Do you want to know how the rich get away with paying little to no taxes, while many others overpay on their taxes?
Like, do you REALLY want to know?
Well here it is – Tax Credits and Tax Incentives!
If you’re anything like me, I’m sure you’ve heard all of these stories about how Jeff Bezos or Donald Trump pays almost little to no taxes.
And while I can’t tell you if those stories are true or not, or whether or not they’re committing fraud or not… I can tell you for a FACT that there are incentives BAKED into the tax law that allows businesses and individuals to save on their taxes.
See, what most people don’t understand is that the government uses the tax code to motivate people to take actions related to their economic agenda.
Yes, even many accountants I know aren’t aware of the tax incentives that small and large businesses are taking advantage of to DRAMATICALLY reduce their tax liability.
So in this post, I’m going to uncover and fully breakdown small business tax credits and incentives that can put tax dollars back into your pockets.
And what I am going to tell you today is actually LEGAL.
So legal that it’s actually right on the IRS and State Government’s websites, most people just have NO Clue about it!
By the way, the information in this post is solely for informational purposes only.
With that said, I hope you’re ready for a fun ride.
Because by the end of this post, you should be able to take advantage of at least one tax credit, I hope, to lower your tax liability and put more money into your pockets.
With that said, let’s get started with the most important info… how do most businesses save on taxes?
Business Tax Credits vs Tax Deductions
Most small businesses lower their tax liability through taking advantage of small business tax deductions & business tax credits.
Now, these two words – Tax Deductions and Tax Credits are often confused.
People often think they mean the same thing.
And they DO NOT at all.
Tax deductions are simply eligible expenses that you incur to run your business that can be deducted from your business income.
So if your business income for the year is $500,000.
And you had $300,000 in eligible expenses, then you could deduct those expenses from your income and only pay taxes on $200,000 in income opposed to $500,000.
If we assume that your effective tax rate is 25%, then you would pay $50,000.00 in taxes opposed to $125,000.00.
By the way, if you’re interested in learning more about the BIGGEST business tax deductions to help you reduce your taxable income, then check out this post about the 14 Biggest Tax Write-Offs for Small Businesses.
Now, tax credits, on the other hand, directly lower your tax liability.
So, if you owe $50,000.00 in taxes, then you could use tax credits to lower this tax liability, dollar for dollar.
So if we compared a tax credit and tax deduction side-by-side, then a tax credit would be much more valuable to you.
How Business Tax Credits Work
A tax deduction reduces your income, which is still taxed, and a tax credit reduces your actual tax liability.
For example, if you had $10 in income, and you could deduct $2 as a tax deduction, then your remaining income would be $8. If we assume your tax rate is 25%, then you would owe $2 in taxes.
On the other hand, if you had $10 in income, and your tax rate is 25%, you would owe $2.50 in taxes. BUT WAIT, if you had a $2 tax credit, then you would only owe $0.50 in taxes.
That’s how powerful tax credits are!
And the really cool thing about tax credits is that in many cases they are refundable.
This means that if it lowers your tax liability so much that you did not owe anything, then the government would PAY you directly in the form of a refund.
So for example, if you owed $2 in taxes, and had a $3 tax credit, then the government would be paying YOU $1 in the form of a tax refund.
Now, obviously this is an over-simplified example, because in many cases the actual numbers are in the THOUSANDS, TENS OF THOUSANDS, and even HUNDREDS of thousands of dollars in terms of what you can save.
And I really want you to understand this so that’s why I am dedicating the rest of this post to Tax Credits.
The “What” and “Why” of Business Tax Credits
Business tax credits are credits that are AVAILABLE for businesses when they file their annual tax return.
These tax credits are used to offset a company’s financial obligations, aka taxes, to the government.
Now, this is pretty straightforward. But WHY does this exist?
Why would the government allow businesses to offset their tax payments with tax credits?
The government uses the tax credits to influence economic conditions and ultimately push their political agenda.
It is how they motivate businesses to do what they want them to do.
For example, our marketing agency, LYFE Marketing, headquartered our agency in what is called a “Opportunity Zone”, which is an area that the city of Atlanta wanted to invest in to create jobs for the economy.
The Opportunity Zone Credit provided a $3500 credit for every job we created in our company. And fortunately, we grew quickly to over 30 employees, which resulted in a 6-figure annual tax savings.
Now, originally, we would’ve never moved our office to Downtown Atlanta due to extra costs around parking and the rent was much more expensive there.
However, this credit paid for all of these expenses and more, which led to us creating jobs in the area.
This is how powerful small business tax credits are. The government controls the actions of businesses by providing tax credits to incentivize them.
Ok by now, I’m sure you’re wondering how in the world you can start finding tax credits and taking advantage of them.
If that’s you, then don’t worry – the remainder of this post will be spent on this.
So let’s jump in.
Where To Find Business Them?
Tax credits are provided by federal, state, and sometimes local governments.
