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What are Tax Deductions, and How Can They Help Your Business Save Money?
Tax deductions, also known as "tax write-offs," are expenses that you can subtract from your taxable income to reduce the amount of taxes you owe. Essentially, they allow you to pay a lower tax bill by reducing your taxable income. However, in order to qualify for a tax deduction, the expense must meet the IRS criteria for a deductible expense.
As a small business owner, taking advantage of all available tax deductions can save you hundreds or even thousands of dollars at tax time. For example, if you are a self-employed writer with $60,000 in self-employment income, your total tax bill would be $13,343. However, by identifying $6,000 in contractor expenses that you were not aware of, you can reduce your taxable income to $54,000 and save over $1,500 in taxes.
To make the most of your tax deductions, it is important to stay on top of your expenses throughout the year and keep accurate records. This can be a challenge for many small business owners, which is why bookkeeping is so important. By working with a bookkeeping service like Better Accounting Solutions, you can ensure that all of your expenses are properly recorded and you are taking advantage of all available tax deductions.
By staying on top of your deductions and keeping accurate records, you can significantly reduce your taxable income and save money at tax time. So don't miss out on potential tax savings – start tracking your expenses and working with a bookkeeping service today!
Here are 15 Massive Tax Deductions and Write Offs for Businesses:
- Advertising and promotion
Marketing your business is integral to ensuring brand awareness and growth, and so, the cost of advertising and promotion is 100 percent deductible. This means that you can write off the costs associated with hiring someone to design a business logo, business cards, or brochures, ad space in print or online media, sending cards to clients, launching a new website, running a social media marketing campaign, and sponsoring an event.
- Business Insurance
As a business owner, you need insurance to protect your business from unexpected events. Fortunately, you can deduct the premiums you pay for business insurance. This includes property coverage for your furniture, equipment, and buildings, liability coverage, group health, dental, and vision insurance for employees, professional liability or malpractice insurance, workers compensation coverage, auto insurance for business vehicles, life insurance that covers employees, and business interruption insurance that covers lost profits if your business is shut down due to fire or another cause.
- Bank fees
If your bank or credit card company charges annual or monthly service charges, transfer fees, or overdraft fees, these are deductible as a regular business expense. You can also write off fees paid to a third-party payment processor, such as PayPal or Stripe, whether they charge as a merchant or per transaction. However, it should be noted that you cannot deduct fees related to your personal bank accounts or credit cards.
- Business meals
You can generally deduct 50% of qualifying food and beverage costs. To be eligible for the deduction, the expense must be an ordinary and necessary part of carrying on your business, the meal cannot be lavish or extravagant under the circumstances, and the business owner or an employee must be present at the meal. You can deduct 100% of the cost of providing meals to employees, such as buying pizza for dinner when your team is working late. Meals provided at culture-building exercises like office parties and picnics are also 100% deductible.
- Business use of your car
If you use your vehicle for business purposes, you can deduct the expenses related to that use. You can choose between the standard mileage rate or the actual expense method to calculate your deduction. The standard mileage rate for 2022 is $0.585 per mile from January 1 to June 30 and $0.625 per mile from July 1 to December 31. In 2023, the mileage rate is increased to $0.655 per mile. If you use the actual expense method, you must track all of the costs of operating the vehicle for the year, including gas, oil, repairs, tires, insurance, registration fees, and lease payments, and multiply those expenses by the percentage of miles driven for business. Note that you cannot count the miles driven while commuting between your home and your regular place of business.
- Contract labor
If you hire freelancers or independent contractors to help in your business, you can deduct their fees as a business expense. Just remember to send them a Form 1099-NEC by January 31st of the following year if you pay them $600 or more during the tax year.
- Depreciation
When you purchase furniture, equipment, and other business assets, you must spread the costs of those assets over the years you’ll use them rather than deducting the full cost in a single hit. However, the IRS gives business owners several ways to write off the full cost in one year. You can use the de minimis safe harbor election to expense assets that cost less than $2,500 per item in the year they are purchased. You can also use the Section 179 deduction to deduct up to $1,080,000 of property placed in service during the tax year, including new and used business property and “off-the-shelf” software. Finally, you can take advantage of bonus depreciation to deduct 100% of the cost of machinery, equipment, computers, appliances, and furniture.
