Demystifying Deductions and Tax Credits in Simple Terms
Navigating the world of taxes can be a head-scratcher, leaving many of us wishing we did not have to deal with it at all. However, while taxation may seem complex, grasping the fundamentals can yield substantial benefits for individuals and businesses alike.
In this blog post, we are going to explain the main differences between deductions and tax credits, which are important when you talk about taxes. Understanding these things can make dealing with taxes a bit easier.
Understanding Deductions
In the business world, deductions refer to expenses that are eligible for a deduction against your revenue. To put it simply, let's say your business earns some money from sales (we will call it "x" amount). You can take away different costs from this "x" amount to find out your real income that you have to pay taxes on. Imagine deductions as a legal way for businesses to lower the money they get taxed on. It is like a money-saving tool for businesses.
Common Deductions for BC Businesses
👉🏻 Business Expenses: This includes all costs essential for running your business, such as rent, office supplies, payroll, advertising, utilities, and so on.
👉🏻 Supplies: All expenses that were indirectly used by your business to operate.
Why Deductions Matter?
It is always important to include your deductions as it will have the biggest effect on your tax owing amount. For instance, if your business earned $50,000 but incurred $10,000 in expenses, your taxable income would be $40,000. This is beneficial as you are taxed on the lower amount of $40,000 instead of the full $50,000 without the deduction of expenses.
💡 Note: Keep all receipts for your deductions; the CRA requires supporting documentation to be retained for six (6) years from the deduction year.
Unpacking Tax Credits
Tax credits are a bit different from deductions. They directly change how much tax you have to pay by taking a percentage of the money you have to pay taxes on. So, tax credits are like a helpful tool when you're planning your taxes.
But here is the thing: tax credits are pickier than deductions. There are not as many of them, and most of the time, they come from the government.
Common Credits for BC Businesses
👉🏻 Training Credits: For employers and apprentices participating in eligible apprenticeship programs, administered through SkilledTradesBC.
👉🏻 Air Quality Improvement Tax Credit: Corporations can claim 25% of eligible expenses related to HVAC (heating, ventilating, and air conditioning) system purchase or upgrade.
How Tax Credits Work
Tax credits are tied to specific activities or investments. To qualify, your business must meet specific criteria and eligibility requirements to claim the credit against its tax liability.
Tax Credits versus Deductions
💡 Timing and Impact:
Tax Credits: Applied after calculating the tax amount owed, directly reducing taxes owed, offering immediate and substantial impact on your tax liability. They lower the final tax bill itself.
Tax Deductions: Used at the beginning of the process to calculate taxable income, indirectly affecting taxes by lowering taxable income, which determines taxes owed. They reduce the base upon which your tax rate is applied.
💡 Eligibility:
Tax Credits: Typically associated with government-supported activities or investments; eligibility criteria must be met before the application of the credits.
Tax Deductions: Tied to business expenses, with eligibility based on nature and purpose.
Our Expertise in Simplifying Finances for You
At NexGen, we know that dealing with finances can be confusing. But do not worry, we are here to help make it easier. As a top-tier bookkeeping firm, we have the skills and tools to make sure your business succeeds.
👉🏻 Tailored Solutions: With our two decades of experience, we understand that every business possesses its unique financial requirements. Our team knows what businesses like yours require, and we'll guide you on the right financial path.
👉🏻 Comprehensive Guidance: Our extensive experience allows us to provide you with comprehensive guidance. We offer informative sessions designed to equip you with the knowledge you need to make informed decisions regarding your financial management.
👉🏻 Help When You Need It: If you ever get stuck, do not worry. Our experienced advisors are here to help. We can answer your questions and find the best solution for your money matters.
As bookkeeping experts, we will show you what makes us different and help you pick the right choice for your financial goals.
Getting help from us is simple. Just GET IN TOUCH with our team, and will set up a session that works for you and your business. Trust our team with over twenty years of financial know-how to guide your money decisions.
(*) This article is intended as general information only and is not to be relied upon as constituting legal, financial, or other professional advice. A professional advisor should be consulted regarding your specific situation.
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