Tax Deductions Every Business Owner Should Know About
Every small business owner needs to do two things- make money and save money. Sometimes it’s not as simple as writing a check to the IRS. There are ways to legally reduce the amount of taxes you have to pay.
Here are tax deductions every small business owner should know about.
Tax deductions you should know
Home Office Deduction
If you work from home, you may be eligible for a home office deduction. This deduction allows you to deduct a portion of your home expenses, such as rent or mortgage interest, property taxes, utilities, and maintenance costs.
To qualify for this deduction, you must use a part of your home exclusively for your business and regularly use that space as your principal place of business or where you meet with clients. The deduction amount is based on the percentage of your home that is used for business purposes.
Vehicle Expenses
If you use your personal vehicle for business purposes, you may be able to deduct some of the expenses related to it.
This includes gas, repairs, insurance, and maintenance costs. However, to claim this deduction, you must keep detailed records of your business mileage and the total mileage of the vehicle. You can either use the standard mileage rate or deduct the actual expenses.
Travel Expenses
If you travel for business, you can deduct some of your expenses related to transportation, lodging, meals, and entertainment. This includes airfare, hotel accommodations, car rentals, and meals with clients or prospects.
These expenses must be necessary and ordinary, meaning they are typical and customary for your industry. Keep detailed records and receipts to support your deductions.
Business Insurance Premiums
Small business owners can deduct the cost of business insurance premiums, such as liability insurance, property insurance, and workers’ compensation insurance. Life insurance premiums are not tax-deductible. This deduction can be claimed as a business expense on your tax return.
Retirement Plan Contributions
If you have a retirement plan for your small business, such as a 401(k) or SEP IRA, you can deduct your contributions as a business expense. This deduction not only reduces your taxable income, but it also helps you save for retirement.
There are limits to how much you can contribute to these plans, and the rules can be complicated. Consult with a tax professional to ensure you’re maximizing this deduction.
Business Supplies and Equipment
Any supplies or equipment that you purchase for your business, such as office supplies, computers, or machinery, can be deducted as a business expense. However, these items must be used exclusively for business purposes.
For example, if you purchase a new computer for your business, you cannot also use it for personal use and still claim the deduction.
Professional Services
If you hire a professional to help with your business, such as a lawyer or accountant, you can deduct their fees as a business expense. This includes fees for tax preparation, bookkeeping, legal advice, and consulting services.
You cannot deduct fees for personal services, such as a personal tax return or legal advice for a non-business matter.
Advertising and Promotion Expenses
Any expenses related to advertising and promoting your business, such as website development, business cards, or online ads, can be deducted as a business expense. These expenses must be ordinary and necessary, meaning they are typical and customary for your industry.
Bad Debt Deduction
If you have unpaid invoices from clients or customers, you may be able to claim a bad debt deduction. This deduction allows you to write off the unpaid balance as a business loss.
However, there are strict rules for claiming this deduction, so it is important to understand them before you file your taxes.
In order to claim a bad debt deduction, the debt must be considered uncollectible. This means that you have attempted to collect the debt, but have been unsuccessful.
In addition, you must be able to provide evidence that the debt is legitimate and that you have attempted to collect it.
There are a few rules that you must follow when claiming a bad debt deduction. The debt must be associated with a trade or business that you are engaged in. Also, the deduction can only be taken for debts that are considered to be wholly or partially worthless.
There are two ways to claim a bad debt deduction. The first is to claim a deduction for the entire amount of the debt. The second is to claim a deduction for the amount of the debt that is considered to be worthless. In order to claim the deduction for the amount of the debt that is worthless, you must be able to provide evidence that the debt is uncollectible.
The bad debt deduction is a valuable tax deduction that can help you recover some of the losses that you have incurred as a result of unpaid debts. Just make sure you understand the rules for claiming this deduction so that you can avoid any mistakes.
Key takeaway
Tax season can be a stressful time for small business owners, but knowing about available tax deductions can ease some of that burden.
Tax deductions are expenses that can be deducted from a business’s taxable income, reducing the amount of tax owed.
However, you should note that not all expenses are tax-deductible, and the rules can be complicated.