- Education
If you take classes or workshops that add value to your business and increase your expertise, you can deduct the education costs. The IRS will look at whether the expense maintains or improves skills that are required in your current business. Valid business education expenses include classes to improve skills in your field, seminars and webinars, subscriptions to trade or professional publications, books tailored to your industry, workshops to increase your expertise and skills, and transportation expenses to and from classes.
- Home office expenses:
If you work from home, you may be able to deduct a portion of your housing expenses as business expenses. There are two ways to do this. The simplified method allows you to deduct $5 per square foot of your home that is used for business, up to a maximum of 300 square feet. The standard method requires you to track all actual expenses of maintaining your home, such as mortgage interest or rent, utilities, real estate taxes, housekeeping and landscaping service, homeowners association fees, and repairs. To qualify for the home office deduction, you need to meet two requirements. First, your home office must be used regularly and exclusively for business activities. Second, your home office must be your principal place of business. Keep in mind that if you use the standard method, you'll need to file Form 8829 along with your Schedule C.
- Interest:
If you take out a loan or use a credit card to cover business expenses, you can deduct the interest paid to your lender or credit card company. To qualify for this deduction, you must be legally liable for the debt, both you and the lender must intend for the debt to be repaid, and you and the lender must have a true debtor/creditor relationship. Keep in mind that if a loan is part business and part personal, you need to divide the interest between the business and personal parts of the loan.
11. Legal and professional fees:
Legal and professional fees that are necessary and directly related to running your business are deductible. These include fees charged by lawyers, accountants, bookkeepers, tax preparers, and online bookkeeping services such as Better Accounting Solutions. If the fees include payments for work of a personal nature, you can only deduct the part of the fee that's related to the business.
- Moving expenses:
Businesses can still deduct the cost of moving business equipment, supplies and inventory from one business location to another. Keep good records to substantiate all costs associated with your business move.
- Rent expense:
If you rent a business location or equipment for your business, you can deduct the rental payments as a business expense. Keep in mind that rent paid on your home should not be deducted as a business expense, even if you have a home office. That rent can be deducted as a part of home office expenses.
- Salaries, benefits, and services:
Salaries, benefits and even vacation time paid to employees are generally tax-deductible, as long as they meet a few criteria. The “employee” is not the sole proprietor, a partner, or an LLC member; the salary is reasonable, ordinary, and necessary; and the services were actually provided. If telephone and internet services are integral to your business, they can be deductible business expenses. If you use a landline at home, you cannot deduct the cost of your first line, even if you use it solely for work. However, if you have a second landline devoted to the business, the cost of that line is deductible. If you use your cell phone and internet connection for both personal and business reasons, you can only deduct the percentage allocable to business use.
- Taxes and licenses:
You can deduct various taxes and licenses related to your business, including state income taxes, payroll taxes, personal property taxes, real estate taxes paid on business property, sales tax, excise taxes, fuel taxes, and business licenses.
And a BONUS TIP
- Travel expenses:
To qualify as business travel, a trip has to be ordinary, necessary, and away from your tax home. You need to travel away from your tax home for longer than a normal day’s work, requiring you to sleep or rest en route. Deductible, IRS-approved business travel expenses include travel to and from your destination by air, rail, bus, or car, as well as lodging, meals, and other incidental expenses.
In addition to transportation and lodging, other eligible travel expenses may include rental cars, parking fees, tolls, and tips for hotel staff and drivers. If you use your personal vehicle for business travel, you may be able to deduct the actual costs of operating the vehicle or use the standard mileage rate set by the IRS.
It's important to keep detailed records of all your business travel expenses, including receipts, invoices, and other documentation. You should also maintain a travel log or diary that includes the dates and locations of your trips, the purpose of each trip, and the total number of miles traveled.
While business travel expenses are generally deductible, there are some restrictions and limitations to be aware of. For example, you cannot deduct expenses for travel that is primarily for personal reasons, such as a vacation that includes a few business meetings. Additionally, expenses that are considered lavish or extravagant may be subject to additional scrutiny by the IRS.
All these are great write-offs you can employ to save money for your business- contact our team today to see how!
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