Small business owners can reduce the tax burden by benefiting from legal tax deductions. Unfortunately, not all business owners educate themselves about tax deductions, so they lose the opportunity to increase their revenue.
Using tax deductions to decrease taxable income is helpful for a business in the long run. Check out how to use tax deductions to benefit a small company. Learn what types of business expenses a company can claim as tax deductions.
What is a Tax Deduction?
A tax deduction is used to lower an organization’s or individual’s taxable income. Not all expenses are deductible. A company can calculate expenses from the gross income occurring during one year. These costs are considered tax deductions.
Taxpayers might opt for using one of two types of deductions:
Standard tax deductions vary in every state. Each year states set different standards. It’s an easy route to choose since taxpayers don’t need to make any calculations. A taxpayer needs to check the standard and file a form. But itemized deductions might be more beneficial.
In the second case, deductions are calculated for any amount that exceeds a standard deduction limit. Itemized tax deductions allow taxpayers to decrease taxable income further. E.g., taxpayers deduct the following expenses by using the itemized deductions approach:
- Property taxes.
- Office or home-office expenses.
- Mortgage interest.
- Healthcare-related expenses, such as medical and dental bills, prescription drugs.
There are many tax deductions available to claim by all business structures. Whether it’s a sole proprietorship, an LLC, a C- or S-corporation, it’s possible to use tax deductions to benefit a company.
How to Use Tax Deductions for the Benefit of a Small Business?
Business owners may use tax deductions to increase their income without working more. By using this approach, you might decrease the taxable income to keep more revenue.
Consulting a CPA accountant about tax deductions a company can claim is a strategy every business should consider. For example, small companies write off some expenses by using this approach. The following list contains only a few taxable deductions a company might claim:
- Car expenses according to mileage.
- Phone bills.
- Office supplies, for instance, computers, software.
- Office expenses such as rent, business property repair, etc.
- Health insurance premiums as long as the company doesn’t receive reimbursement from any other agency.
- Parking bills related to business expenses.
- Expenses related to travel (including buying flight tickets, renting cars, hotels, or motels).
- Company postage expenses.
- Expenses on continuing education.
A company might calculate all these expenses and more to reduce taxable income. That’s how a small business finds the possibility to save money and invest in developing the company.
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A 100 Percent Tax Deduction
A 100 percent tax deductions are those business expenses that a taxpayer can claim 100% on the income tax. There are different expenses for various business structures. Small businesses can deduct the following expenses:
- Travel costs for business purposes.
- Gifts to clients, but only up to $25 per client per year.
- Office and home-office equipment used for business purposes.
- Furniture for the office.
But this is just the short list of deductions to claim. Small business owners should take their time and analyze all their expenses. This approach allows detecting all itemized deductions. But to understand what expenses you might deduct, check the detailed list below.
Top of Valuable Small Business Tax Deductions
Some of the mentioned tax deductions are useful for the business. Calculating all the expenses may take a while, but it’s worth it since deducting some of these expenses may significantly reduce a business’s tax burden.
All the utilities needed to perform business operations are 100% deductible. The list includes expenses on electricity, water, telephone bills, trash, etc. If you use a home office, then the cost for the first landline isn’t deductable, unlike all subsequent expenses.
Advertising and Promotions
A business can deduct expenses related to advertisement and promotional campaigns. For instance, the expenses include hosting the website, search engine optimization (SEO), Web Design, etc. But if the business uses such promotional means as printing stationery to send official letters of gratitude to clients for referrals, it is also considered a deductible expense.
Small business owners may also deduct expenses on meals and drinks for clients or employees. A meal has to be a business expense with documentation to prove its purpose to claim the deduction. Here are the documents to attach to the expenses on meals and drinks:
- Date and location.
- Total cost.
- Business relations to the person or people with whom employees dined with.
Employees can use receipt scanning apps to record this form of a business expense correctly. That way, receipts don’t get lost.
If the business depends on manufacturing products or buying items to resale, it is possible to deduct the cost of inventory or goods for sale.
A small business has to evaluate the inventory at the beginning and end of each tax year. That way, a company calculates the cost of items that were sold.
To calculate the cost of sold products, include the following list of expenses:
- The cost of direct labor to manufacture products. A business should also include contributions to pensions.
- The expense on purchasing materials or products to produce items, including the costs spent on freight.
- Costs incurred during the manufacture of products.
