One of the best ways to decrease your tax exposure is to pay attention to tax credits as well as tax deductions.
Unlike tax deductions, which reduce your taxable income, tax credits are deducted from your tax burden. Rather than decreasing the income you owe taxes on, tax credits grant a dollar amount reduction in the tax that you owe. There are many federal tax credits available for businesses, such as the general business credit, investment credit, credit for employer-provided childcare and facilities, the Indian employment credit and more.
In some cases, you may find that your business is eligible for more tax credits than you can legally take that year. In these cases, you can do one of two things:
Apply the tax credit to previous years when you did not exceed your credit limit to receive a retroactive refund.
Carry the balance forward and apply them to the next tax year.
Many states offer tax credits to encourage economic growth and business investment. These vary from state to state, and many are offered for businesses that increase employment, use local resources, or operate in underdeveloped cities and regions. Your state’s treasury department or chamber of commerce will have comprehensive information on the state and local tax credits that are available.
Many businesses record their deductions carefully but forget to explore all the tax credits that might be available to them. To ensure that you reduce your business’s tax exposure as fully as possible, work with your accountant to make sure you are taking every applicable tax credit that can benefit your business.
Key takeaway: Securing tax credits can reduce your overall tax liability. Consider the general business credit and investment credit to start.