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A tax credit is an amount of money that a person or company can subtract directly from taxes owed to the federal and/or state government. Unlike deductions, which decrease the amount of taxable income, tax credits reduce the amount of tax owed. The value of a tax credit depends on the nature of the credit; certain types of tax credits are granted to people or businesses in specific locations, classifications or industries.
Tax credits are more favorable than tax deductions because they actually lessen the tax due, not just the amount of taxable income. They are a dollar-for-dollar reduction of the income tax you owe. For example, if you owe $1,000 in federal taxes but are eligible for a $1,000 tax credit, your net liability drops to zero and you pay nothing.
There are a wide variety of tax credits. Credits are designed for families and dependents, homeowners, health care, businesses and education. The government often dangles a tax credit to motivate certain behaviors and activities that might be beneficial for the environment, the economy or some other cause.
Tax credits are also a way to provide a tax break for low- and middle-income taxpayers who need it most.
Each credit has its own rules and eligibility requirements. The Internal Revenue Service (IRS) requires specific forms and documentation to substantiate the amount claimed.
In addition to federal tax credits, many states that impose an income tax on residents and businesses often offer tax credits. For example, if you live in California, you may qualify for a renter's credit if you pay rent for your housing, your income is below a certain amount, and you meet other state requirements. Most states and the District of Columbia offer credits that mirror federal tax credits.
One of the most complex areas of the IRS code, if not the most complex, is Section 41 -- The Credit for Increasing Research Activities. This is commonly called the Research and Development Tax Credit, or the R&D credit. It was designed to incentivize U.S. technological innovation and keep American businesses from going overseas. (We'll investigate the R&D credit as it specifically pertains to oil and gas in our next article in BIC.)
Because the laws are constantly changing and the rules can be quite complex, people and businesses seek expertise in capturing tax credits. Certified public accountants (CPAs) and tax lawyers are well educated and specialize in offering advice on tax and financial matters. Additionally, a CPA or tax lawyer is eligible to represent you before the IRS in an audit, whereas most others are not.
In short, an expert such as a CPA or tax lawyer can save a taxpayer time, money and headaches.
Some tax credits require even further specialization. Many businesses use a CPA, a trusted business partner they rely on for day-to-day needs. In this way, they are like a family doctor: They use their vast technical knowledge to take care of a company's day-to-day issues and provide solid advice on nearly all the concerns that directly impact the organization's overall condition. However, even though your family doctor is a trusted medical expert, they probably would not be your first choice if you needed heart surgery. Instead, you would probably seek out a world-class cardiologist with years of specialized education and experience.
If you were to need heart surgery, you would not replace your doctor with the cardiologist. Rather, the two work in harmony to provide the best care.
Get expert advice on tax credits
Do you think your business might qualify for a tax credit but you're just not certain? Well friend, you're not alone. Incredibly, billions of dollars in tax credits go unclaimed each year. This is money that should be in your bank account instead of the government's treasure chest.
Know that ABGi is the largest global network of experts specializing in tax credit optimization. Our teams combine years of experience and diverse legal, accounting, scientific and engineering backgrounds to maximize tax credit claims, tax deductions and other financial benefits so you can increase your bottom line.
We'd be glad to speak with you and help you get the credit you deserve.
For more information, visit www.abgi-usa.com, or contact Greg Miller at (281) 732-1848 or greg.miller@abgi-usa.com.
