In small businesses where every dollar counts, owners are always looking for ways to maximize their profits. However, when tax season rolls around each year, they end up paying a significant chunk of their profits in taxes.

So, if you’re tired of feeling like a deer in headlights every time April rolls around, you’re not alone. Luckily, running a small business allows you to pay less taxes that you would not have done otherwise. 

Since you can’t find a way out of your tax bill, you can make it less painful by claiming all of the tax credits and tax deductions. Unfortunately, most small business owners are oblivious to these savings, leaving money on the table that they may not even realize exists.

So, instead of frantically sifting through invoices and statements, wondering how to save more of their hard-earned money, doola Bookkeeping can help you transform tax time from a dreaded obligation into a powerful opportunity!

From boosting your bottom line to reinvesting in growth opportunities, these incentives help you keep more money in your pocket. In this blog, we’ll unveil the best tax deductions and credits available specifically for businesses like yours. 

Let’s dive in and discover how you can make every dollar count this filing season—after all, it’s not just about paying taxes; it’s about keeping what you’ve earned!

How to Maximize Tax Savings with Credits and Deductions

For every missed tax deduction and credit, you end up paying a higher tax bill—and that’s not something any entrepreneur wants. That’s why we have brought you an industry-by-industry guide for tax deductions to unravel the ones that are made for you.

While tax credits and deductions can help lower your tax burden and increase your overall savings, they both work in different ways. A tax credit is a dollar-for-dollar reduction of the taxes owed. 

Once you’ve finished filing your tax return, you’re left with either a tax refund or a tax liability (tax you owe, also called a tax bill). Each dollar you have in tax credits counts as a dollar reduction to the amount of tax you pay.

This means that if you have a $1,000 credit, your taxes will be reduced by $1,000. Credits directly reduce the amount of taxes you owe, which makes them highly valuable for businesses looking to maximize their savings.

Unlike credits, which directly reduce your taxes owed, deductions reduce your taxable income before calculating your final taxes. For example, if your taxable income is $50,000 and you have $1,000 in tax deductions, your taxable income is reduced to $49,000.

How Tax Credits Work?

A missed tax credit means a higher tax bill—and that’s not something any small business needs. But this is easier said than done. Unless you know what credits are available to you, you won’t know where even to start. 

There are three types of tax credits: refundable, partially refundable, and nonrefundable. As you have understood from their name, the first two increase your tax refund, while the other doesn’t.

Refundable Tax Credits 

These credits increase your taxes and will even give you a refund if you don’t owe any tax. So, 

If they reduce your tax bill beyond $0, you’re owed a refund, and you will receive the total tax credit. For example, a $500 tax bill with $600 in tax credits becomes a $100 tax refund.

Partially Refundable Tax Credits 

These credits give you refunds up to a certain amount. For example, a credit might be $2,000, but only $1,000 is refundable. If your tax bill is $500, the total credit would net you a $1,000 refund. However, since only $1,000 is refundable, your refund amount will decrease to $500.

Non-refundable Tax Credits

These tax credits do not become a tax refund no matter how much you owe in taxes down to $0. For example, a $500 tax bill with a $600 tax credit gets reduced to $0, but there is no tax refund.

However, some of these nonrefundable tax credits won’t relapse after your tax bill reaches $0 and can be carried over into the next year.

How Tax Deductions Work?

Tax deductions are accumulated through qualified expenses you pay throughout the year and are generally either 50% or 100% deductible. This means a dollar spent on a tax-deductible expense generally creates a tax deduction of $0.50 or $1.00. 

Let’s say you made $50,000 in a year and spend $10,000 in business expenses eligible for tax deductions. Therefore, your taxable income is reduced to $40,000, which falls into the 22% tax bracket. So, your total savings are $2,220 (22% of the $10,000 reduction).

By spending money on deductible expenses, you reduce your taxable income, which, in turn, reduces your tax bill. But first, you have to choose between standard deduction and itemized deductions to reduce your taxable income. 

