Business Tax Deduction Guide for Busy Business People
A tax deduction is an economic benefit that the tax laws and regulations grant the taxpayer based on certain data or factors that is called deductible expenses. The deduction is applied on the tax rate. The law establishes this for both business and personal tax deductions.
In this article, we will be discussing business tax deduction for busy people and the important things to know beforehand. Of course, it is recommended that you hire a tax accountant or CPA, but it is still important to know these things for yourself.
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Tax Benefits
Tax deductions, like other tax benefits or tax incentives such as bonuses, reductions, deductions, must always be regulated by a law that refers to their creation, modification, deletion or extension. The taxpayer who applies a deduction for a deductible expense is obliged to justify the reality of said expense. The law establishes that he must do so primarily by means of invoices or substitute, but proven documents, which must be made available to the tax preparer and also to file away in a safe place, if needed later on.
The Proof
More specifically, the law requires that, when the taxpayer who applies the business tax deduction is an employer or professional, these deductible expenses are justified with their corresponding invoices. But these invoices, although they must exist and be provided when appropriate, do not make an absolute proof of the expense that is deducted (the words used by the law are that the invoice is not a privileged means of proof). A tax audit can question its content and, then, you will have to prove the reality of the expense that you are deducting by other means.
The Audit
The IRS has the right to verify the veracity or reality of the facts that give rise to a tax deduction, through the verification procedure together with the other factors that affect each tax deduction and its bases and fees. This right of verification by the IRS is known as a tax audit and not many business people are aware of how complex this can be. That is why you need a tax advisor, accountant and/or CPA. You don’t want to be caught unprepared for an IRS tax audit and so it is important to have all your ducks in a row before that could happen to you. While people who have filed their personal tax returns can be audited by the IRS, most of the focus is usually the complex tax returns of the business person.
Your Bottom Line
If the taxpayer has applied a tax deduction that, due to subsequent events, ceases to exist and cannot be applied, they must submit the corresponding supplementary declaration eliminating that deduction. Whether it's your first year at a startup or you're busy with trying to get your business back up and running after years in the trenches, you should have already learned to be attentive to your company's bottom line.
Strategic Opportunity
When tax season rolls around and it comes time for business tax preparation, you will always have a strategic opportunity to maximize your tax deductions in order to minimize the total amount you pay. When it comes to deducting taxes in a startup, this would be a case where you don't have to innovate, as there are a lot of tax deductions that already exist. All you have to do is take advantage of any or all of the deductions that apply to your business.
The Small Business Owner
Did you know that all small business owners want to save money, but not all take advantage of the tax deductions that can help them do so? Tax deductions can help small business owners save hundreds or even thousands of dollars each year! A tax deduction, or tax allowance, is an expense that you can deduct from your taxable income. Claiming all available tax deductions for your small business allows you to reduce your total income tax bill. Let’s summarize some of the common tax exemptions and benefits you need to know to help you reduce the amount of taxes you have to pay.
Almost anything you use to promote your business and attract customers can be deducted from your taxes as a necessary operating expense. This includes business cards, social media ads, yellow page ads, flyers, promotional mugs, pens and T-shirts, billboards, radio time, television time, and any other expenses that you have to use in order to promote and advertise your business.
You will likely pay a number of insurance premiums to protect your business. Fortunately, the cost of liability insurance, fire and flood insurance, the business owner's policy, and even health insurance (in certain circumstances) can count as tax deductions for small businesses.
Small businesses can also benefit from an income deduction. Businesses with a taxable income of less than $182,100 (single) or $364,200 (married) are eligible for a deduction of 20% of business income.
You can deduct expenses you paid for gas for your vehicle and for mileage, especially when you use your vehicle to do business more than half the time. If you have flown to a business meeting, it means that your airfare is deductible. The same is true, if you were to meet for business and used public transportation such as busy, train, and taxi or you had a friend or family dropped you off. While traveling to your business meeting and you stayed overnight at a hotel, the accommodation expenses should also be included.
Most trips that you take; as long as it has to do with the growth and progress of your business can be deductible on your business tax return as an expense. This may also involve international travel and trade shows where you can claim almost any expense, if that is the case and airfare cost. However, you must be either meeting a client or attending a business-related event such as a conference, convention, seminar or workshop. While on this business trip, you can also claim for meals and any form of transportation that you have to use such as a taxi, Uber, shuttle and more.
