between the two. The business part is tax-deductible, while the personal part is not.
Paid family and medical leave credit
If your business offers paid family and medical leave to its employees, you are eligible for this tax credit. Your business needs to have a policy in place that regulates the requirements, as well as provide a minimum of two weeks of paid family and medical leave for full-time employees. Furthermore, the paid leave cannot be lower than 50% of the normal employee wage.
This tax credit covers between 12.5% and 25% of the employee’s wages while they are on the leave. The qualifying employees also need to work for the employer for at least one year, as well as earn less than $78,000 in the year prior.
Legal/professional fees tax deduction
Any legal or professional fees that tie directly to your business operations are tax-deductible. This includes hiring a lawyer, bookkeeper, accountant, tax professionals, etc. It even includes online bookkeeping services. One thing to note is that if these fees include any work that is of a personal nature, like writing a will, the only part that is deductible is the one that is relevant to the business.
Moving expenses tax deduction
While only military individuals can get a full tax deduction on moving expenses, businesses can deduct some costs as well. For example, moving supplies, inventory, or business equipment, is tax-deductible. The IRS will want to see clear documentation before approving these tax reductions for businesses, of course.
Business taxes are an extremely complex subject. Most of the time, businesses opt to hire tax experts to minimize their tax lien. And if you want to work with some of the best tax relief companies in the U.S., Consumer Opinion Guide is your #1 resource! We also have a comprehensive knowledge database where you can learn all about tax relief!