The Shoeboxed Blog

What Is A Refundable Tax Credit?

One of the most confusing terms to those new to the tax game is refundable tax credits.

Most people have heard of refundable tax credits but are unsure how they work or how they can be of benefit.

We’re here to help explain and clear it up for you!

This article will give you the simplest definition of refundable tax credits and list the most common credits, and the criteria for receiving them..

Refundable tax credit definition

Firstly, let’s quickly go over what a tax credit is.

A tax credit directly reduces the amount of tax owed by a taxpayer. It’s an amount of money that is subtracted from the taxes they owe. There are two main categories of tax credits: refundable and nonrefundable. A refundable tax credit allows you to receive a payment from the IRS if your credits exceed your tax liability. On the other hand, a nonrefundable tax credit doesn’t generate a refund and can only reduce your taxes owed to $0.

To better visualize how a refundable tax credit works, take a look at the following example. Let’s say you owe $2000 in taxes this year but you’re also eligible for $3000 refundable tax credits. That means your $2000 tax liability will be eliminated, but you will also get a $1000 refund from the IRS. Yes, you can even ‘earn’ some money with refundable tax credits!

What tax credits are refundable?

Now that you understand how beneficial a refundable tax credit can be, let’s check out the most common refundable tax credits that you might be eligible for:

1. Child Tax Credit (CTC)

The CTC is a federal program that helps American families make ends meet, easing the costs of raising children, and to help prepare for their children’s future. Under the American Rescue Act of 2021, families could receive $3,000 per qualifying child under the age of 6 and $3,600 for those aged 6 to 17.

2. Earned Income Tax Credit (EITC)

EITC is a refundable tax credit for low- to moderate-income working taxpayers and couples, particularly those with children. The EITC benefit amount is determined by the recipient’s income and the number of children. For example, if you have three or more qualifying children and meet all other conditions, you can get a refund of up to $6,728.

3 . American Opportunity Tax Credit (AOTC)

AOTC helps students or their parents (if the student is dependent) pay for the first four years of education after high school with a credit of up to $2,500. One thing to note about this tax credit is that it’s only partially refundable—40% is refundable and is capped at $1,000, while the remaining 60% is nonrefundable.

4. Premium Tax Credits (PTC)

PTC is a refundable tax credit that helps low- and moderate-income people and families afford health insurance through the Health Insurance Marketplace. A sliding scale is used to determine the amount of your premium tax credit: those with a lesser income are given greater credit to assist in offsetting the cost of their insurance.

Want to know more about finance?

If you’d like to explore more entrepreneurship stories, get simple explanations of complex financial terms, or learn about the best productivity tools, find more posts like this on the Shoeboxed blog.

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C Corp Filing Requirements: Everything You Need to Know

There are many requirements in filing a federal income tax return for your small business, depending on your business structure. Each type of entity requires a different tax form and filing requirements to report your business income and expenses. This article will bring you an overview of C corporations and C corp filing requirements.

What is a C corporation?

C corporation is a form of business organization in which the owner (or shareholders) are taxed separately from the business. Shareholders are the corporation’s owners, each owning a fraction of the company. A shareholder may own a share of the stock of the corporation. C corporations raise funds by selling these shares.

The C corp entity is taxed on income earned, whereas shareholders are taxed on individual income. A C corporation pays the same tax on its revenue as a person would on their annual salary—a flat 21% on operating earnings.

Because shareholders in a C corporation are wholly separate from the corporation, income delivered to stockholders of profits or other payments is paid at the shareholders’ rates, leading to “double taxation.”

How are C corps taxed?

C corps must first pay corporate taxes. Investors then pay taxes on profits received by the corporation. This tax rule is also known as double taxation, meaning that income taxes are paid twice on the same income source. Double taxation occurs when income is taxed at both the corporate and personal levels.

Though the possibility of double taxation is frightening, there are many ways that business owners can lower the taxes. For example, C corps can deduct its operating costs from its revenues, lowering its taxable income. So, if a corporation earns $100,000 in revenue but spends $65,000 on operating expenses in a financial year, the company’s tax liability is only $35,000, not $100,000.

Furthermore, C corp owners only pay their taxes if the corporation pays them profits. So if a C corporation decides not to sell stock and retains profits instead, it can also avoid double taxation.

All C corps must file and submit Form 1120. This report provides the IRS with information on the corporation’s revenue, gains, liabilities, deductions, and income tax payable.

