- Salary and Wage Deductions
- Home Office
- Office Supply Expenses
- Marketing Expenses
- Amortization is similar to depreciation.
- Fees from freelancers or independent contractors are deductible as a business expense.
- Tools and parts are deductible as a business expense.
- Startup costs are deductible as a business expense.
- Renting a space for a small business can be deductible from tax.
- Advertising is deductible as a business expense.
Small businesses are taxed differently than corporations. While corporations pay taxes on profits distributed to the shareholders, small businesses pay taxes on the income of the owner. Corporations are also subject to tax when the profit is distributed as dividends which create a double tax on the profit of the corporation.
You as a small business owner have it much easier compared to corporations. The Internal Revenue Service allows small business owners to take certain itemized deductions to reduce their taxes. However, you will have to pay taxes on the profits you made during the year regardless. So there isn’t a way for a small business owner to have $0 tax liability for any given year. The deductions you claim simply won’t cut it.
The deductions will help you reduce the taxable profit of your business, therefore, reducing the amount of tax you owe to the IRS when the tax season comes. So everything works the same as federal income taxes.
Here are the most common tax deductişons for small businesses. The deductions below are for deductions a small business owner can claim aside from their federal income taxes.
Salary and Wage Deductions
If your small business is an LLC or a sole proprietor, the salaries and wages you pay your employees are tax deductible. This isn’t limited to the salaries and wages though. You can even deduct payments like meals, per diem, allowances and employer-paid taxes on behalf of the employee. However, as a sole proprietor or an LLC, small businesses mostly cannot deduct income taken from the business and draws.
All and all though, being able to deduct wage and salary paid to employees is possibly the best way to reduce the taxable income of your business.
Employee benefits that you offer to your employees are definitely going to boost the motivation of your team. The benefits you give to your employees will also benefit you in taxes. The contributions you make on your employees’ pensions, reimbursements, health insurance, etc. are all tax deductible.
There is no doubt that the rent has increased substantially in recent years. Luckily, you can claim the rent you pay on your business location. Although this will not apply to most, you cannot deduct rent as an expense if you have or will receive equity on the property. Other than that, rent is 100 percent tax-deductible.
If you or your employees have an office at home, the expenses that go for maintaining it are tax deductible. The qualification for this deduction is simple. You must strictly use your home office for your business. The same applies to your employees.
Even though you won’t be able to deduct all of the expenses, a portion of expenses that go towards repairs, real estate taxes, mortgage insurance premiums, and interest are deductible.
Office Supply Expenses
Pretty much all of your office supplies can be tax deductible. But the “office supplies” here isn’t only for the traditional office environments. Let’s say you have a food place and the take out containers run you quite a bit money when added up.
Expenses like that can be deductible as long as they are used within the year of the purchase. This also includes expenses that go towards delivery services.
Your insurance premiums are expenses that can be tax-deductible as long as it is ordinary and necessary. This classification must be done by the insurance company. So before you claim the insurance premiums, make sure that they fall into either one of these categories by your insurance provider.
Generally, coverage for vehicles used in the business, health, malpractice, and theft is going to be tax deductible.
Advertising is certainly a big part of owning a business. Even if the products and services you offer are top-notch, without a marketing strategy, things can go sideways quickly. If you fear the cost of marketing and advertising, no worries. Every single penny that goes towards ads and marketing are tax deductible.
So cutting expenses on your website, business cards, or any form of advertisement isn’t necessary at all.
Other Small Business Tax Deductions
On top of these deductions, there are a few other ones that might be attractive to you. Most small business owners are going to be able to claim these deductions. These deductions include fuel and excise taxes, expenses for business property repair or maintenance, charitable contributions, and costs of starting your business. The expenses related to starting your business cannot be deducted all at once. Instead, you can claim one fifth of it each year, for five years.
Amortization is similar to depreciation.
Depreciation is a small business tax deduction that allows a small business to recover the cost of property over its useful life. It accounts for wear and tear, deterioration, and obsolescence. Depreciation is calculated annually for property that is placed in service and used to generate income. Once it has recovered its costs, a business can stop depreciating the property.
Amortization and depreciation are similar tax methods for small businesses, but they have different purposes. Depreciation applies to tangible property, such as office equipment, while amortization applies to intangible assets. For example, if a business purchases a laptop for $2,000, it can deduct $400 a year for five years.
Amortization works the same way as depreciation, except that it spreads the cost of an asset over its useful life. It’s commonly used in association with loans. An amortization schedule shows how much a business will pay each year as interest and principal and helps the business reduce its year-end tax bill.