Some of these expenses can be claimed as tax deductions depending on the type of services the small business offers.
If a business lends money to employees or vendors and doesn’t receive some or all of the money back top, the company owner should claim this expense as a bad debt. The business has to prove that it was a business, not a personal debt, to claim a bad debt.
The following list shows examples of bad debts:
- A loan to a client, employee, distributor, or supplier.
- A credit sale to a customer.
- A business loan guarantee.
Check IRS guidelines to find recommendations on how to claim bad debts.
It’s almost impossible to find a company that doesn’t use cars in work. Even self-employed individuals and sole proprietorship owners can deduct car expenses.
But to claim car expenses, they have to be correctly recorded. If a business doesn’t record any car expenses, the IRS standard mileage rate might be used. The mileage rate is different each year.
To reduce taxable income, deduct costs that a business spends on business insurance. But it is possible to deduct the expenses on business insurance only if it’s needed to operate a business.
For example, if the company works with data, the expenses on data breach insurance are deductible. Commercial Property Insurance and Professional Liability Insurance are also deductible. If a business is located at the home office, it’s possible to deduct expenses on the renter’s insurance.
Business Interest, Bank Fees
Borrowing money to start or fund a business means that the bank will charge this business an interest fee on the given loan. The company owner can deduct the interest charged on loan and one the business credit card.
It’s also possible to write off charges on the business bank account/credit card and additional fees. For example, annual credit cards or monthly service fees. The business has to meet the following requirements to claim these expenses as deductions:
- The debt has to be of a repayable type.
- The relationship between a lender and bank (or creditor) must be official and documented.
- The lender has to be liable for the debt.
Consulting an accountant may help you figure out whether a business qualifies to apply for this type of deduction.
If a business owner has property with a terminable lifespan, then the cost of depreciation is deductible. As long as a business owns the property for longer than a year and it falls under the depreciation category, it’s possible to reduce the tax burden on a company.
For example, if a company owns a car, it is possible to deduct the cost of depreciation of the vehicle. Such types of property as buildings, machinery, office equipment are deductible. But if the business isn’t actively using the property to get income, then it’s not possible to deduct depreciation.
Rent of Business Property
If a small business doesn’t own any buildings and instead rents property, it’s possible to deduct rental or lease payments. If, instead of renting property, a business owner uses a home office, it’s possible to file a request to the IRS to find out whether it’s possible to deduct some of the expenses on rent.
When using a home office, it may also be possible to deduct expenses on insurance, utilities, deprecation, repairs, etc.
Don’t forget about office supplies! Even though it might seem that a business doesn’t invest a lot into office supplies, costs add up. It is possible to deduct expenses on paper, pens, staples, boxes, cleaning products, etc.
If a company needs an office, it also needs furniture. Just like office supplies, office furniture is also a deductible expense.
The business might need software subscriptions to function fully. The cost of subscribing or buying software is a deductible expense.
If a business contributes to an IRA (Individual Retirement Account), then it’s possible to reduce the taxable income during the year of contributions. The total contribution has a limit, and it’s based on the total revenue that a business earns during that year. A contribution to an IRA can’t exceed the annual maximum contribution.
Charitable Tax Deductions
A business can claim charitable expenses as tax deductions but only if a business isn’t registered as a sole proprietorship, LLC, or partnership. In other cases, it’s possible to claim a charitable contribution as a business expense.
If a business doesn’t include a charitable contribution as a personal tax return, then it’s possible to claim up to $300 of cash donations.
During the latest tax year, launching a startup allows a company to get up to $5,000 in deductible expenses. In some cases, it’s also possible to deduct the costs of marketing the new project, travel, educational expenses, etc.
But it’s possible only if you can prove that these are business expenses required to launch a startup. You can find more information about this tax deduction in IRS guidelines.
Being proactive about tax planning throughout the year is a wise strategy. This strategy should include carefully recording all financial operations and calculating income and expenses. As a result, you won’t feel powerless at the end of the tax year.
Careful planning allows a company to benefit from all legal tax deductions. Claiming deductible expenses can positively affect business performance. That way, the company reduces the taxable income. Meaning the company saves money and can use it to improve the overall business performance.
Not knowing what expenses are deductible in your case may dig a big hole in the company’s budget. That’s why it’s so important to use the services of an accountant. CPA accountants inform their employers about deductible tax expenses to reduce their tax burden.
Author: Charles Lutwidge