About 93% of small business rate themselves as being confident in their ability to file taxes accurately. Years in the business world have helped them master relevant tax tips. But despite this fact, 30 percent of entrepreneurs believe they overpay their taxes.
The fact is tax can be a complicated subject, with many Americans opting to hire tax professionals to handle it on their behalf. In fact, 50% of all tax filers at the moment hire a tax professional to help them complete their returns.
One area business owners have trouble with has to do with tax deductions. Many entrepreneurs don’t know what business tax deductions are relevant to them. If this applies to you, you’ve come to the right place.
This guide tells you what you need to know about tax deductions. We also highlight some business deductions you should know about so you don’t miss your tax write-offs.
Let’s delve right in.
What Is a Tax Deduction?
Also known as a tax write-off, a tax deduction refers to an expense that you’re allowed to deduct from your taxable income. Tax deductions bring your tax bill down.
Note that expenses can only qualify as tax deductions if they fit the criteria of a tax deduction given by the IRS. Where you aren’t sure which expenses in your business qualify as tax deductions, consider working with a tax professional to help you out. Sites like https://www.taxfyle.com/freelance-cpa-jobs can help connect you with qualified tax experts.
Here Are Some Common Small Business Tax Deductions
Whether you’re a sole proprietor, a partnership, or an LLC, there are many write-offs you can qualify for. Here are six of them.
Advertising and Business Promotion Costs
All expenses involved in marketing your business are entirely deductible. These expenses involve things like hiring a professional to design your business logo, ad space in print media or online platforms, printing brochures and business cards, launching a business website, sponsoring events, and running your social media marketing campaign.
Note that the IRS doesn’t allow you to deduct expenses you incurred while trying to influence legislation. Money paid to sponsor a political event or campaign is also not deductible.
Business Insurance Premiums
The IRS also allows you to deduct business insurance premiums when filing your small business taxes. These deductions are related to such things as business liability coverage, property coverage, and workers’ compensation insurance.
You can also deduct costs related to professional liability or malpractice insurance, group health and dental insurance for your employees, life insurance that covers staff, and auto insurance for company vehicles.
One of the most important things you can do when you launch a business is to open a bank account and credit card for your business. This helps separate your business finances from personal funds.
Most banks will charge you monthly or annual service charges for maintaining an account with them. There are also overdraft fees and transfer fees. All these expenses are deductible.
If you use a third-party payment processor, such as PayPal, you can deduct transaction or merchant fees that you’re charged.
Half of the costs associated with business food and beverages are also tax-deductible. For the expense to be eligible for the deduction, it has to be an ordinary and necessary part of conducting your business operations. In addition, the meal must not be extravagant or lavish under the circumstances, and the owner of the business or an employee has to be present at the meal.
You’re also allowed to deduct half of the cost of meals provided to employees when they’re working late. All meals you provide at business parties and picnics are 100 percent deductible.
You’ll want to keep all the documentation related to the outing, including the date, place you took the meal, and the total amount of every expense. In addition, you need to point out the business relationship of the people who took the meal.
Business Use of Your Vehicle
Many entrepreneurs use their vehicles for business purposes, either partly or fully. If the vehicle is solely used for business, then you can deduct all the costs related to running the vehicle. Where you use the car for both personal and business purposes, then you’ll need to deduct only the costs related to company-related usage.
Try to keep a log of your business miles. You can use an app for tracking your trips. Be sure to clearly document the time, place, and business purpose of your trips.
Remember, you’re not allowed to count the miles you drive while commuting between your home and business premises as these are viewed as personal commuting costs.
Home Office Expenses
Many people operate their businesses from home. If you have a home office, you can deduct a percentage of your housing expenses against your business income.
The simplified way to deduct home office expenses is to subtract $5 per square foot of the part of your house you use for business. The eligible size of the home office is capped at 300 square feet.
You can also use the standard method, where you track every actual expense of maintaining your home, including the rent or mortgage, utilities, housekeeping service, real estate taxes, and so on. You then multiple these expenses by the percentage of your house that’s dedicated to business use.
These Tax Tips Can Help You Stay on Top of Your Tax Deductions
Taxes are a significant business expense, but you can keep the costs lower by taking advantage of tax deductions. Take the time to identify all the deductions you qualify for, and go ahead and subtract those amounts from your taxable income. Use the tax tips we’ve shared in this blog to ensure that you get to keep your tax deductions, in case the tax officials ever come knocking on your door.
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