Tax Credits vs. Tax Deductions: What’s the Difference?
- Brian R. Schobel, CPA
- 13 minutes ago
- 2 min read
If you’re a small business owner, tax season can feel overwhelming—especially when terms like tax credits and tax deductions get thrown around. They sound similar, but they work very differently. Knowing the difference can help you keep more of your hard-earned money.
Tax Deductions: Lower Your Taxable Income
A tax deduction reduces the amount of income you’re taxed on. Think of it this way: deductions shrink the size of the income pie before taxes are calculated.
Common small business deductions include:
Office supplies and equipment
Business mileage or vehicle expenses
Home office expenses (if you qualify)
Professional services like accounting or legal fees
Example: If your business earns $80,000 and you claim $10,000 in deductions, you’re taxed on $70,000 instead.
Tax Credits: Reduce Your Tax Bill Dollar for Dollar
Tax credits are even more powerful because they reduce the actual tax you owe. Instead of lowering income, credits lower the final bill.
Examples of credits small business owners may qualify for:
Credits for providing employee health insurance
Research and development (R&D) credits
Credits for energy-efficient improvements
Example: If you owe $5,000 in taxes and qualify for a $1,000 credit, your tax bill drops to $4,000.
Key Differences at a Glance
Deductions reduce taxable income
Credits reduce tax owed
Credits are usually more valuable, but harder to qualify for
Take Action: Plan Ahead
The best tax savings happen before you file. Track expenses year-round, understand which credits apply to your business, and don’t wait until the deadline to think about strategy.
When in doubt, ask your accountant—a quick conversation now can mean big savings later and fewer surprises when tax time rolls around.
Instagram: https://www.instagram.com/bookkeepingbrian