The whole concept of calculating and filing for taxes is complicated, especially when you are a small-business owner. As a small business owner, your budget is always stringent, and saving every penny can help you in the long run. But you have bigger fishes to fry, improving your products and services while cutting costs to increase revenue being the topmost priority.
While most business owners tend to focus on decreasing production costs, one area that goes unnoticed is the benefits of small-business tax deductions. If you know which tax deductions you are eligible for, you could save hundreds of dollars and expand your profit. Other the other hand, the wrong tax deductions can mess up your financial risk management and get your business in hot water with the IRS.
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What tax deductions is your small business eligible for?
Now, there is no definite list of deductions for small businesses to write off when it comes to the IRS. However, the IRS follows the “Ordinary and Necessary” rule. According to this rule, small-business owners have the prerogative to write off taxes for expenditures that are necessary to running a business.
Bottom line: If your business needs certain items to operate, you can file such expenses for tax returns. For example, for someone who sells handicraft items, expenses incurred in buying art and craft supplies would be tax-deductible. But it isn’t as simple as this example. Filing for tax returns when there is no definite list is like walking on a tightrope.
The thumb rule of “ordinary and necessary” also varies from one business to another. On that note, here are the common tax deductions that most small-business owners can benefit from:
Qualified Business Income
As per the 2018 tax reform law, sole proprietorships, LLCs, and partnerships are eligibleto deduct 20% of the company income on their business taxes.Let me give you an example to help you understand it better.
Suppose you own a small business that generates $100,000 as gross profit at the end of a year. In that case, you can deduct 20% of $100,000, which equals to $20,000 and apply the ordinary income tax rates on the rest of the amount ($80,000). Now, the example may seem simple. But that isn’t the case. My advice is to consult a tax consultant to check which amount is eligible for the tax deduction.
Also, there are a few limitations to this rule. The income limit varies from business to business. If you fall in the high-income slot, where your income exceeds $157,500, you will not be eligible for the deduction. High-income business owners involve doctors, lawyers, and subject-matter consultants.
Several small business owners save by eliminating the expenses of office rent. If you carry out your business work from a spare room in your house, there is good news for you! As per the IRS, you can file for deduction expenses like insurance, mortgage interest, repairs, and depreciation when you turn your house into your business space. As of 2020, small-business owners can deduct $5 per square foot of the area of a home office, up to a maximum of 300 square feet.
Now, there is a catch here. As per the IRS, you can claim this deduction only when you use the extra room solely as your home office. If you use the room as a guest room for friends visiting you, you cannot claim the deduction.
Advertising and Marketing
If you are using something to advertise and market your business, the charges come under something “necessary”. So, if you are handing out pamphlets in a busy street or offering business cards to potential clients, do not have to worry about the expenses. You can deduct the cost of printing the pamphlets and business cards and file for a tax return. Basically, when you are using certain things to promote your business and attract more leads – both offline and online – the costs are 100% deductible.
Office Supplies and Expenses
Regardless of the type of your business and the products and services you deal in, you will need office stationery by default. So, if you have to spend on traditional office supplies, like printing paper, printer ink, notepads, and post-it notes, you can file them under tax deductibles.
Other than traditional office supplies, expenses incurred on laptops and smartphones that are exclusively used for your small business can be written off as well.
Utilities and Repairs
According to the IRS, the amount you spend on utilities, like internet, electricity, phone bills, heat, and water, is fully deductible. This goes the same way for repairs and maintenance costs. If you had to spend on repairing plumbing leaks or repainting office space, you could file the costs under tax deductibles. If you are using a spare room in your apartment as your office space, then you will have to justify that the expenses were solely for the room from which you conduct business.
If you take care of the delivery of products and services for your small business, you can endorse the vehicles’ fuel and maintenance expenses for tax returns. Even if you are using a pickup truck to transport heavy equipment or a car to drive to and from worksites, you are eligible for a tax deduction. However, beware of the elaborate paperwork that you have to submit as evidence that you use the vehicle solely for business purposes.
Now, when it comes to car deductions, there are two ways to claim this deduction:
- You can use the standard mileage rate where you add all the miles you drove for business work and multiply the total figure by the standard deduction rate as stated by the IRS.
- You can also add up the actual car-related expenses from the detailed records you have collected throughout the year. This option can be a tedious one, but it is simpler to understand.
So, do not lose the bills from the gas station or the repair bills.
Even if you have a small business, you or your employees may have to travel around the country for business purposes. Now, we all know how heavy on the pocket can airline tickets and hotel charges get! If you have to go on business tours often, Uncle Sam gives you the option to deduct most expenses that can be directly traced to business trips. Again, the financial risk management process for this can be an elaborate one, where you have to justify every expense you have made. Better not throw away the receipts if you want to enjoy the benefits of this deductible.
Salaries and Employee Benefits
As a small business owner, paying your employees can often be burdensome. Then again, it is next to impossible to do everything all by yourself. If you are having a hard time managing all the business work independently, do not let your budget constraints stop you from dividing the pressure. The salaries and wages you pay, including the bonuses and commissions, all are eligible under tax-deductible expenses. If you offer retirement plans and health benefits to your employees, you can file these expenses as tax deductibles, too!
Yes, you read that right! As a small business owner, you get the double bonanza – deducting taxes on taxes. The first tax that tops the list, in this case, is federal income taxes. Other than this, you can write off state and local income taxes up to $10,000.
Some other taxes that you can deduct are:
- Real estate taxes
- Personal property taxes
- Sales taxes
- Occupational taxes
- A part of self-employment tax
- Franchise taxes
- Excise taxes
Understanding tax deductions and is a saga in itself. One wrong step and it can lead to judicial repercussions. So, tread carefully and make sure you have all the evidence to justify your filings. If need be, consult a tax expert before your file your taxes.
Make the most of these deductibles and save your hard earned money. All the best!