Standardized vs Itemized Deductions

Standard deductions are a fixed amount set by the IRS each year. While everyone qualifies for the standard deduction, the amount depends on your filing status. On the other hand, itemized deductions where you add up all your deductions one by one.

This is an amount you deduct from your income based on the total from a list of accepted or “qualified” deductions, such as mortgage interest, state and local taxes, charitable contributions, and certain medical expenses.

In contrast, there are many different itemized deductions, and their amounts vary by industry. Depending on one’s line of work, there are many more industry-specific credits and deductions available. 

However, not every dollar you spend can be deducted from your taxable income. For example, medical and dental expenses that exceed 7.5 per cent of your adjusted gross income can be deducted. If you didn’t spend that much, then none of your medical costs are deductible.

Claiming these credits and deductions requires proper documentation and adherence to all IRS guidelines.

Consult a professional tax expert to ensure you are taking full advantage of all the tax breaks available in your specific industry.

Tax Credits and Deductions in Different Industries

Apart from standard ones, every industry has its own set of deductions and credits designed to provide relief while also promoting growth and development within the industry.

Retail Industry

Retailers with physical products and/or storefronts are eligible for various tax deductions that can help reduce their taxable income. However, understanding what is available for you can be crucial in maximizing the potential tax credits for your retail business. 

By knowing what benefits are available and staying up-to-date on your requirements, you can maximize tax savings while remaining compliant with IRS regulations.

1. Cost of Goods Sold (COGS)

One of the primary deductible expenses for retail businesses is the cost of goods sold (COGS). This includes any costs associated with purchasing or producing the products that are sold, such as raw materials, manufacturing costs, and direct labor costs.

2. Lower Cost or Market (LCM)

The retail industry is highly influenced by trends and seasonality, which directly impact your sales and prices. However, if the value of inventory drops below its cost, you may offset these costs by claiming a deduction under the LCM rule.

3. Store Maintenance

Keeping your store in top-notch condition is a necessity, and it requires routine maintenance and repairs to storefronts, shelving units, and other physical spaces. This keeps your store looking clean and organized and ensures the safety and comfort of your customers and employees.

Luckily, certain store maintenance expenses can be claimed as tax deductions, helping you save money while investing in the upkeep of your store. So, remember to keep detailed records of expenses related to the upkeep of retail spaces.

4. Employee Wages

Employers must compensate their employees fairly and competitively because they are the backbone of their businesses. The IRS offers several tax credits that can help retail businesses manage their employee wages and reduce their overall tax burden. 

Wages paid to employees, such as salaries, bonuses, commissions, and other forms of compensation, are eligible for deductible expenses. You can avail of The Work Opportunity Tax Credit (WOTC) by hiring and employing individuals from certain targeted groups.

Additionally, retail businesses that offer healthcare coverage to their employees may be eligible for small business tax relief, such as Health Care Tax Credit. 

Book a consultation to learn which tax credits and deductions are reasonable and necessary for running your business in order to be deductible.

5. Advertising Costs

Retailers must run several advertising and marketing campaigns, both online and offline, to boost footfall and sales. These include social media promotions, print advertisements, and other promotional activities.

Almost any type of business-related advertising is deductible under business operating expenses. Since an online presence has become a necessity for retailers, you can deduct expenses related to website development, maintenance, and hosting.

6. Point of Sale Equipment

You can deduct the cost of your POS systems, including hardware and software since they are essential to your store operations. Additionally, you can include the ongoing maintenance and upgrade costs of this equipment.

Section 179 Deduction allows businesses to deduct the full cost of qualifying equipment purchases in the purchasing year. Retailers can take advantage of this deduction when investing in technology or equipment for their stores.

7. Online Services

Like point-of-sale equipment, you also need online solutions and tools to run your retail business. For example, you can use Gusto to get your payroll done and doola Bookkeeping to help out with your financial management.

