While you are working on managing your business, satisfying your customers, keeping up with inventory, and executing flawless customer service, who is managing the numbers? We know that the numbers and taxes portion of the business is often one of the biggest chores on your plate. But what if we told you there’s a way to make taxes work in your favor?
It wasn’t a typo, you read that correctly! By understanding and maximizing your tax deductions, you can retain more of your hard-earned money. Think of tax deductions as your business’s best-kept secret, a tool to lighten your financial burden if done right. Contrary to popular belief, deducting everything under the sun is not always the best option. Let’s take a look at the small business tax deductions you should be aware of.
Home Office Deduction
Let’s start with a common favorite: the home office deduction. If you’re operating your business from home, you might qualify for this. The IRS allows you to deduct a portion of your home expenses, such as rent or mortgage interest, utilities, and even home insurance. It’s calculated based on the square footage of your home office space relative to your entire home. So, whether you’re working from a cozy corner in your living room or a fully equipped basement office, don’t miss out on this one!
Business Use of Your Car
Do you use your car for business purposes? Perhaps you’re zipping to meetings, making deliveries, or running business errands. You can deduct expenses related to the business use of your vehicle. There are two options here: the standard mileage rate or actual expenses. The standard mileage rate is a simplified method where you multiply the IRS standard mileage rate by the number of business miles driven. The actual expenses method involves tracking and deducting all costs associated with the business use of your car, like gas, maintenance, and insurance. Choose the one that yields the bigger deduction!
Office Supplies and Equipment
Remember that printer you bought last year? Or the mountain of sticky notes and paper clips? These expenses add up, and fortunately, they’re deductible. Office supplies and equipment that you use for your business are fully deductible. This includes computers, software, and even the coffee machine in the break room. Just make sure to keep those receipts – even if they’re stuck to your monitor with a sticky note! Pro Tip: Make a Google Drive folder and put the app on your phone. When you make a business-related purchase, snap a photo of your receipt, and upload it to the drive
Utilities
Utilities can constitute a significant part of your operating costs. The good news? They’re deductible too. This includes electricity, water, heat, internet, and phone services. If you’re running a home office, only the portion of these utilities that pertain to your business operations can be deducted. For example, if your office occupies 10% of your home’s square footage, you can deduct 10% of your utility bills.
Travel Expenses
Do you travel for business? Whether it’s for meetings, conferences, or networking events, travel expenses can be deducted. This includes transportation (airfare, taxis, rental cars), lodging, and meals. Keep detailed records and receipts of your trips and make sure they’re business-related to qualify. And no, that beachside piña colada doesn’t count unless you’re meeting a client in the sand!
Meals and Entertainment
Taking clients out for meals? You can deduct 50% of these expenses. This includes meals with clients, potential clients, and business associates. Make sure to keep the receipts and note the purpose of the meal, who attended, and the business relationship. Just remember, the primary purpose must be business! So, that five-course meal? Yes, it’s deductible if you talked shop between bites.
Employee Salaries and Benefits
If you have employees, their wages, salaries, and other forms of compensation are deductible. This includes bonuses, commissions, and fringe benefits like health insurance and retirement plan contributions. Hiring your family members can also qualify as long as they are legitimate employees doing legitimate work.
Rent on Business Property
If you’re renting office space, a storefront, or any other business property, the rent is fully deductible. This can be a significant expense, so make sure to take advantage of this deduction. Keep in mind that if you own the property, mortgage interest and property taxes are deductible instead.
Insurance
Insurance premiums for your business are deductible. This includes health insurance, liability insurance, workers’ compensation insurance, and even business interruption insurance. These premiums can add up, so this is a valuable deduction to remember.
Marketing and Advertising
How do you attract customers? Whether it’s through online ads, business cards, flyers, or social media marketing, these expenses are deductible. This also includes website costs and promotional materials. Investing in marketing is essential for growth, and the tax deductions can help soften the blow to your budget.
Professional Services
Do you use an accountant, lawyer, or any other professional service? Their fees are deductible. This can include tax preparation fees, legal advice, and consulting services. These professionals help keep your business on track, so make sure to deduct their costs. Consider it a tax break for being wise enough to get expert advice!
Retirement Contributions
Saving for the future is always a prudent move, and it’s even better when it can save you money on taxes. Contributions to retirement plans, like a SEP IRA, SIMPLE IRA, or 401(k), are deductible. These contributions not only help you build a nest egg but also reduce your taxable income.
Education and Training
Are you or your employees taking courses to enhance your skills? Education and training expenses related to your business are deductible. This includes workshops, seminars, and even online courses. Investing in education pays off in many ways, including at tax time.
Loan Interest
If you’ve taken out a loan for your business, the interest on that loan is deductible. This includes loans for equipment, property, or even working capital. Keep track of your loan statements and the interest paid throughout the year.
Depreciation
Depreciation allows you to deduct the cost of assets over their useful lives. This can include machinery, equipment, buildings, and even vehicles. Instead of deducting the entire cost in one year, you spread it out over several years. This deduction helps you recover the cost of these big-ticket items over time.
Keeping Track of Deductions
The reality of the situation is that in order to maximize your deductions, you need to keep meticulous records. This means saving receipts, tracking mileage, and keeping detailed notes. Use accounting software and/or hire a professional bookkeeper to stay organized and consider consulting with a tax professional to ensure you’re taking advantage of every deduction available to you.
Navigating the world of tax deductions can be complex, but it’s worth the effort. By understanding and claiming these deductions, you can significantly reduce your taxable income, leaving more money in your pocket to reinvest in your business. Remember, each small deduction adds up to big savings.
Need assistance? We’re here for you. At Sommer & Sommer Bookkeeping, we specialize in helping small business owners like you navigate the intricacies of bookkeeping and tax preparation. Let’s make sure you get every deduction you deserve!