Tax deductions are a crucial part for small businesses, and it helps the owners to reduce the income tax bills. To deduct taxes, we can show all our expenses related to business. This article will discuss the points that might help small business owners lower their income tax bills issued by the government. The owners could get the benefit by reducing taxes only. By legally writing off certain operating expenses, your business may owe less in taxes, sometimes much less.
We have prepared a list for you in the next part of the article accordingly to prepare your tax return as not all expenses are accounted for write-offs.
Here’s everything you need to know about maximizing tax deductions for your small business:
- Tax deductions used as Business expenses
- How do business write-offs work?
- What is a 100 percent tax deduction?
- What is a 1099 Tax form?
Tax deductions used as Business expenses:
Small businesses could consider the following business expenses to deduct tax while filing income tax:
- Car expenses and mileage
- Office expenses include rent, utilities, etc.
- Office supplies include computers, software, etc.
- Health insurance premiums
- Business phone bills
- Continuing education courses
- Parking for business-related trips
- Business-related travel expenses include flights, rental cars, hotels, etc.
Top Tax Deductions for Small businesses:
Here are the write-offs discussed below small businesses would use. Small companies should use these expenses, not for personal use. The top tax deductions used for small businesses include:
- Transportation (car) use for business purpose:
Transportation used for business purposes only can wholly be written-off, including maintenance and performance of the vehicle. But if the vehicle is used for personal purposes, you have to keep a record of vehicles used for business purposes such as gas and tolls paid. The personal use of a vehicle is excluded from business tax records. You can avoid the need to keep track of gasoline and tolls paid, etc., instead claim the mileage used for business driving as per the standard mileage deduction.
Both methods can be used as the actual expense method and calculating mileage used as per standard mileage rate.
- Salaries/Wages and Benefits:
Salaries, wages, bonuses. Commissions and tax infringeable benefits you pay your employees are tax-deductible expenses. You can offer your employees paid vacations before the tax return you may receive. The owner, sole proprietor, partner, or LLC member are not employees and are not paid salaries or wages.
- Business Meals:
Business meal expenses are 50% deductible from taxes. The food and drinks purchased for a business meal are noted by their date, time, location, which business persons were present, and the meal’s total cost. It would be more convenient if you keep the receipt of the meal and jot down other points on the receipt, so you have the proof to write-off the expense.
You can write-off the depreciation cost of an asset used in operating your business by assessing its useful life assets like computers, tables, chairs, machinery, etc. The depreciation expense is written-off. It is not just deductible for the single tax year; instead, it uses the asset’s useful lifetime, which helps the business in long-term investment get a significant expense reimbursed.
- Travel expense for business purposes:
All travel expenses, including airfare, tips, dry cleaning, food, hotel, etc., used for business purposes are entirely tax-deductible. However, the trip should only be for business purposes. The place you are traveling to should be away from your tax home, and the stay for one day is also necessary; if these points are applicable only, this expense will be qualified for a tax deduction.
- Telephone and internet expense:
If your business depends mostly on the internet and the telephone’s usage is also excessive, you can write-off these expenses. If you use the internet and telephone for personal and business purposes, you have to mention only the usage cost for business purposes.
- Moving expenses:
If you require moving related to your business from one place to another, those expenses are tax-deductible. You may be able to deduct the expense from your taxes fully. The moving of supplies, inventory, machinery, etc., qualifies for moving expenses, but the new job location should be 50 miles away from the old job location.
- Startup costs:
You can deduct as much as $5000 as your startup cost expense for starting a new business. The expenses associated with a new startup venture are marketing of the business, travel, training costs, finding suppliers, etc.
- Advertising and Marketing:
You can fully deduct the expenses used for advertising, promotions, and marketing of the business. Everything that falls under the category of advertising and promotion, such as logo design, business card printing, website design/development, social media marketing campaign, etc. a lot of things cover-up and all are 100% tax-deductible.
- Mortgage Interest:
Deduct the mortgage interest payments you make for the mortgage loan to maintain, improve, etc., for your home if you are using your own home for business purposes.
- Machinery or Equipment rent:
Fees paid to lease or rent items used in your small business are fully deductible.
