Tax
Definition
A tax credit is a direct, dollar-for-dollar reduction of your tax bill. Unlike a tax deduction (which reduces taxable income and saves taxes at your marginal rate), a $1,000 tax credit reduces taxes owed by exactly $1,000 — making credits significantly more valuable than equivalent deductions.
Tax credits come in two main types: non-refundable credits reduce liability to zero but not below (no refund beyond what you owe), and refundable credits can reduce liability below zero, generating a refund. Common business credits include the R&D Tax Credit (Section 41 — available to software, manufacturing, and any business with qualified research activity), Work Opportunity Tax Credit (WOTC — for hiring from certain target groups), and energy efficiency credits. Common individual credits include the Child Tax Credit, Earned Income Tax Credit (EITC), American Opportunity Tax Credit (education), and residential energy credits. Tax credits are claimed on the return and often require specific forms, documentation, and substantiation — particularly the R&D credit, which requires contemporaneous project records.
Most small businesses and startups don't claim all credits they're entitled to — the R&D Tax Credit in particular is massively underutilized by software companies and manufacturers. A tax advisor can identify credits you're missing, document qualifying activities, and file amended returns for prior years if credits were previously unclaimed.