Cost of goods sold and capital expenses for long-term assets are some types of business expenses that qualify as tax deductions. Capital expenses are such as equipment, company car, cost of improvements, and startup costs. These expenses go into making, shipping, and selling products, and the overall running of the business. This could also include paying employees, and non-employees, cost of leasing, utilities, office expenses, and supplies.
You can reduce your company’s tax bill by incorporating as many qualified tax deductions as possible. We’ll show you 10 of the widely known deductions and how they work.
But first, let’s find out how tax deductions work in businesses.
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How Do Tax Deductions Work For Businesses?
Startups can accept tax deductions for all necessary and ordinary expenses for running the business for profit. But there are different kinds of expenses that are deducted differently.
Since personal expenses are not deductible in business, it is important that you separate them from business expenses. For instance expenses such as commuting between your business location and your residence is considered personal and not deductible.
10 Tax Deductions for Small Businesses
Use of a Truck or Car for Business Purposes
You can harness the IRS standard mileage rate or by the deduction of actual expenses to determine expenses related to vehicle use in business.
There is usually a change in standard mileage rate every year, so you must find out what the current one is. Check out both actual mileage and standard mileage to see which one is most suitable for your business.
You must however take note of certain restrictions. For instance, if you have depreciated the vehicle cost in the past 48 months, you’ll not be eligible for the standard mileage rate.
Legal and Accounting Fees and Tax Preparation
Professional services such as that of an attorney for legal service or an accountant or bookkeeper, or a professional to handle your tax returns or provide you with tax advice are deductible.
Accounting or legal fees cannot be deducted for services in helping with the business startup or for asset acquisition. But they can be included in the cost of your business or asset. In addition, if an attorney or accountant is engaged in your tax return or others that include both personal and business-related services, the personal part of the fee is not deductible.
Mobile Phones, Computers, and Tablets
The cost of acquiring necessary reference materials and computer software and hardware can be deducted. It is no longer necessary to depreciate these items so long the cost does not exceed $2,500.
Only the part of your iPad that goes into your business is also deductible. Tablets, computers, and related software and hardware resources are not regarded as listed property as of the tax year of 2018. But they must still be used towards business at least 50% of the time.
Marketing and Advertising Expenses
You can deduct expenses such as marketing, promotion, or advertising which are purposed at helping your business gain more visibility. However, business owners sometimes think that the cost of driving around with an ad for your business on your car should also be deducted, but this is wrong.
While you can deduct the cost of the ad on your car, you can’t deduct the cost of driving around with the ad on your car.
Premium costs of expenses surrounding the purchase of business equipment or group health insurance for you as a business owner and your employees can be deducted. Other types of insurance premiums that can be considered for deduction include:
– Life insurance for employees and officers, if the business isn’t a beneficiary.
– Workers’ compensation insurance under state laws.
– Business interruption insurance if your business had a fire incident that led to it being shut down.
– Insurance for business expenses coverage if a business owner is disabled.
Interest on Business Debts
If you have an active business loan or you have a building newly acquired for your business, you probably have interest expenses. Startups with a $25million annual average gross receipt or less for a period of thirty-six months can receive all interest expense deductions without limit. Interest rate deductions for bigger businesses from 2018 are limited to the sum of:
– Business interest income
– 30% of the company’s adjustable taxable income
– Floor plan financing interest.
Leasing Equipment, Office Space, or Business Vehicle
The expense that goes into the leasing of equipment or office space is deductible yearly but only for the expense for that particular year. This implies that you cannot prepay a lease for an extra year and still receive the tax deduction for the second year on the return for the current year.
Depending on the lease type, you can deduct the leased vehicle cost for your business. If the lease has been active for less than a year, the cost can be deducted each year for the term of the lease.
The other lease type which is a longer-term lease similar to that of purchase is the capital lease. This type of lease must be depreciated.
Most business vehicles are regarded as listed property. And that means that you have to distinguish between personal use and business use, and will only be allowed to deduct the part of the lease that is connected to business use.
If you pay workers, you can deduct the expenses that go into salaries and wages and other employee-related costs that are used in acquiring uniforms, tools, and equipment.
You can also deduct costs for employment taxes which include compensation for your workers, unemployment tax, and FICA tax for the employer part of Medicare taxes and Social Security.
The part of employee benefit costs deducted is done in two different places on your business tax return. You will need to separate pension and profit-sharing plans from costs for other benefit programs before they are entered on the return.
Business Travel and Meal Expenses
When expenses for business involve travel away from your original business location or workplace, then they are deductible. These expenses must be solely geared towards business activities. You can deduct expenses that go into lodging, ride-sharing or taxis, transportation, and miscellaneous expenses such as tips and laundry services.
You can’t deduct expenses on entertainment any longer, but you can still deduct expenses on meals. You can deduct most meals by up to 50%, and they must be proven for business purposes. You can also deduct expenses spent on meals while traveling by up to 50% rate.
Office Supplies and Office Expenses
You are most likely going to require the usual office supplies such as pencils, pens, staplers, paperclips, and so on. You can deduct all the expenses that go into these items freely for business tax purposes.
But then, carefully distinguish between office supplies used in making and shipping items and include these in the cost of goods. You can deduct other expenses such as the cost of internet hosting office expenses, desktop computers, office phones in the year of purchase especially when they don’t cost less than $2,500
If the office items you got are useful beyond 12 months, like business equipment, books, and professional instruments, they must be depreciated with time.
In conclusion, many business deductions are accompanied by limits, qualifications, and restrictions. Talk to a licensed tax professional who can provide you with all the required information you need when you are set to have your yearly taxes done. Also, if you have a relatively simple tax return, you may be able to use business tax preparation software.
Create an electronic or paper trail for your deduction claims. Reflect the exact amount of expense, the date, and the purpose of it in your business, in case there is a need to explain the deduction to the IRS. It doesn’t have to be a tedious process. It can be as easy as documenting your receipts, credit card statements, bank statements, and making notations on them to keep a record of the essence of the expense.
Frequently Asked Questions (FAQs)
What’s The Difference Between Business Tax Credits and Tax Deductions?
Tax credits and tax deductions are of different value and also work differently. Tax credits directly reduce taxes dollar for dollar, and their full value can be claimed, but are not able to reduce the tax bill of a business less than zero to give a loss.
Tax credits are often offered to achieve some specific purposes for businesses. For instance, the Work Opportunity Tax Credit for hiring disadvantaged workers and the small employer health insurance tax credit for paying part of the cost for employee health insurance.
Tax deductions on the other hand are targeted towards cutting down your business income to figure out your tax rate. Hence, you may receive a net loss for tax purposes if your business gets less income from deductions.
How Much Can Your Business Be Saved With Tax Deductions
The tax situation of every business differs, and the annual tax deductions may change every year. Most startup owners pay their business taxes as part of their personal tax return on Form 1040 or 1040-SR (for seniors). In situations like these, the net income of the business is included with expenses and personal income, to provide a taxable income and tax rate for the income level.
A way to figure out a broad value of what you can finally save with business deductions is to give an estimate of your total tax using IRS Form 1040-ES Estimated Tax for Individuals. You can also do this estimate using your business tax preparation software.