But accounting can be a tax-deduction minefield that shifts all the time; remaining up to date is no easy feat for the small businessperson. Latching on to allowances is a strategy some adopt to minimise tax and stay within acceptable costings.
Be sure to get every small-business tax deduction you can to pay fewer taxes and run your business efficiently. Here are 10 common ones.
Depreciation
Office equipment and work vehicles bought with large lump sums can be ‘depreciated’ over their useful lives so that small business owners might claim expenses as an annual cost over several years, rather than as a one-off outlay when they file their tax returns. Your decisions will depend on what depreciation strategy best fits your situation if your company will have higher income and rates of corporation tax in the future, whereas if your company will have lower income or rates of corporation tax, a different strategy might be better. An accountant should be consulted about which method is better for your company.
Home Office Deduction
The deduction is also allowed to sole proprietors and freelancers whose home-based work space passes IRS criteria for ‘exclusive and regular use’, for the benefit of the business. The details must be kept carefully; deductions are not allowed over $1,500 a year, and any overage can trigger depreciation recapture when the home is eventually sold. An alternative simplified method capping deductions at $5 per square foot of office space is elective.
Business Insurance
If you’re self-employed then you might be pleased to hear that many of the insurance premiums you pay on your business – such as liability, fire and general business coverage – are also tax deductions. Premiums for liability, fire and general business coverage. Premiums paid under the cash method of accounting are deductible for your business, including premiums for health care coverage, workers’ compensation, disability and life policies, subject to certain qualifications.
Rent Deduction
Rent deduction is the portion of rent or lease expense that can be deducted from an individual’s or a company’s tax return: businesses can deduct rent payments that are made for offices and shop spaces, as well as deduct payments for physical assets such as retail storefronts and warehouses. However, you can likewise only claim that deduction if your space is used exclusively for business purposes and not personal purposes – and you’ll have to go back to your lease to determine what amount may or may not be deductible.
Bad Debt Deduction
A bad debt is an amount a business feels it is unlikely to receive payment for, and therefore can deduct from its tax return as long as: it is bona fide and a reasonable expectation of payment exists; and it is a debt from an outside taxpayer (not a related party) – this can be a delicate issue and a closer look should be taken. Businesses using accrual basis accounting must take a deduction from accounts receivable of the amounts that management expects won’t be collected; cash-basis taxpayers cannot take that deduction, because money that is owed to them won’t be income until collected.
Business Credit
Cards Interest paid on your credit card in business transactions is deductible as an ordinary and necessary expense. Other expenses that may be deductible include late fees and transactions fees. Many business cards come with built-in bookkeeping software so filing your return and itemising your deductions will be easy. I would like to continue using the same company credit card that I used to acquire the business property; however, the interest paid on all of these loans is tax-deductible – including loan interest either paid with a company credit card as part of the purchase or a mortgage loan used to acquire it, or as working capital to operate the business.
Business Bank
Account Fees The owner of a small business should open a separate account in the name of his/her business to prevent paying extra expenses that are deductible such as monthly service charges, wire transfer fee, overdraft fee and others. The biggest deductions would be from legal, accounting and bookkeeping services, reducing your taxable income and your tax filing time. So, it is very important that this information be tracked on a regular basis over the course of the year.
Startup Costs
It’s expensive to get your business off the ground. But there may be several expenses you incur that are deductible on your tax return – expenses you can subtract from your income to determine how much you will pay the IRS. Some examples: the cost of studying a market and concept to determine its viability, as well as organisation costs, such as the fees you pay to a lawyer setting up the company. Make sure you’re claiming for allowable expenses, and know exactly what are allowable and what are not; grasp the concept of fixed versus variable expenses.
Employee Expenses
A tax deduction (also known as a ‘tax write-off’) reduces the amount of your income that is used to compute your taxes – and, therefore, how much tax you pay to the IRS. Although most small businesses will know they could deduct employee salaries and wages, many might not realise that other employee-related expenses are deductible, too, such as health insurance premiums, training fees, or awards for achievement.
Other Business Expenses
A lot of small business owners aren’t aware of the sheer number of available tax deductions; utilising those that apply and taking full advantage of these write-offs can reduce their taxable income and lower taxes paid. You can deduct meals and entertainment that are directly connected to your business, as well as legal fees related to organisation or incorporation, as well as Google Workspace, point-of-sale systems and more.