As a business owner, you are responsible for paying taxes on your profits. That said, you can deduct certain expenses from your taxable income, which will reduce the amount you have to pay.
This blog post discusses some of the most common and uncommon business deductions. Knowing about these deductions can help you keep more of your hard-earned money!
What are Tax Deductions?
A tax deduction is an expense that you can subtract from your taxable income. Deductions reduce the amount of money you owe in taxes, meaning you’ll pay less to your local, state, and tax authorities. There are many different types of deductions available to business owners, and each one can save you a significant amount of money.
Common Business Tax Deductions
Many owners always remember several standard business deductions during tax time.
Here are some of the most popular ones:
- Meal-related expenses: You can deduct 50% of the cost of meals, which is different from years past where certain “entertainment” expenses were also deductible, but that’s no longer the case. In some cases, 100% of your meal is deductible. This caveat is temporary and due to the impact on restaurants in the pandemic, but if you consume food and beverages meant for “immediate consumption” you’re likely able to deduct the entire cost of the meal.
- Car expenses: If you use your car for business purposes, you can deduct the cost of gas and repairs. You can also deduct mileage expenses, calculated at a rate of 54 cents per mile.
- Home office: If you use a part of your home exclusively for business purposes, you can deduct the related expenses, such as rent or mortgage payments, utilities, and repairs.
- Equipment: If you purchase equipment for your business, such as computers or printers, you can deduct the cost from your taxable income. You can also depreciate assets over time if they last longer than one year in service but less than five years of use before being replaced by new ones (this includes furniture).
- Utilities: If you use your home’s internet connection to conduct business, you can deduct that service’s cost from your taxable income. You can also deduct a portion of other utility expenses if used for business purposes (e.g., electricity).
Uncommon Business Tax Deductions
While common business tax deductions are well-known, some less obvious ones can save you money. Here is a list of some of the most common and uncommon business tax deductions:
- Uniforms: If you must wear a uniform at work or purchase one for use while on duty (e.g., police officers), then the cost of the uniform can be deducted from your taxable income.
- Moving expenses: If you move to a new location closer to where you work, some moving expenses may be deductible. You should consult with tax professionals about how much this deduction is worth, as it will vary depending on various factors such as distance traveled, size of household, and more.
- Tuition: If you are taking courses to improve your business skills, then the cost of education may be deductible. This deduction is available for both full-time and part-time students.
- Gifts: If you give a gift to an employee or client, then the cost of that gift is tax-deductible. However, this deduction has some limitations. (For example, only up to $25 per person is allowed each year without penalty. Any amount over that amount must count as income.)
Are There Any Special Rules Or Restrictions?
Business tax deductions help you keep more of your hard-earned money. However, some special rules and restrictions apply when claiming these deductions on your taxes. Here is a list of the most common ones:
- It would help if you had receipts for each deduction; otherwise, the IRS will not allow it.
- You cannot deduct expenses if they were personal (e.g., eating out with family or friends). These are called nondeductible expenses, and any amount spent on them will not be allowed by the IRS as an expense deduction from your taxes. Many people mistakenly think that because their business has a credit card, everything charged to that card is a business expense. This myth is not the case! You must have receipts to prove that the charge was for a business-related purpose for it to be deductible.
- The amount deducted must be reasonable about the size and scale of your business. For example, you cannot deduct the total cost of a new computer if you are a one-person business; instead, you would only deduct a portion of that cost based on its use for business purposes.
How Can You Keep Track Of All Your Expenses Throughout The Year?
The best way to ensure that you take full advantage of all the business tax deductions available to you? Have a plan and keep track of your expenses throughout the year. This tracking happens in a variety of ways, such as:
- Using a spreadsheet or accounting software
- Maintaining a paper trail of receipts and invoices
- Scanning and saving receipts into a digital format
- Employing a reputable accounting firm to keep your expenses and books organized
No matter how you choose to track your expenses, you must do so regularly. Clean books make filing your taxes much more manageable — while keeping you from overpaying.
Work with a Reputable Tax Accounting Solution
As you can see, there are many different deductions available to your business. Knowing which ones apply to your organization — and how much they can save you — reduces your overall tax liability.
Ready to find out more? See how I can help.