You will be thrilled to know that you can deduct the cost of these services from your taxable income. So, make sure you keep track of these services to maximize your potential savings.

8. Qualified Business Income Deduction

This deduction was introduced under the Tax Cuts and Jobs Act as a way for small business owners to reduce their taxable income by up to 20%. To qualify for this deduction, your business must be classified as a sole proprietorship, partnership or S corporation.

It’s important to note that while these are just a few examples of potential credits and deductions available for retailers, there may be other industry-specific ones that could benefit your business.

Ecommerce

The ecommerce industry has been experiencing rapid growth in recent years, with more and more consumers turning to online shopping. This has resulted in a high saturation of the market and a cut-throat competition. 

If you are a small business owner wondering how to survive in this industry, tax credits and deductions can give you a much-needed lifeline. 

1. Home Office Deduction

If your principal place of business is your home or you spend the bulk of your time working from home, you can take the home office deduction. To qualify for this deduction, you must have a dedicated office space in your home that you use regularly only for business-related activities.

2. Inventory Storage

If you use your home as a storage space for inventory or product samples, you can deduct expenses for the business use of your home. Even if you rent another space to store inventory, such as a storage unit, you can also deduct rent and other expenses for that space.

3. Internet and Cell phone

Intenel is a necessity to run an ecommerce business, which means that your business’s internet bill is tax deductible. If you use your cell phone to manage customer orders, talk to vendors, and other business purposes, you can deduct the cost for the portion of the bill.

4. ​​Shipping Costs

If you have to bear the shipping costs of delivering your products to customers, you can deduct them from your taxes. This includes expenses for postage, packing material, subscriptions for postage meters, envelopes, and delivery charges. 

5. Tools and Software

You need a website or an online store for your ecommerce business, which can put a dent in your pocket. However, you can deduct the cost of registering a domain, hosting your website, and building the website using GoDaddy.

Similarly, any additional software or online service you bought for your website or ecommerce store are deductible expenses.

6. Independent Contractors

Hiring an independent contractor is a standard practice in every business, and so is deducting the cost of their services as a business expense. Whether you hire a designer to design a catalog or a CPA to help with year-end accounting, you can deduct their fees from your tax return.

Service Business 

Whether you run your service business online or offline, you have unique deduction opportunities related to client interactions and professional development. 

‍1. Client Meetings

While entertaining clients is a huge part of the job, the costs of these meals and events are not all a lost cause. In some cases, you can claim a deduction from 50% to 100% of these recurring costs. So, make sure you keep thorough records and always pay with your business account, not a personal one.

2. Business Travel Expenses

If your business is keeping you on the road, you can claim deductions for travel expenses incurred for business purposes. This includes airfare, accommodation, meals, and transportation during business trips. 

3. Training and Education

Expenses for professional development, including workshops, conferences, and courses, are generally deductible. Make sure that the training or educational opportunity is directly related to your business.

4. Specialized Equipment

If your business requires specific equipment or tools to run or deliver its services, you can deduct the costs associated with purchasing and maintaining such equipment from your taxable income.

Manufacturing

The manufacturing industry has been a key contributor to the economy for centuries. However, the costs associated with running a successful manufacturing business can quickly add up, often resulting in high tax burdens for companies in this sector.

Thankfully, tax credits and deductions available specifically for the manufacturing industry can help alleviate some of these financial pressures. 

1. Depreciation of Machinery

In some cases, you can deduct the full cost or a portion of the cost of your equipment over time through depreciation. However, it’s best to consult a tax professional first since depreciation methods and schedules can be complex and represent a significant investment.

2. Raw Material Cost

You can deduct the cost to acquire raw materials used in the manufacturing process. Therefore, you must keep detailed records of material you have purchased and used in a tax year.

3. Production Facility Expenses

Expenses related to the operation and maintenance of production facilities are tax deductible. So, you can deduct many recurring costs, such as utilities, rent, electricity bills and so on.

