As a small business owner, you need to maximize your profits responsibly. Doing so will keep more money in your pocket and protect your bottom line from paying unnecessary taxes and fees come tax season.
However, you must know what tax deductions are allowed for your business and what accounting best practices to follow to keep your company compliant. From home office deductions to tax credits for business travel, there are many ways to bring down your income tax and keep more money in your pocket.
This article discusses some creative small business tax deductions that can save you money, how to use technology to streamline your expense tracking process, and thoughts on leveraging the help of a tax professional to maximize your deductions.
Business Expense Tax Deductions
A business expense is any cost that is incurred in the everyday course of running a business. Every business, from small solo operations to the largest corporations, must track these expenses meticulously throughout the year so they may use them as itemized deductions on their income tax.
In the US, the term ‘self-employment tax’ generally refers to the Social Security and Medicare taxes an individual employed by themselves must pay. The tax a self-employed person is expected to pay depends on their location and business structure. However, businesses can deduct some common business expenses regardless of their location.
Deductions are calculated by subtracting business expenses from your gross income to generate a taxable income.
Small business owners don’t have an accounting department to handle these tasks, so they need to understand what a legitimate expense is and what can be deducted. If they don’t want to do it alone, business owners can hire a tax professional or utilize software to simplify the process.
Types of Deductible Business Expenses
Some business expenses that qualify as standard deductions include the following:
- Car expenses (if you travel to clients)
- Startup costs (business research, licensing fees, and other initial costs)
- Home office deduction (square footage write-off)
- Real estate tax (for out-of-home office or store)
- Depreciation
- Professional books and guides
- Legal and accounting fees
- Business Insurance
- Travel expenses
- Business loan interest
- Technology and tools
- Continuing education and certifications
- Charitable donations
- Advertising and promotional costs
Importance of Appropriate Record Keeping for Tax Deductions
As a small business owner, basic bookkeeping is one of the most essential skills to develop early on. Practicing good record-keeping strategies reduces the chance of an audit and makes your life easier.
If you are self-employed, or a sole proprietor, you will need to keep a record of the following items for tax purposes:
- Receipts
- Invoices
- Mileage logs
- Medical bills (if necessary)
- Credit card statements
- Canceled checks
- A copy of your latest tax return
The IRS suggests that you hold onto your expense records for a minimum of three years. You should also keep a spreadsheet or ledger to itemize income and expenses. In the event you do get audited, having these in order will help out a lot.
Identifying Creative Small Business Tax Deductions
Now that we know some standard business expense tax deductions and the importance of good record-keeping let's look deeper into some creative small business tax deductions.
Home Office Deductions
If you are a freelancer and work exclusively from home, you may be eligible to write off a portion of your home’s square footage for your home office. To qualify for a home office deduction, your designated space must be used regularly for your business. The prescribed rate in 2022 was $5 per square foot, with a maximum of 300 square feet.
In addition to your home office’s square footage, you may also deduct the following:
- Office Supplies
- Utilities (internet and electric)
- Equipment (computer, printer, doc cam)
- Furniture (desk, chair, cabinets)
Deductible Business Travel Expenses
The IRS provides guidelines for travel deductions on its website. Business travel is a considerable expense that you don’t want to forget when calculating your costs. To maximize the deductions from business trips, avoid overlooking some standard deductions.
Overlooked deductions :
- Taxi, bus, and airline fees
- Dry cleaning or laundry
- Shipping luggage
- Standard mileage rate if you use your own vehicle
- Business calls and communications
- Non-entertainment-related meals
- Tips for services relating to these expenses
Deductions from Employee Training
Generally, any training that improves employees' skills to perform their current job is tax deductible. Under self-employment, you can write off any course or training that enhances the skills needed to provide your service effectively.
For example, suppose you are a tutor and you complete a certification program that solidifies your skills as a high-quality tutor in your subject area. In that case, you may deduct the costs you incurred to complete that program. You cannot deduct expenses associated with training for a future career. If you are a tutor and enroll in a nursing certification program, you cannot write that off on your business taxes.
Deductions from Business Insurance
Protecting your livelihood and assets with business insurance should an unforeseen event arise is important. The cost of your insurance premium is an expense you can deduct from your taxable income.
Some examples of business coverages that are tax deductible include the following:
- Commercial Property Insurance
- Data breach insurance
- Professional liability insurance
- General liability insurance
- Workers’ compensation insurance
- Business income insurance
An insurance premium must be exclusively for your business to qualify as a deduction. If an insurance premium is unnecessary for your business, the IRS will not recognize it as a write-off. You can’t deduct premiums for policies that help recover lost wages due to illness or injury, life insurance, and policies you obtain to qualify for a loan.
The Role of Digital Tools in Expense Tracking
If you are worried about keeping up with your business expenses, mobile and web apps can help with expense tracking and reporting. Enlisting the help of accounting software will help you streamline your bookkeeping and ensure you are tracking your deductions effectively.
Some helpful features with accounting software include tax calculators, financial reports, integrations, and security.
Some popular cloud-based accounting apps for small businesses include the following:
- Oracle Netsuite
- QuickBooks
- Sage
- Freshbooks
- Zoho Books
Consulting With Tax Professionals
Partnering with a CPA to help when filing your income tax is another way to ensure maximum tax deductions. CPAs have the knowledge and experience to help you find the tax write-offs your business qualifies for. They also act as a safety net catching any discrepancies and ensuring compliance.
Hiring a CPA to handle your business taxes will do more than save taxes. A CPA will also help you:
- Save time
- Improve cash flow
- Place more emphasis on running your business
- Navigate audits
- Understand tax laws
- Make better business decisions
The Bottom Line: Balancing Creative Deductions and Legal Responsibilities
When filing taxes, there is a fine line between maximizing deductions and avoiding tax evasion. That is why it is essential to know what expenses qualify and maintain clear records of your costs for the IRS in case you have an audit.
Accounting software is one option to help independent contractors stay organized and on top of documenting their business’s income and expenses. Programs like Quickbooks are intuitive for business owners to use themselves and offer support to help them use the software effectively.
Some business owners may also work with a CPA to help them navigate their business taxes and savings options. Hiring a professional is the surest way to maximize deductions while staying compliant.
Depending on the size and nature of your business, you may benefit from one or a combination of all these options. The most important thing is to educate yourself to make informed decisions.
How Streamlining Your Administrative Tasks Saves Time and Money
In addition to accounting software, many CRM software programs help frazzled business owners find balance in running their companies.
CRM software helps you communicate more effectively to build stronger client relationships. Cloud-based platforms make it easy to share information quickly while preserving the integrity of your brand.
As a business owner, it is easy to understand how any time-saving tool can protect your bottom line.
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