C corp filing requirements that you need to know

If you decide to run your business as a C corporation, here are the critical C corp filing requirements that you must know:

Choose a business name. Your C corp must be a legal company with a legal reputation established with the authorities. Once you have filed your business as a C corp, you mustn’t operate under another registered name.
File a certificate of organization. Before starting your business as a C corporation, you must file a certificate of organization with the tax agency in your country or state and pay an application fee. The agency will mail you a registration article once you have correctly registered.
Get an Employer Identification Number (EIN) and banking information. The IRS will only issue companies with an Employer Identification Number (EIN) and a commercial bank account.
Make a business agreement. Each entity level has different operating rules and regulations. A C corp’s rules identify its shareholders, restrict the number of shareholders, and establish financial distribution criteria.
Have a business representative. A C corporation must have a local representative who handles legal and tax paperwork on the company’s behalf.
Establish a board of directors. A C corporation should have an executive board of directors voted by the company’s shareholders. The board members are responsible for managing the corporation, making major business decisions, hiring, firing, managing officers, etc.
Give out stock certificates. Shareholders are C corp owners, and they should be issued company shares indicating their ownership position in the corporation.

It’s also important to keep up with changes in tax rules and regulations, which can occur at any level. This can be particularly challenging if your company has multiple locations in different states, requiring you to follow tax rules in each jurisdiction.

The bottom line

A C corporation is the right corporate type for your company if you want to attract many investors, work with international partners, or sell internationally. If you choose to file your business as a corporation, it’s extremely important to be aware of C corp filing requirements, keep yourself updated on the tax rules and tax changes, and keep in hand the most suitable accounting tools to help your business prepare and file taxes accurately.

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All You Need to Know About Outsourced Accounting Services

Not every business owner has the time and energy to manage every aspect of a business. It’s understandable if you are not able to handle all of the responsibilities of running a business. In such cases, outsourced services have become a more common solution for small businesses.

This article will introduce you to outsourced accounting services, one of the most popular types of outsourced services, and help you decide whether your business needs to use outsourced accounting services or not.

What are outsourced accounting services?

Outsourced accounting services are a third party that provides a full accounting department experience for small businesses.

An outsourced accounting service handles day-to-day transactions, accounts payable, accounts receivable, financial statements, taxes, payroll, financial reports, and many other accounting tasks like a regular accounting department.

Most outsourced accounting services provide a wide selection of packages; you can decide whether you also need a bookkeeper or an auditor. To remain competitive in the market, outsourced accounting service providers must constantly enhance their abilities and certifications. You can rest assured that your books are handled well by finance professionals.

However, keep in mind that even if you hire an experienced and qualified accountant, you’ll still need to be involved in authorizing invoices, making payments, evaluating timesheets, etc.

The benefits of outsourced accounting services

Cost-saving

Hiring an outsourced accounting service is often cheaper and more cost-effective than hiring in-house staff to handle the finance function.

By outsourcing, you can save your money on costs that hiring an employee would generate, such as paid leaves, health insurance, retirement, vacation, bonuses, and sick days. You just pay for what you require.

Furthermore, accounting and bookkeeping services are charged on an hourly basis. It means that you can increase or decrease the number of hours without interruption.

Time-saving

As your company expands, you’ll realize yourself focusing more on the business’s core value rather than handling administrative tasks.

As a result, using outsourced accounting services allows you to concentrate your attention, energy, and resources on developing a business strategy. This will then help you increase the business revenue and enhance the relationship with your customers.

Reduced hiring processes

The hiring process requires many resources. For example, it takes time to develop a recruitment policy, interview, and expenses for onboarding and training new employees. This process usually costs your business a significant amount of time and money and distracts you from other important tasks.

Outsourced accounting services can help you eliminate hiring and training costs as the service providers already did it for you. All you need to do is choose the most appropriate package for your business, sign the contract, and pay for the plan.

Accounting scaling made simple

Outsourced accounting service providers can expand their services dramatically in order to compete with their competitors.

In particular, if your bookkeeping and accounting activities require more than an accountant to handle, you can easily demand more staff from the service agent.

Automation technologies

Most outsourced accounting services have adopted accounting automation technologies to save time. It also reduces human errors and helps business owners eliminate hazards.

Moreover, automation technologies will lower the likelihood of internal fraud. You’ll have multiple pairs of eyes on your transaction processing and reports, which provides increased internal controls. Having a dedicated team with expertise in accounting best practices will be far more likely to spot an anomaly than one person who’s probably overburdened and overloaded with work.

When should you consider using outsourced account services?

Outsourced accounting services are most effective when:

A small company doesn’t need a full-time accountant, but it demands someone with higher accounting knowledge and skills than a regular office staff or secretary.
A business that can’t afford to hire a full-time accountant with the necessary skills.
Temporary services are required, such as extra assistance with end-of-year reports or when a full-time worker is on maternity leave, sick leave, etc.

The bottom line

Choosing outsourced accounting services is not just about handling your accounting activities. It also helps you drive profits, improve cash flow, and grow your business in the long term. You can always discuss with the service provider to design a package that suits your business needs and budget, brings you the peace of mind, efficiency, and actionable financial intelligence you need to succeed.

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