4. Research and development expenses

Manufacturers investing in research and development activities may qualify for R&D tax credits. However, many business owners don’t claim the R&D credit because they aren’t aware of it or think lab coats and test tubes are a requirement for claiming it. 

This credit is available to any business that incurs expenses on qualified research activities within the U.S., including developing new products or techniques.

Maintain a detailed record of your expenses with doola Bookkeeping, including employee wages, supplies, and contractor costs.

5. Domestic Production Activities Deduction (DPAD)

Also known as the “manufacturer’s deduction,” DPAD allows businesses to deduct up to 9% of their qualified production activities income (QPAI). To be eligible for this deduction, your business manufacturing or production must be within the US.

Content Creators

The content creation industry, which includes professionals such as writers, musicians, filmmakers, and artists, is a highly competitive and ever-evolving field. Luckily, there are tax credits and deductions available to reduce taxable income or provide direct refunds. 

1. Artistic Tools and instruments

Tools and equipment used for creating content, such as cameras, microphones, and musical instruments, are eligible for deductions under business expenses.

2. Content Creation Software

Expenses incurred for software used in content creation, editing, and production are deductible. These can be anything from graphic design software to music production tools or podcast platform fees, as long as they are necessary.

3. Studio Rental and Maintenance

You can deduct the costs related to your creative space or studio, which includes the rental, maintenance, and utilities.

4. Promotional Expenses

Any cost you bear for promoting your content, including advertising, social media promotion, and website development, is generally deductible.

Technology and IT Services Industry

With the rapid growth and innovation in this field, businesses often face significant expenses when it comes to investing in new technology and IT services. However, you can utilize several tax credits and deductions available to help ease the financial burden.

1. Software Development Costs

You can deduct the cost of creating and improving your software offerings, including coding, testing, and debugging.

2. Computer Hardware

In addition to the cost of software and online services, you can deduct the cost of computers, servers, and other hardware necessary for business operations.

‍3. Cybersecurity Enhancements

Investments to protect digital assets and sensitive data, such as cybersecurity software and consulting services, can be deducted as business expenses.

Healthcare Industry

The healthcare and wellness industry has been steadily growing over the years. With this growth comes the opportunity for businesses in this sector to take advantage of certain tax credits and deductions.

1. Medical Equipment and Operation Costs

Expenses related to acquiring and maintaining medical equipment is deductible. Additionally, you can deduct the cost of operating your healthcare facility, including rent, utilities, and administrative costs.

2. Professional Liability Insurance

Clinics, hospitals and businesses operating in the healthcare industry can deduct the costs of professional liability insurance premiums.

3. Electronic Health Records (EHR) Systems

While healthcare providers can decide to implement an EHR system, federal law strongly encourages it in the United States. Medical professionals and businesses can deduct the costs associated with acquiring and maintaining these systems.

Professional Services Industry

Whether you are a self-employed individual or business owner in this industry, you may be eligible for various tax credits and deductions that can help reduce your overall tax liability. 

1. Professional Research Tools

The purchase and maintenance of research tools, software, and databases can be deducted.

‍2. Professional Liability Insurance

Insurance premiums paid to cover professional liability are tax deductible.

‍3. Continuing Education

To survive and thrive in a competitive industry, you must constantly upskill yourself and your employees. Plus, you can deduct the expenses for professional development, including seminars, courses, and workshops. 

Maximize Your Tax Savings with doola

Tax credits and deductions require you to accurately track your business expenses throughout the year, which is a tiresome process. However, the benefits are too big for you not to do it.

Thankfully, doola can take care of all this administrative legwork for you.

Our bookkeeping solution ensures that all financial transactions are properly recorded and maintains the receipts and records associated with each expense. This will help you claim as many tax deductions as possible and file a better return when tax time comes.

With the help of our tax experts, you can rest assured that your business is not overpaying taxes and has taken full advantage of all potential savings.

Ready to see the difference we can make? Book a demo today!