Small Business Tax Tips: 8 Deductions That Can save You Thousands
If you're a small business owner looking to maximize your deductions come tax time, you'll want to read these small business tax tips. They'll outline 8 of the top deductions you can claim.
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Did you know that there are nearly 30 million small businesses in the US? In fact, small businesses count for 99.7% of all businesses in America.
There are many complicated parts to running your own business, and one of the hardest is filing your taxes every year. Many small business owners choose to have their taxes filed by a CPA.
When you're filing taxes as a small business, there are many tax deductions that you can take advantage.
Read on to learn some small business tax tips that will help you lower your tax payment.
What Are Tax Deductions?
Running a business comes with many expenses such as rent, vehicle maintenance, office supplies and more. The government allows you to subtract the cost of many of these expenses from your company's gross income or the money that they've earned in a year.
For example, your business has earned $100,000 in the past year. You qualify for $15,000 in tax deductions. Now your business's taxable income is $85,000.
In some cases, the deductions will push you into a lower tax bracket so you'll also enjoy a lower rate of taxation.
Small Business Tax Tips
Most expenses that you incur while running your business are tax deductible. However, different rules apply to each category of expenses.
Having a system to summarize your income and expenses will save you a lot of time when it comes time to have your taxes prepared.
1. Vehicle Expenses
You have two options for claiming your vehicle expenses during the year. This can be a tricky expense to calculate, especially if you use one vehicle for personal and business purposes. Again, keeping organized records will help you calculate this expense.
One option is to deduct the IRS standard mileage rate of 54.5 cents per mile driven in 2018. If you have a newer vehicle or you drive a lot for your business, this is likely your best option.
The second option is to deduct your actual expenses including gas, repairs, parking fees, tolls etc. If your vehicle requires a lot of repairs or you pay a lot in parking fees and tolls, this may work out to a larger deduction for you.
2. Client Entertainment Expenses
Keeping your clients happy is part of doing business. As long as you are in fact discussing business and the meals are a reasonable cost relative to the business that's being done, you can keep these receipts for client entertainment deductions.
Unfortunately, you can only deduct 50% of the cost of your meals with business clients. For auditing purposes, you need to keep a record of the total bill, date, the name of the establishment and the business relationship between you and your client.
3. Travel Expenses
When you travel to trade shows or conferences, you are eligible for tax deductions for most things pertaining to that trip. The criteria to qualify for travel expenses are that your attendance at the event keeps you away from your regular work and you need sleep or rest to meet the demands of your work while traveling.
The list of travel expenses is quite comprehensive. As you would expect, you can deduct things like transportation, taxi fares, meals (at 50%) and lodging.
However, some of the less obvious deductions include shipping products, dry cleaning, business calls and even tips related to any of these services.
4. Salaries and Wages
Any payments made to employees are tax deductible. Not just limited to salaries or hourly wages, this also includes bonuses and commissions.
However, payment to the business owners in sole proprietorships or partnerships or LLC members for incorporated companies are not tax deductible.
5. Employee Benefits
Payments into employee benefits programs are tax deductible. This includes education, qualified retirement plans, and dependent care assistance. If you're self-employed, these payments must be filed as personal deductions rather than business deductions.
6. Contract Labor
Many small businesses use independent contractors as opposed to hiring employees. According to the IRS, an independent contractor is defined as a situation where "the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."
In plain English, if someone has their own equipment and tools and controls when or whether they come to work, they are an independent contractor. The cost of hiring these independent contractors is deductible.
Don't forget you need to issue form 1099-MISC to any contractors who receive more than $600 per year.
7. Employee Entertainment Expenses
Along with keeping your clients happy, employee morale is also important for the success of your business. When you take your team out to congratulate them for hitting their sales targets or to celebrate a birthday, these events are 100% tax deductible.
Additionally, if these outings include recreational activities or social events, the associated costs are also tax deductible.
8. Insurance Expenses
Perhaps the only cost of business more infuriating than taxes is the cost of insurance. Along with your business owner's insurance, you should also have industry and location specific insurance coverage.
This includes flood insurance, malpractice insurance, professional liability insurance, etc. The premiums for any type of business insurance are fully deductible from your taxable income.
Health insurance is a different matter. For example, a small business can get a tax credit for up to 50% of employees' health insurance premiums.
A tax credit is actually better than a tax deduction. A tax credit is an amount that you can subtract from your tax bill. For sole proprietors, health insurance premiums are deductible from their personal taxes.
Make Your Life Easier During Tax Season
For a lot of small business owners, tax season is a nightmare. However, by keeping organized records all year and having a better understanding of these small business tax tips and the deductions that apply to your business, it doesn't have to be.
If you're still feeling overwhelmed or just looking for a professional to take over your small business accounting, contact us today to see how we can help you with your financial needs.