Tax Credit
A dollar-for-dollar reduction in taxes owed.
A tax credit reduces your tax liability dollar-for-dollar, making it more valuable than a deduction of the same amount. Credits can be nonrefundable (reducing tax to zero but not below) or refundable (generating a refund even if no tax is owed). Common business credits include the R&D credit, work opportunity credit, and small employer health insurance credit.
Example
A small business qualifies for a $5,000 Work Opportunity Tax Credit for hiring veterans—this directly reduces the tax bill by $5,000, not just taxable income.
Why It Matters for Your Business
Tax credits are the most powerful tax savings tool because they reduce your bill dollar-for-dollar, unlike deductions which only reduce taxable income.
Practical Tips
- •Research industry-specific credits you may qualify for—many small businesses overlook the R&D credit.
- •Refundable credits are especially valuable because they can result in a payment to you even if you owe no tax.
More Taxes Terms
Adjusted Gross Income
Gross income minus specific deductions like retirement contributions.
Tax Audit
An examination of tax returns by the IRS to verify accuracy.
Capital Gains
Profit from selling an asset for more than its purchase price.
Capital Loss
Loss from selling an asset for less than its purchase price.
Tax Deduction
An expense that reduces taxable income.
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