If you are going to use mileage as a business tax deduction on your returns, you have to document it; tracking every kilometer and also making note of the existing mileage on your odometer prior to taking trips. Be sure to find out the accurate rate of mileage you can be reimbursed for. It changes each year. Please bear in mind that your commute to your business each day does not count. It is only the business trips that do.
Legal and professional fees are considered deductible expense. Small businesses often rely on the help of other professionals to carry out necessary services. Fees paid to your attorney, accountant, business consultant, or any other professional who supports your business may be tax deductible.
Whether you rent a store on a busy street or an office in a skyscraper, the cost of renting space for your business is tax deductible. You can also deduct equipment rental payments as a business expense.
Wages, commissions, benefits, and even vacation time paid to employees are typically tax deductible. You can also deduct contributions from your employees' retirement plans, educational assistance, and other employee benefit programs.
Depreciation allows you to deduct the cost of your business assets over the time you use them. It can be applied to new and used assets with an expected useful life of 20 years or less. If you have company vehicles or equipment, you can declare depreciation; even if you used it the first time as your business property and then no longer need them. You can claim the full amount of assets that you have financed, purchased or rented as long as they are used only for the business.
The Forms
Now, it is also important that you appropriate whether your business is a LLC, sole proprietorship, corporation or partnership. You are allowed additional deductions; depending on which type of business you are running. If you are a sole proprietorship business, your expenses would be recorded on Form 1040 or Schedule C. If you are a partnership, it would be Form 1065. For corporations, it would be Form 1120. Your tax professional will advice you on the IRS form that you need to use for your business tax deduction.
Employee Benefits Package
If you have a benefits package for your employees and it includes things like health insurance, group life insurance, dependent care and accident insurance, these are tax deductible. If you make contributions to employees such as 401K retirement plan, this is also deductible.
Insurance
Every business should have insurance coverage and any payment made in this regard for professional liability and commercial insurance, you are allowed to deduct them.
Mortgage Interest
Form 1098 is used to document any mortgage interest that you have paid on your commercial property. This is also a deductible expense.
Office Supplies
All office supplies purchased for the business can be deducted. This includes shipping costs, paper, staplers, printer ink, folders, packaging products and more.
Payments to Employees
As long as you pay your employees, it is considered an expense. It does not matter how they are paid; whether by commission, paycheck or bonuses, you are allowed to deduct as an expense on your tax return.
Bad Debt
If you have bad debt from loans or account receivables, which involve vendors, customers, and past employees and you are unable to collect those, then these are tax deductibles. All you have to do is to write them off and submit them to your tax preparer at tax time.
Your Home
If you use your home as a business, there are some things that you can deduct such as 25% of the space you use in square footage, utility bill used, cleaning bill for the space, and any upgrades made. You would have to fill out Form 8829 to claim these deductions.
Commissions
If you pay broker commission after selling or buying a business, you can deduct this expense. However, you cannot include this same expense in other areas of your tax return when filing it.
Education
If you take extra courses to continue your education as a business owner, this could be a legitimate business tax deduction. It is also deductible, if it helps to enhance or improve your business. If it enriches your skills to be a better business person in your field such as getting or maintaining a professional license, then this could be a deductible expense. In addition, if you offer continuing education to your staff, this expense could also be deductible.
Hiring Independent Contractors
If your business is such that you have to hire independent contractors to carry out certain projects and you pay them; as long as the work is completed using their own equipment, tools and materials, you can deduct this expense. The main reason is that they won’t be considered as your employees, but self employed individuals.
The IRS
Many people might not believe that the IRS is generous when it comes to business tax deductions, but they are. This is especially true if you were to compare with other countries. In many cases, business owners are not aware of the allowed deductions and so they leave money on the table. Unfortunately, the IRS is not going to pick up the phone and call to let you know that you did not claim for a business tax deduction.
Conclusion
This is where a professional tax service is significant. Do not intentionally try to lie to the IRS as it relates to your tax deductibles. If it is discovered that you lied, then there will be severe monetary penalties or even jail time. However, in many cases, the IRS does give you time to pay the amount, if a tax audit shows any form of tax evasion. It is important that you consult with an experienced professional accountant before claiming a deduction on your tax return. The best recommendation is to get help from a professional who will be able to spot missed tax deductions for you.