Top 10 Tax Deductions For Small Business Owners

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Taxes daunt professionals even when they’ve done them for years.

Tax codes change every year, and it’s hard to keep up with new laws. Government officials approve or deny business tax deductions based on the current political market. This makes it harder to track for individuals who don’t work in the tax field.

How do you know which deductions you can use on a regular basis? Some of them have stood the test of time. Learn these and how they work and you’ll start down the right track.

It will be a foundation to begin the tax work for your company. It also creates an expenditure guide for receipt tracking and financial categories in your files. Don’t give free money away to the government like a business owner. Instead, find out what it takes to keep the company income you worked so hard for.  

1. Renting Your Business Site

The building you use for your company may not be yours but that doesn’t mean you can’t benefit. Rent you pay each month or quarter can be deducted from your annual income. Small business entrepreneurs who work from their home enjoy this protection as well.

The office space or room you use to conduct business operations can be counted as your business location. Figure out the square footage of that space and make a note of it. You’ll use this number many times as you figure out how much of your rent and utilities you can deduct.

Track this expense on a profit and loss each month for easy addition at the end of the year. Tracking this rented space and the amount of the deduction every month is much easier than trying to add it up once annually.

Whether you rent an entire office building or a single room in your home to run your company, your deductions increase either way.

2. Business Meals & Tax Deductions

Deducting meals can be done if you follow the rules. An entire meal is not allowed. However, if you understand what the percentage is, you can easily track the legal portion of each meal.

Each receipt should be kept and filed, categorized appropriately. Log whether the meals were for employees or clients. If you’re able to track this at the end of the year, you can see whether you’re spending more than you’re earning on food.

Of course, the price of the meal is small compared to earning a potential client’s business in the future. Even if you don’t earn their business though, your company doesn’t have to take a total loss.

Budget the money you have for business meals and then follow that based on your business goals. Never assume that small meals aren’t worth tracking either, as these add up just as much.

3. Utility Expenditures

Paying for services such as water, gas, and electricity each month adds up quickly. However, once again because you rent either an entire office building or a single room, you benefit. The cost of services for an entire office building can be deducted in full.

Single rooms in homes and small offices are another matter. Much the same as business rent, you’re allowed to claim a portion of the services and utilities you pay for this portion of your home.

This is based on square footage and the amount of time you run that company in your house each year. File your utility bills every month in the proper categories so you can easily reference them while gathering your tax information. There are some easy-to-use digital programs that help you track and categorize these expenses as well.

4. Marketing Your Products and Services

Every time you advertise your company, this expense is deductible. Track any amount you spend on internet ads, newspaper listings, mailing flyers, and other informational pieces. All of these apply when you’re tracking legal deductions and can use a sizable amount of your budget.

Consider using a digital program for this financial tracking if you’re more of a mobile business owner. Otherwise, you can use paper receipt tracking for an office based at a single site. The most important feature is the ability to add up this information when you need to use it.

Track results to evaluate which form of advertising is most effective and which returns the most potential clients. It will help you decide where to invest more of your money as time goes on.

You might decide to focus on one main form of advertising after running several trials using various avenues. The good news is that all the bills can be deducted from your tax responsibility when the year is over.

5. Travel & Company Vehicle Use

Company cars fall under the deductible category for a business owner. Remember this includes the vehicle license fee, the insurance, the gas, and the maintenance costs. All of these are necessary in order to keep the car up and running. Since this vehicle is detrimental to your business operation, you can claim the expense.

Logs work well for company vehicle use. Use mileage tracking sheets that are filled out every time the car is used. Track the beginning and ending mileage, the locations traveled to, and the gasoline that was purchased each trip. Scan and file copies of these sheets for easy digitization when the month is over.

At the end of each month, summarize the data. This makes it much easier to determine what your deductible expenses are for either a full-time company car or a personal vehicle that is used part-time for business needs.

6. Supplies for Daily Operation

Depending on what products or services your company offers, there are specific supplies you need. Resupplying your inventory costs money and this falls under a legal expense category. Most profit and loss templates include places to track these expenditures, no matter how many times you purchase supplies each month.

It’s easy to add up these purchase amounts, as well as which vendors you buy from. Take the time to evaluate prices for supplies from time to time, so you’re not overspending. Ask your vendors if they’re giving you the best deal possible. Give them a chance to sweeten the deal before you simply take the lowest price offered.

Despite getting tax benefits for these inventory purchases, it’s not smart to overspend for supplies. Many times, a vendor will work hard to earn your business if they know you’re comparing supply purchase costs.