Educational Expenses that are for the profit of your business are fully tax-deductible. If you want to enhance your skills and want to gain more expertise and enroll in a specific educational course related to your business, you can use those expenses to write-off your tax. Expenses include books, seminars, transportation costs (for going to the institution), etc., that would be tax-deductible. But if you are going for education to build a new career path that does not relate to your business, it is not tax-deductible.
- Bank Fees:
The charges that the bank takes on an overdraft, transferring fund fees, annual credit card fees, etc., on your business bank account and credit are the expenses you could write-off from your expenses.
- Interest on business loans:
The money you borrow from the bank in terms of loans to operate your business activities and the interest charged on that loan paid by you is tax-deductible.
The supplies you use related to your business, including pens, papers, computer software, etc. it is treated as an expense and are tax-deductible.
- Home office expenses:
According to your business, if you are using your home as a home office, you can deduct some amount as a business expense. Your home should be the principal place of your business to claim the tax deduction.
You can deduct the expense directly or indirectly in the form of painting your house for office use, interest you pay on taking mortgage loans, etc.
Fully deduct electricity for your facility. Other utility expenses include your mobile phone charges.
- Maintenance and Repairs:
Maintenance and repairs associated with your business are tax-deductible but replacing an old roof with a new one is not deductible with immediate effect. It depends if you have a home office, then you can deduct some portion accordingly.
- Retirement plans:
If you invest in a retirement plan for your own and your employees, that expense will be considered deductible from your income tax file.
If you borrow money to make investments, you can write off the interest paid on loan. You can deduct the interest up to the point that it matches what you earned in investment income.
- Legal and Professional fees:
The service fee that you pay for legal purposes to the accountant, bookkeepers, tax preparers, etc., are the expenses you can write-off while filing your tax return. If you use specific software for bookkeeping and accounting, still the tax deduction is applicable. It’s only tax-deductible if these activities are related to your business.
- Business Insurance:
You can deduct the cost of your business insurance on your tax return. If you have a home office or use a portion of your home to run your business, you can deduct your renter’s insurance costs as part of your home office write-offs.
- Rental Costs:
The rental cost you pay for the place you rent for running your business or the equipment you use for business purposes are tax-deductible expenses.
- Child and Dependent care:
If you bear the costs for your child care or a dependent like a spouse/elderly who cannot work or be disabled, you qualify for a tax deduction.
- Client and Employee Entertainment:
Going out with your business clients for business purposes is tax-deductible. If you discuss things with your clients in a business meeting and entertainment gets involved in a business setting for only business purpose. You can deduct 50 percent of the cost of these entertainment expenses. You can also deduct as much as 100 percent of the cost of social events held for your employees.
- Taxes and Licenses:
You can deduct various taxes and licenses related to your business; this may include:
- State income taxes
- Payroll taxes
- Personal property taxes
- Real estate taxes paid on business property
- Sales tax
- Excise taxes
- Fuel taxes
- Business licenses
How do Business write-offs work?
Business write-offs are used to lower taxable income, which you owe to the government, and businesses file taxes to get a tax return. If you don’t know how to reduce your taxable income, hire an expert who can help you apply tax deductions.
What Is a 100 Percent Tax Deduction?
A 100 percent tax deduction is a business expense that you can claim 100 percent on your income taxes. For small businesses, some of the expenses that are 100 percent deductible include the following:
- Furniture purchased entirely for office use is 100 percent deductible in the year of purchase.
- Office equipment, such as computers, printers, and scanners are 100 percent deductible.
- Business travel and its associated costs, like car rentals, hotels, etc., are 100 percent deductible.
- Gifts to clients and employees are 100 percent deductible, up to $25 per person per year.
- If you’re self-employed and pay your health premiums, you can deduct those at 100 percent.
- Your annual business phone bills are 100% deductible.
What is a 1099 tax form?
Income received other than an employer from another entity is recorded in 1099 form. The payer has to fill this form and send a copy to you and the Internal Revenue Service (IRS). So independent contractors, freelancers, and self-employed workers use the 1099 form.
In the end, we would say it is crucial to keep track of your tax deductions, and you get the advantage of minimizing your taxable income, which is profitable for your business.