She paid more in taxes this year than she needed to, all because she failed to understand what business deductions were available for her business.
Are you sure you’ve claimed every business deduction available to you?
You may have decided to do your own bookkeeping and file your own taxes, without understanding that there may be tax deductions available that you missed. I see this more and more as small business owners decide to take the DIY approach to their bookkeeping and tax preparation.
As a small business owner, you’re always looking for ways to save money and maximize your profits. One of the best ways to do this is by taking advantage of every possible business deduction available to you.
But how do you know what you can deduct? And how can you be sure you’re not missing anything?
Like my client, “Did you pay too much in taxes this year?”
Keep reading to discover what business deductions are and all the ways you can save at tax time.
Understanding Business Deductions
Let’s start with, “What exactly are business deductions?”
These are expenses that are considered both ordinary and necessary for running your business. Ordinary means common and accepted in your industry, while necessary means helpful and appropriate for your business. Deductions reduce your taxable income, which means you pay less in taxes.
Common Business Deductions
Here are some common business deductions you should be aware of:
– Operating Expenses: This includes everyday expenses like office supplies, utilities, and rent. Think of anything that keeps your business running smoothly on a daily basis.
– Employee Salaries and Benefits: If you have employees, their wages, health insurance, and even retirement benefits can be deducted.
– Depreciation: If you’ve invested in expensive equipment or property, you can deduct a portion of these costs over several years. This is known as depreciation. For example, if you bought a piece of machinery for $10,000, you might deduct $2,000 each year for five years.
Home Office Deduction
Do you work from home?
If so, you might qualify for the home office deduction. To be eligible, a portion of your home must be used exclusively and regularly for business. You can choose between the regular method, which involves detailed record-keeping, or the simplified method, which offers a standard deduction based on the square footage of your office space.
Travel and Transportation Expenses
Do you travel for business?
Expenses like airfare, lodging, and meals can be deducted. But remember, commuting expenses (the cost of traveling from home to your regular place of business) are not deductible. If you use your vehicle for business, you can choose to deduct either the actual expenses (like gas and maintenance) or use the standard mileage rate.
Meals and Entertainment
Business meals are 50% deductible if they are necessary and directly related to your business. Taking a client out for lunch to discuss a project? Deductible. However, recent tax laws have limited deductions for entertainment expenses, so tickets to a concert or a sporting event are no longer deductible.
Professional Services and Fees
Do you hire an accountant or a lawyer?
Fees paid for professional services are fully deductible. This also includes consulting fees and subscriptions to professional journals or software needed for your business operations.
Marketing and Advertising
Any money you spend on marketing and advertising is deductible. This includes everything from building and maintaining your website to running social media ads. Have you spent money on business cards, flyers, or even sponsoring a local event? All deductible.
Education and Training
Investing in your own education or that of your employees can pay off in multiple ways. Deductible expenses include seminars, workshops, and courses that improve your skills or knowledge related to your business. For example, if you own a bakery and take a course on advanced pastry techniques, that’s a deductible expense.
Insurance Premiums
Different types of insurance premiums are deductible, such as liability insurance, property insurance, and health insurance for yourself and your employees. This can significantly reduce your taxable income, so make sure you’re not missing out.
Retirement Plan Contributions
Contributing to a retirement plan can be a win-win. It’s a great way to save for your future while also getting a tax deduction. There are several options available, such as SEP IRAs, SIMPLE IRAs, and Solo 401(k)s. Each plan has different contribution limits and benefits, so choose the one that best fits your needs.
Miscellaneous Deductions
Don’t overlook these often-forgotten deductions:
– Bad Debts: If you’ve made sales on credit and the debt becomes uncollectible, you can deduct it as a bad debt.
– Interest on Business Loans: Interest paid on loans used for business purposes is deductible.
– Charitable Contributions: Donations made to qualifying charitable organizations can also be deducted, though there are some limits.
Record-Keeping and Documentation
Accurate record-keeping is crucial. Keep all receipts, invoices, and documentation to support your deductions. Using accounting software can help you stay organized and ensure you don’t miss any deductions.
Common Mistakes to Avoid
Avoid these pitfalls to maximize your deductions:
– Mixing Personal and Business Expenses: Keep separate accounts and records for business and personal expenses.
– Overlooking Small Deductions: Small expenses can add up over time, so don’t ignore them.
– Failing to Update Tax Knowledge: Tax laws change frequently. Stay informed or consult a tax professional to ensure you’re taking full advantage of available deductions.
Understanding and maximizing your business deductions can lead to significant tax savings, which is money you can reinvest into your business. Keep detailed records, stay informed about tax laws, and don’t hesitate to seek professional advice. By taking full advantage of every possible deduction, you’ll be well on your way to keeping more of your hard-earned money.
Get Professional Bookkeeping Assistance Today
Contact me today for expert bookkeeping services tailored to your business’s needs. Let me handle the numbers so you can focus on growing your business with confidence.