Businesses are unique in that they can deduct their expenses to decrease their taxable income. Most individuals can only deduct very specific expenses, and they are often limited by income or other restrictions. Businesses, on the other hand, can claim virtually any "ordinary and necessary" expense related to their activities as a deduction. The IRS takes a broad view of this definition, noting that as long as the expense is "helpful and appropriate," then it is permitted. Generally, if the payment helped you earn income, it is likely deductible.
Many small businesses do not realize just how broad this definition is. They occasionally do not take full advantage of the various deductions available to them. Using deductions effectively benefits business owners by decreasing their taxable income. This, in turn, lowers the company’s tax liability. For pass-through entities, such as sole proprietorships, S corporations, and partnerships, it can reduce individual tax liabilities as well.
Every expense is a deduction for a business. That means that if you maximize your costs, you will be taking full advantage of your deductions. Consider the following examples of common expenses you may not realize are associated with your business.
If your company operates on an accrual basis instead of a cash basis, you can deduct an amount for bad debts. Cash basis accounting means that you only account for each dollar as it comes in the door. Accrual-based accounting is based on when you earn the income, not when you are actually paid.
In accrual-based accounting, you count your earnings before they actually reach your bank account. However, in some instances, you do not get paid the full amount. The situation is particularly relevant for businesses that allow customers to purchase on credit. If a business has unfulfilled purchase agreements, it may be able to write off those losses as well. Anytime a customer or client does not pay you in full, you can deduct that amount as an expense.
Most business owners realize that they can deduct some amount for their vehicles, but it is important to take full advantage of this deduction. When you use a vehicle for your business exclusively, you can deduct the entire amount that you spend on the vehicle as part of your business expenses. This includes things like regular maintenance, gas, and repairs after an accident. Even things like insurance and registration are considered business expenses.
You can also choose to take the standard mileage rate instead of deducting the actual expenses. The standard mileage rate is based on the number of miles that you drive your vehicle and is often easier to figure out. You do have to track the number of miles you have driven in a year, but you do not have to keep receipts for expenses related to the vehicle.
Once you start using your vehicle for both business and personal use, the rules change. You can deduct a portion of your vehicle’s expenses as it relates to your business. That is, if you use your car 10 percent of the time for business use, then you can deduct 10 percent of the expenses as a business expense. It may be difficult to determine the percentage of use for business versus personal, but keeping track of the total net miles versus the business miles can be helpful.
As a small business owner, you may want to arrange to take full advantage of this partial deduction. For example, if you need to go to the store to pick up business supplies, you should also get any personal supplies you need as well. That way, you cut down on the cost of having to make a second trip later. Creative combinations like this example increase your business deductions and decrease your personal expenses.
Contributions to retirement plans do not have to be a formal process. Instead, you can simply deposit money into a 401(k) or IRA on your own, and still get a business deduction.
In addition, businesses can also deduct contributions for their employees. That is, if the business offers a plan such as a percentage matching for retirement, then the company can claim those expenses as well. This deduction not only encourages businesses to contribute to their employees’ pension plans, but it also often increases employee morale as well.
Other employee benefits that are also likely to be deductible include the following:
Virtually any employee benefit that you offer will be deductible. However, keep in mind that you must be able to show that the benefit has a business purpose for it to be deductible.
Some business owners make the mistake of cutting out professional services altogether because they feel that they are too expensive. This is an unfortunate mistake because legal and professional expenses are deductible business expenses.
A good way to cut costs is to use self-help tools that allow you to create your own legal documents. Even purchasing legal documents at LegalNature for your business is a deductible business expense, and costs significantly less than professional services. There is no reason to create legal documents completely from scratch when you can deduct the expenses related to those purchases.
Many small businesses forgo calculating depreciation because it can be extremely complicated. While it is true that depreciation can be confusing, small businesses miss out on significant tax deductions by ignoring depreciation. For example, if you make a large equipment purchase, you may not be able to deduct the entire purchase as a business expense. However, you might be able to depreciate it over time instead. In some situations, the equipment pays for itself over several years thanks to tax deductions.
