Often referred to as “write-offs”, Tax Credits and Tax Deductions are benefits that a taxpayer receives in a given year in order to reduce taxes. Although similar, Credits and Deductions are two separate items.

 

For businesses, Deductions are defined as ordinary and necessary expenses incurred. For individuals, Deductions can be either personal or professional in nature. Deductions are either fully or partially eligible for application on the tax returns, based on the actual dollars paid for the particular expense. The end goal for Deductions to both taxpayers is to reduce Taxable Income.

 

In comparison, Tax Credits are direct reductions to total tax. For example, Credits are reported and determined after Deductions have been applied. Credits are essentially rewards or incentives provided by the IRS for undertaking action in a particular activity (i.e. Education Credits, Research and Development Credits, Entertainment Credits). Credits are also typically subject to strict calculations, making the total dollars of expenses paid for an eligible activity not necessarily eligible for the total rewarded Credit. However, Credits when compared to deductions, are direct reductions to either Taxable Income or Total Tax and they are often not limited to certain income benchmarks.

 

Whether you are filing a personal or business return, tax credits and tax deductions can drastically impact your tax liability. Missed opportunities or improper utilization of credits and deductions can have a significant financial impact on your overall dollars owed to the government.

 

The tax professionals at PeachCap can help all individuals and businesses understand whether or not they qualify for unique credits and deductions.