Understanding Important Tax Terms
As a business owner, staying on top of your tax obligations is one of the most important items to do. However, with the complexity of the U.S. tax code and new tax laws and regulations coming into effect each year, keeping up with the legal tax language can be a challenge.
Thankfully, Tobin & Collins is here to help you navigate important tax terms. By understanding these words and phrases, you’ll be well equipped to read up on tax issues, discuss key tax terms with your accountant and financial team, and ensure tax season is stress-free.
For a business, your taxable income represents the amount of profits (revenue minus costs) that are subject to federal and state tax. Using shrewd accountants (and accounting practices), you can find ways to reduce your taxable income based on the costs you’ve incurred. As a result, you’ll be able to lower the final amount you owe Uncle Sam come tax season.
The way to reduce taxable income is known as tax deductions. When totaling tax deductions, you’re looking for costs your business incurred that should reduce your considered profit and thus reduce your taxable income.
Common tax deductions include:
- Office supplies
- Materials for your goods
- Software for your business
- Professional services such as tax preparation professionals
Any costs you’ve used can potentially be tax deductions, so it’s essential to keep thorough records and receipts to maximize your deductions when preparing taxes.
Net Operating Losses
If your costs, or deductions, exceed the amount you’ve taken in as revenue, you may benefit from not owing taxes this year since you did not make any profit. In addition, you can likely carry over net operating losses into future years. This means if you have excess losses in one year, the following year, you can potentially include those losses to reduce your taxable income and reduce your taxable burden. This is why businesses must keep accurate and thorough records, as it only serves to benefit you.
Tax credits sometimes get confused with tax deductions, but the difference is that tax credits represent direct reductions in taxes that you owe. Common business tax credits include:
- The general business tax credit
- The credit for small employer health insurance premiums
- Alternative motor vehicle credits
When paying your employees, withholding represents the amount of their wages you don’t pay directly to them and instead send directly to the government for their tax burden. As an employer, it’s your job to do this withholding based upon the tax forms you have employees fill out. Employees count on you to report it to the government and give them a summary of the amount paid vs. withheld.
Depreciation represents the loss in value of a tangible asset owned by a business, such as machinery, vehicles, property, or otherwise. The value lost to depreciation can be considered a cost that reduces the taxable income and the business’s tax burden.
Tobin & Collins: NJ Certified Public Accountants and Financial & Business Advisors
Taxes can become complex for businesses to navigate, especially as they grow, offer new products, and take on new employees. To ensure your business isn’t overlooking any opportunity for reducing its tax burden, it’s vital to consult professionals who understand and follow the latest developments in the U.S. tax code.
Tobin and Collins can help you navigate and understand the U.S. tax code. Our tax consultants are ready and able to assist you, so get in touch with us to get started today.