The main difference between the two methods is their use of assets. Intangible assets, such as patents and trademarks, are more difficult to value than tangible assets. As such, the use of amortization should be carefully considered. Its goal is to match expenses to income.
Fees from freelancers or independent contractors are deductible as a business expense.
When establishing a business, freelancers and independent contractors are able to deduct some of their fees. For example, attorneys’ fees, consulting fees, and bookkeeping services are tax deductible. They can also claim expenses related to travel and entertaining clients. In addition, they can deduct up to $50 per meal and up to $25 per entertainment event. However, the freelancers or independent contractors must also have a way to attract clients and maintain a strong online presence.
In addition to paying freelancers, you can also deduct the cost of providing a workspace. The cost of rent, utilities, and mortgage interest are all deductible. You can even deduct the cost of computers and other office equipment as long as they are used for business purposes.
Health insurance is another small business expense that you can deduct. You can also deduct the premiums for medical insurance, dental insurance, and long-term care insurance as long as it’s a business expense. You can also deduct the cost of business insurance, which is an excellent way to protect yourself and your clients.
Tools and parts are deductible as a business expense.
When you purchase specialized tools and equipment for your business, you can write off these expenses. This is particularly helpful when you purchase large equipment and want to deduct it from your taxes. You can write off this expense over many years, depending on the type of equipment you purchase. If you’re unsure of whether or not tools and parts are deductible as a small business expense, consult an accountant.
Small business expenses can vary widely from year to year depending on the nature of your business. In general, however, any expenses that are “ordinary and necessary” to run your business are deductible. Although the IRS does not provide a master list of deductible expenses, there are a few common categories that are often eligible.
Startup costs are deductible as a business expense.
Startup costs are expenses that are incurred when a new business is first established. These expenses can include expenses incurred to research potential markets, develop products, and plan logistics. These expenses are deductible in full if they are related to the actual operations of the business. It is important to keep good records of these expenses, and the tax professionals at Mize can provide more information.
The IRS considers startup costs to be capital expenses. As such, they cannot be deducted all at once. However, certain startup expenses are deductible during the first year of business. After this, the business must amortize the costs. The IRS allows new businesses to deduct up to $5,000 of these expenses.
Besides inventory, startup costs can include costs related to purchasing goods for resale or used for the business. They can also include costs related to obtaining permits. The business owner should ensure that all the necessary paperwork is in place before starting the business. For instance, the owner can purchase a computer.
The expenses associated with the creation and research of a new business are also deductible. These expenses may include familiarizing oneself with the market for the new product, checking out the location of the business, or hiring a marketing consultant. Other startup expenses include labor force training, travel, and advertising.
Renting a space for a small business can be deductible from tax.
For small businesses, renting a space can be a tax-deductible expense. This deduction is calculated as a percentage of the rent. For instance, if your home office is 250 square feet, you can deduct 25% of the rent. Then, you multiply the percent by the rent to arrive at your deduction amount.
In order to deduct rent, you must use the space exclusively for your business. A home office does not necessarily need a separate room; even a corner of a bedroom can count. You can also deduct rent for a studio or small office.
The rent you pay must be reasonable. Otherwise, the IRS treats it as a dividend and it may not be deductible. If you own a controlling interest in the business, the benefit of renting your home for your small business may be lessened. In such a case, the property may be depreciated over several years. However, this is still a viable tax strategy.
The rent you pay for a space can be deductible if you pay in advance. You can deduct the first year’s rent and the remainder of it over the next three years. You must have detailed records to support your deductions.
Advertising is deductible as a business expense.
Advertising is a business expense that can be deducted when it is related to the sale of goods and services. However, some types of advertising are not deductible. This includes the use of the radio, television, and Internet. Advertising expenses can also include the purchase of promotional items.
The IRS provides guidelines on the types of expenses that are tax deductible. Most types of advertising are deductible. The main criterion is whether the expense is common in the industry and related to the nature of the business. The expense must be necessary and appropriate for the business. The cost can’t be considered essential or necessary, but it does have to be related to the business.
When filing tax returns, businesses can deduct advertising expenses as a small business expense. These expenses are generally deductible as miscellaneous expenses, as long as they are reasonable and ordinary. For a deduction to be possible, the ads must be relevant to the business and directly related to how the business works.
If you own a small business, you likely spend a lot of money on advertising. Luckily, the IRS allows small businesses to deduct the majority of marketing and advertising expenses as a small business expense. However, some types of advertising and promotion are not tax deductible.