As Independence Day approaches (Happy 235th Birthday to the United States), I thought it might be a good time to reflect upon this day from an entrepreneur’s perspective and offer some advice that has its roots in our nation’s founding.
Names like Benjamin Franklin, Patrick Henry, Samuel Adams, and Paul Revere invoke patriotism, but those names should also invoke another word for us, entrepreneurs, some more successful (Franklin) than others (Henry).
Independence is what the first patriots wanted, but they also wanted to control how they were going to be taxed, and I’m sure entrepreneurs still feel the same way today, particularly about taxes. So, before making this blog anymore political or historical than necessary, here’s one element to help control the taxes we pay for our business: tax credits. Here are some helpful hints on how to maximise your tax credits that can potentially save your business thousands of dollars.
1. Tax deductions are good, but tax credits are better
I’m sure many of you know the difference between a tax deduction and tax credit, but just in case, tax deductions reduce your taxable income; tax credits reduce your actual tax. For example, a tax deduction of $1 for a person within the 25 per cent tax bracket means a reduction of 25 cents in taxes. A tax credit of $1 for that same person means $1 reduction in taxes. It’s obvious to see the value of tax credits, and in many instances, businesses don’t know that they may be eligible for thousands of dollars of tax credits. Large corporations are able to hire tax professionals and maintain a team of individual to manage and to maximise their tax credits and deductions. Smaller businesses unfortunately do not have the same luxury, and so they need to remain informed on recent legislation by both the federal government and their local governments for any potential tax credits they qualify for.
2. Piggyback federal tax credits with local government tax credits/incentives
As states continue to compete for business, state laws are loaded with incentives to entice businesses to either remain or move into their state. Often, these enticements come in low taxes and lax regulations. However, states also include incentives in the form of subsidies and tax credits. Some incentives target a particular industry or class of businesses, but others can be utilized by any business. Check your local government to see if any tax credits/incentives can apply to your business, and ask a tax expert if you are missing any benefits. Some common state incentives include tax credits for employer provided healthcare, green improvements, job creation, and research and development.
3. Keep good records
Because tax credits are more profitable to a business than a tax deduction, tax credits tend to be more complicated. As mentioned above, large corporations can hire a team of people to manage all their records to keep everything in order. Small businesses can’t hire a team to manage all their records, but must nonetheless have a system to keep all records updated and easily accessible. Keep detailed records of your business activities and of your employees. Know the past job and economic history of your employees. Many employer tax credits based on an employee’s past require certain employee qualifications that the employer must provide (i.e. HIRE Act, WOTC). Having a record of all this information will allow an employer to maximise the tax credits he or she may receive.
4. Get help from an expert
This is probably the most important advice regarding tax credits. Tax credits are complicated and it takes an expert to fully understand how much a business can reap from tax credits. Knowing if one qualifies for a tax credit is merely the first step in receiving a tax credit. You will definitely need the help of a tax expert for the next steps. Do not rely on internet calculators or even your own calculations (unless you are a tax expert yourself) to figure out if a tax credit is worth it or not due to the wide inaccuracies these calculations tend to produce. Experts are expensive, but tax credits are worth thousands and may end up saving your business quite a bit of money.
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