Businesses can reduce their tax liability with deductions and credits. The IRS allows businesses to deduct expenses that are considered ordinary and necessary for that line of business, and it provides credits to encourage specific business activities. Deductions reduce the amount of income on which a company must pay tax, while credits directly reduce a company's tax liability. In other words, a deduction might mean that a company pays tax on $750,000 instead of $1,000,000; a credit might mean that a company can subtract $50,000 from its $250,000 tax bill.
Some common business deductions and credits include the following:
Cost of Goods Sold: The amount spent to purchase inventory, including products purchased for resale, raw materials, freight, storage, labor and factory overhead. Indirect costs such as rent, interest and administrative costs must be capitalized.
Capital Expenses: Major expenses for ongoing business assets, including startup costs and improvements, must be capitalized. However, up to $5,000 in startup costs can be deducted in the year the business is opened.
Rent: The cost of leasing a place of business is tax deductible.
Interest: The cost of borrowing money for business activities can be deducted.
Employees' Pay: The salaries and wages paid to employees are tax deductible. So are retirement contributions for employees, directors and officers.
Taxes: Business taxes paid to state, local and foreign tax authorities are tax deductible.
Insurance: Premiums for business insurance such as property, casualty and liability insurance are tax deductible.
IRS Publication 535, Business Expenses, provides more detail about tax deductible business expenses.
Source: IRS Offical Website
The IRS offers various tax credits for business activities it wants to promote. These include research, oil recovery, reforestation, starting a pension plan, providing low-income housing, employing a member of a targeted group such as veterans or ex-felons, providing employment in an urban empowerment zone, and a number of other activities. All qualifying credits are tallied up and claimed on General Business Tax Credit Form 3800.
For further reading, see Give Your Taxes Some Credit, Starting A Small Business: Taxes, The Impact Of U.S. Corporate Taxation On Investment Decisions And CFC Transfer Pricing and Understanding The U.S. Tax Withholding System.
Types Of Depreciation
Small BusinessLearn how to navigate the complicated rules for writing off the expenses of starting your own business. It could save you a lot of money.
TaxesThis strategy of moving your tax deductable payments and donations to the following year could mean hundreds more on your return.
Financial AdvisorUnderstanding the difference between tax deductions and credits is crucial, as the tax strategies that you adopt now can favor one over the other and yield substantially different tax savings.
TaxesWhen it comes to taxes, it's hard to make people happy but these deductions raised more than the average amount of controversy.
TaxesMany people pay more taxes than they have to simply because they don’t know better. Here are a few suggestions for getting the most out of your tax return.
TaxesRunning your own business has both personal and financial perks.
TaxesAs the tax season begins, there are certain words you need to know. Read on to see what they are.
Managing WealthFind out how you can deduct property taxes.
TaxesIf you're a small business owner, note these potential tax deductibles so that you don't pay taxes that could have been extra revenue in your account.