Top 5 Tax Deductions for Small Businesses
Tax Season is one of the most stressful times of the year for many business owners, especially with the new 2018 Tax Reform changes. Whether you're self-employed or the founder of a non-profit organization, it can be difficult to navigate the waters of the IRS regulations and changes (i.e. taxes). Though you can and should utilize the services of tax professionals and software, it is always good to have a basic knowledge of your own. Personal taxes can be complicated enough and filing as a business can be downright overwhelming. But if you’re willing to comb through the paperwork and read the fine print, you can save a lot of time and money utilizing tax deductions. Here are some basics tax tips on deductions for small businesses.
Many small business owners are afraid to claim “home office” deductions for fear it will initiate an IRS audit request. Fear of an audit should never keep you from claiming legitimate deductions. Ensure you keep well-organized records to prove your deductions are indeed for business expenses and you’ll be fine. Please note, there is a difference between a home-based business and having a home office (doing business out of your home).
Here are some pointers when it comes to home offices:
Make sure that your office is distinct from your living area. Whether it is a room of its own or a part of a larger space, there should be a clear line between your workspace and the rest of the home. Don’t use your office as a spare bedroom or a playroom for the kids.
Figuring out the percentage of home expenses that are tax deductible for your business is simple. Measure your work area and divide by the square footage of your home. That percentage is the fraction of rent, mortgage, utilities, taxes, and maintenance you can claim.
Purchase the necessary assets you need to perform necessary business tasks (computers, tablets, printers, equipment, etc). Be aware of the amount you can deduct under section 179 because it changes yearly. Also, if you only have one vehicle, justify your business-related expenses (gas, repairs, insurance, etc.). If you’re going to purchase a work vehicle, make sure it is only used for work.
Subscriptions to business-related websites and magazines are fully deductible. Combined with the conference deductions (discussed below), there is no reason not to stay informed in your field.
Owning a small businesses that requires travel is something many people dream of, and small business owners often get to realize that dream. Since travel can be necessary for business success and expansion, many of the expenses are completely tax deductible. Our tax tip on travel is to write off expenses like airfare, hotel fees, car rental and mileage, and travel expenses like laundry costs. Food is only deductible up to 50%, probably because the government figures you would have to eat whether you were traveling or not. Remember these points when deducting business travel expenses:
Feel free to take your family with you, but only the costs for you, and only those that are business-related, can be deducted.
If you’re taking clients out for a meal those costs are 50% deductible. Write on the bill/receipt the reason for the meal. This makes it easier for you to keep tabs, and easier for any auditors to trace through your files. While no one wants an audit, if one does come your way, the more prepared you are, the less unpleasant the experience will be.
Conference fees are deductible as long as the conference is directly useful for your business. If it’s a conference related to your industry or will help you run your business more smoothly, it probably qualifies. If the objective is to earn more money it’s not as impactful to your business, and is not as likely to qualify. And of course, fan conventions and other entertainment-based events do not count, even if there are lectures.
Entertainment such as amusement parks, tourist attractions, and the like are not deductible. You can definitely combine business and pleasure, just don’t include the pleasure expenses in your deductions. If you are going for a business-related purpose, you may be able to write off the expense, but sometimes it’s safer just to call a good time a good time and save the write-offs for less ambiguous ventures.
Outside of the big April deadline, there are other taxes that are due frequently, such as monthly sales taxes, quarterly estimated taxes, quarterly employment taxes and more. If you’re not ready to file your taxes you NEED to file an extension. You want to avoid as many penalties and interest as possible. Failing to communicate with the RS will result in HIGH penalties and HIGH interest. Doing these 3 things while preparing to file their taxes will immediately help reduce your tax liability:
1) Organize your documents. Pull all of your receipts, pull your bank statements, payroll reports if you pay 941 taxes, final inventory count sheets and depreciation schedules. These documents should capture all business related transactions for your business.
2) If you’re using a cloud Accounting system such as Quick Books, Wave or Xero, make sure that all of your credit card, cash and business bank accounts are reconciled and tie back to your statements. This verifies that all your transactional data is correct and verified to your statements.
3) Run a final P&L report and Balance sheet. Your P&L will give you your total profit/loss for the operating year.
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