7. Fees for Legal Services

Most business owners need an attorney at some point for a variety of reasons. Some company owners are smart and keep one on retainer. They do this by either subscribing to a monthly legal service or simply by bartering for services with a legal expert.

Either way, the price you pay for legal assistance can be deducted from your annual company income. As with all expenditures, track what you’re spending each month to keep an attorney on retainer.

Do the same with a monthly subscription so your tax numbers are easier to put together later on. Legal protection is necessary if you plan on protecting the company you’ve built. You never know when a client is going to be unhappy for a seemingly unknown reason.  

The price you pay for this help can be deducted and claimed on your annual taxes. Do it properly and you might even be able to use this same legal assistance to help you prepare your business taxes. Why not get the most out of this expense if you already have an attorney working for your benefit?

8. Health Insurance for Your Team

Health insurance is required if your company employs a certain number of employees. There may also be specific requirements as to what you need to give them access to. All these details add up to a monthly bill for you as the business owner.

However, you’re the company owner so you deduct this amount from your taxes. Make sure you stay on top of what is allowed for that year since this amount can change from time to time. Providing health coverage for your team might be required, but you’re also allowed to get some of that money back.

Make sure you stay on track with these bills, so you know what it costs to give your team these benefits. It also informs you of the best plans available for your company budget and the benefits your team might be asking for.

9. Computers and Technology Purchases

The technology that you use to run and grow your business can cost a pretty penny. Upgrading your registers, computer systems or security cameras gets expensive but it’s necessary. In order to stay competitive, you need to give yourself and your team the tools they require.

Even though these prices vary based on brand, subscription services, and monitoring packages, you can track them every month. It’s important to see how much of your budget is going towards technology and the results it provides.

At the end of the year, add these costs up and find out how much the IRS allows you to deduct. It might seem like a big chunk to pay when you’re buying new computers and such. The profit levels should increase though once they’re installed and your crew begins using them.

Use your profit and loss statements to log this information and make it easier for yourself at the end of the year. If you’re using a corporate tax professional, they will appreciate the data tracking efforts you’ve used.

10. Depreciation and Bad Debts

Remember that a loss in your business doesn’t have to end there. Computers and similar technology depreciate regularly. The value of a computer usually goes down the second you leave the store. Once your business purchases an item like this, it earns the right to claim the amount of loss from this depreciation process.

In fact, when you file taxes each year, the higher the value of the item, the longer it takes to fully depreciate. Keep track of how long it takes for a computer or similar item to fully depreciate so you gain the full value of your deduction.

Bad debts are another costly item that can cost your business valuable income. When a client doesn’t pay their bill, track this in your monthly profit and loss statements.

At the end of the year, you can claim that bad debt and use the associated transaction information. This protects you during an audit if that occurs. Make sure you can easily identify the client, the amount of the purchase, the transaction date and any relevant information you might use for filing purposes. Tax rules allow you to claim these amounts so you can recover a certain portion of them.

Tax Issues? Negotiate with the IRS

Approximately 25 percent of all businesses make a deal with the IRS to settle their outstanding tax bills. Many negotiate a much lower rate in the process.

The IRS refers to this process as an offer in compromise or OIC. It represents a discount on the debt owed.

That said, this process takes time and requires a written request. To get the ball rolling, you’ll need to fill out IRS forms 656 and 433, providing detailed information about your uncertain financial situation along the way.

This information then gets used by the IRS to decide how much they can collect without causing you further financial hardship. Check out the IRS’s offer in compromise pre-qualifier.

Of course, there’s a caveat.

The IRS rejects many of these compromise submissions. So, you should always enlist the help of a seasoned tax professional when filling out the forms for an offer in compromise. Find out more about what an OIC means and how to handle it.

Would the IRS prove willing to negotiate with some business owners? In some cases, the answer is yes, after they have determined that it’s in their best interests to settle for less.

Plan Business Deductions Appropriately

The more you understand how business taxes work, the easier it will be to identify possible tax deductions. However, some of these have been around for a long time and will likely remain that way. If you want to make the most of your business efforts, protect yourself by managing, tracking and monitoring your expenses.

Learn what your state allows and then apply that information to your business practice. If you know you’re going to make a specific purchase for your company, then find out ahead of time from your tax attorney how to make the most of it.

This ensures you get the most back at the end of the year. You can then reinvest these funds back into your business. Do this on a regular basis and your business will continue to grow and be successful.  

Tax codes may change but the need to recover as much of your income as possible doesn’t. Nobody puts in that kind of work or effort to give good money away.

Learn how you can protect and ensure the future of your business by working with the tax laws. Use the available deductions for your benefit and apply them correctly. It will be an effort that yields results on a daily and annual basis, so contact us with questions for help anytime.

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