It is generally worth the time and effort to determine which assets can be depreciated and assert that as an expense on your tax return. You can also consult an accounting firm or CPA for more information. After all, those professional expenses are deductible too!
Some small business owners may not realize that they can deduct expenses related to travel. Any and all travel expenses are completely deductible as long as they are directly linked to your business.
That does not mean that you are not allowed to have fun on your travels, however. You can count the initial travel expenses as business expenses, but then also enjoy yourself while you are there as well. For example, imagine you are going to Orlando for a large conference. While your tickets to Disney World will probably not be deductible, the plane tickets to get to Orlando will be. Any meals while you are traveling are also partially deductible. You can deduct up to 50 percent of your meals while on the road.
The IRS understands that attracting and keeping clients can be expensive, which is why entertainment and food are both deductible. Anytime you are treating a customer, those expenses will likely be deductible. While it is not a good idea to get extravagant, many basic thank-you gifts, sympathy cards, and related expenses will be deductible.
These costs include entertainment, as long as you are discussing business while the entertainment occurred or immediately before or immediately after. Remember, you must be able to explain to the IRS how the entertainment is business related if they ask. Meals shared with clients are also deductible, and your portion is 50 percent deductible.
You should be able to deduct virtually any fee that your business must pay. This could include things like:
Even though some of these items may be very small, they add up over time. It is important to track everything and take every expense that you deserve to cut down on your tax obligation.
Training opportunities for employees and business owners alike can be very expensive, but they often help businesses grow and thrive. Many business owners realize that they can deduct expenses related to employee training, but they may not realize that they can claim their own educational expenses as well. This includes things like continuing education, specialized training courses, and even formal postsecondary education. As long as the education or training will benefit your business, it can be considered a deduction.
This is a huge benefit for a business owner that is considering going back to school. Keep in mind, however, that you cannot take deductions twice. If you use your education as a business expense, it cannot be used on your personal tax return. This type of double dipping may raise a red flag for the IRS and trigger an audit.
Regardless of what type of business you have, you will likely be able to deduct some expenses related to your business location. For example, if you have a commercial lease agreement, you will be able to deduct your rent payments. You can also usually deduct your utility payments and required maintenance and upkeep for your location. If your lease agreement also requires you to make repairs, you can deduct these expenses as well. If you rent, however, you will not be able to deduct depreciation for the building you occupy.
If you run your business out of your home, you also likely have extensive deductions available for your home office. This includes the location where you work and any places where you may store supplies or inventory. You can choose to take a standard office deduction based on the size of your space, or you can track your actual expenses and deduct a portion of those. The part of the expenses you are allowed to deduct depends on how the office location compares to the overall size of your home. For example, if the bedroom you use for your office takes up 10 percent of your home, then you will be able to deduct 10 percent of virtually every expense related to your home (assuming you use these services in your business), including things like:
You can deduct the amount that you pay in taxes as an expense. For your federal tax return, the taxes you can deduct are usually for state taxes, local taxes, and sales taxes. Certain industries are also taxed in other ways as well. These are often also deductible on your federal return. Employment taxes are usually deductible too. The rules are slightly different for self-employment tax, however, so keep an eye out for that distinction.
You may also be able to deduct a certain amount from your state tax return for your federal taxes owed. State tax returns often have additional deductions as well, including required licenses and regulatory fees.
Businesses, like individuals, can have a deduction for charitable giving. This deduction is designed to encourage businesses to give back. According to one study conducted by Propinquity, a cause-marketing business, 85 percent of consumers have a more positive image of those companies that give to their communities. This increased image can also increase business, which means charitable deductions are directly related to your business.
Only certain qualifying organizations will trigger the tax deduction, and the giving must be in the form of cash, inventory, services, or sponsorships. There are certain additional restrictions as well.
Whether you need a corporate document or a human resources document, LegalNature can help, and the expenses associated with these materials are deductible business expenses. There is no reason to spend your valuable time and effort creating these documents from scratch when LegalNature puts them at your fingertips. You can also keep on top of the latest tips and suggestions for your business by checking out our articles section.
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