Small Business Tax Explained | Tax Credits & Deductions

Small Business Tax Explained

Have you ever wondered what the difference is between a tax deduction and a tax credit or been fearful that you’re missing out on claiming business expenses you didn’t know about?

Taxes can be complicated, but you have nothing to worry about with our small business tax services. One of the reasons taxes are so confusing is because there are so many rules and considerations. Here are three major items that factor into the calculation of your small business taxes.

What Can You Deduct?

Costs you can deduct against business income for tax purposes are called eligible business expenses. Eligible business expenses will vary based on industry, but generally, if you wouldn’t have the expense if you didn’t have the business, then it’s an eligible business expense.

For an accountant who has an office outside their home, expenses relating to the office would be considered eligible business expenses because that accountant wouldn’t have those expenses if they weren’t in business.

If you are a sole proprietor, you will file your business income and expenses on Schedule C as part of your 1040, itemizing your income and eligible expenses.

What About Credits? Small Business Tax Calculation

There are several credits and deductions available to small business owners. Credits and deductions are sometimes used interchangeably, but they are two different things. Both reduce your tax bill, but deductions are items subtracted from taxable income before income tax is calculated, and credits are subtracted from the amount of tax you owe.

Eligible business expenses (mentioned above) are deductions because they are subtracted from income before tax is calculated. On the other hand, Credits are subtracted from the amount of tax you owe rather than from your taxable income. When credit and a deduction have the same value (say $1,000), the credit will result in a greater reduction in taxes owed.

Calculating Taxable Income

Your taxable income must be calculated based on tax laws. This is also why you must use IRS approved forms to calculate and file your taxes. Under a marginal tax system like what we have here in the US, multiplying your business income by your tax rate isn’t going to give you an accurate calculation of how much tax you owe. This is because of things like credits and exemptions.

Accounting and taxable income can defer substantially depending on the industry you’re in, as well as the credits and deductions available to you.

Because there are different rules for tax and accounting purposes, there are also a number of adjustments required when calculating your taxes. It’s a good idea to have your accountant calculate estimated taxes for you rather than using your accounting income multiplied by your tax rate as a basis for your quarterly payment.

Not sure which deductions and credits you’re eligible for? If you need some help planning for the current tax year, we’re here to help. Schedule a call to learn more about our small business tax services.

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