To find federal tax credits, you can find them by searching the IRS’s website.
On the other hand, to find state tax credits, you can start by searching for your State’s Economic Development Authority’s website.
For example, the State of Georgia has an entire book on their small business tax incentives and tax credits. They not only explain the full list of tax credits they have available, but they also explain the requirements and who is eligible for them.
Then, all you’d have to do is have your CPA verify your eligibility and file the right forms for you when you file your tax returns.
Finally, you may also be able to find tax credits specific to your city.
For example, Atlanta’s economic authority, Invest Atlanta, has specific tax credits related to their region.
So that’s how you can start finding small business tax credits. The last thing I want to do here is quickly go over 5 of the HOTTEST business tax credits available right now.
So let’s jump into it.
5 Hottest Business Tax Credits
1. Opportunity or Empowerment Zones
I mentioned this tax credit earlier but because I’ve personally used it for my own business I think it is fair to start here.
Find out if your business is located in an Opportunity or Empowerment Zone.
These are basically specific zones or zip codes that the government has selected as areas they want to invest in. If it works anything like mine did, you can receive tax credits based on things like the number of jobs you create in your business, for example.
And if you’re not located in an opportunity zone, you should see if there are any around you. I mean, imagine being located 1 block away from an opportunity zone and never knowing about it.
Especially if relocating to an opportunity zone could save you tens of thousands of dollars on your tax return.
2. Research and Development
The research & development tax credit can put up to $250,000.00 back in your pocket!
The R&D credit is a payroll tax credit allowed to any company that have QUALIFIED research & development activities.
Companies from ANY industry can qualify for this tax credit as long as they are a QUALIFIED small business that is conducting QUALIFIED research and development activities.
So if you’re researching anything that is technological in nature to develop a brand new or improved business component in your business, this is a great tax credit to take advantage of.
You can find out more about what is considered “qualified research” and a “qualified small business” on the IRS’s website.
3. Work Opportunity
The Work Opportunity Tax Credit is a tax credit that incentivizes employers to hire from certain targeted groups that have faced significant barriers to employment.
For example, if you hire qualified veterans or ex-felons, you could qualify for business tax credits that can save you in taxes and put money back into your pockets!
You can view a list of targeted groups on the IRS’s website, but if you’re already hiring people from these targeted groups, then you definitely will want to look into obtaining this tax credit the next time you file your taxes.
4. Employee Benefits
If you are a small business that provides health insurance or retirement plans to your employees, then you may also qualify for big tax savings.
The Small Business Health Care Tax Credit could put up to 50% of the fees you pay for your employee’s health care back into your pockets.
Now boom – all of sudden, providing health insurance to your employees isn’t so expensive anymore, are they?
There’s also the Retirement Plan Tax Credit. If you’re setting up a qualified retirement plan, you can also receive a credit on up to 50% of your startup costs.
This makes offering retirement plans to your employees easier as a small business owner.
Now, there are various eligibility requirements for these types of credits, so be sure to read the Tax Guidance on the necessary websites or consult your CPA.
5. General Business
The General Business Tax Credit is exactly what it sounds like, GENERAL tax credits.
There are so many different tax credits out there that I guess the IRS came-up with the name “General Business Tax Credit”.
No, but seriously there’s over a dozen credits available within it.
From credits for expanding into New Markets to Credits for Providing Child Care Services for your employees’ children.
Because different things apply to different businesses, I’d just advise that you go through the list and find out if there are any credits that may apply to your business.
Alright, so those are some of my favorite business tax credits.
Please, please, please keep in mind that there are so many more tax credits out there for you than you can imagine.
I provided some very general tax credits that I’ve seen work for myself personally and some of my clients, but be sure to check out your State and Local tax credits as well like we discussed.
Also, in order to take advantage of these tax credits, make sure that you have your stuff together.
Your business books and records should always be up to-date, and you need to have a legit Tax Advisor that can file the necessary forms for you, CORRECTLY, so that you can take advantage of these tax credits.
If you need help with any of this, look no further. LYFE Accounting is a full-service accounting firm that would love to help you bookkeeping, tax planning, and preparation.
Anyway, enough about us – let’s go ahead and wrap up today’s post.
First, we discussed how the rich save on taxes.
They do it in two ways – tax deductions and tax credits. Anything else you hear out there is probably illegal and can end-up with you behind bars.
Tax deductions are simply expenses you write-off from your business income, while Tax credits are dollar-for-dollar reductions in your tax liability to the IRS.
Since tax credits are more beneficial, we went on to discuss where you can find them. You can find them through the federal, state, and local governments.
Finally, we went over some of the hottest tax credits available right now, but remember, I highly recommend you search on every level to find all of the available tax credits specific to your business.
And that’s a wrap! Again, if you need more guidance with planning, preparing and filing your business taxes, we got you covered. Simply click this link to get in touch with us today.