Tax season can be stressful for small business owners, and the prospect of handing over a large sum of money to the government is not appealing. The importance of small business tax deductions can’t be overstated. Here are five tax perks that small business owners typically miss that might save your company money.
The Internal Revenue Service (IRS) defines deductible business expenses as “normal and reasonable” charges. Clearly, the government backs up this vague statement with a mountain of rules about what expenses can be deducted from taxes.
The next five require you to maintain a tax-aware mindset throughout the year. Maintaining accurate records of your daily expenses can result in significant tax savings.
Important Takeaways
- If you host lunch meetings, you may be eligible to deduct the expense of your meals.
- If you use your phone or the internet for business purposes, you can deduct the associated expenses.
- If you pay for health insurance, you may be eligible to deduct the premium costs.
- You can plan your large business expenditures to optimize the associated tax deduction.
- You can deduct travel expenses and use bonus miles for future holidays.
Deductions For Taxes: An Overview
Tax deductions are costs that you can subtract from your taxable income to lower the amount of taxes you have to pay. With the passage of the Tax Cuts and Jobs Act of 2017.2, some of the most common tax breaks for individuals were either taken away or made harder to get.
This is not true for small business owners, whose taxable income can only be estimated by taking operating costs out of gross sales. Keeping track of your business expenses so you can deduct them from your income is still important if you own a small business, work for yourself, or get paid through a limited liability company (LLC).
Some of these deductible expenses, such as office rent, business equipment, staff wages, and business insurance, are obvious, while others need strict record-keeping and receipts; however, the work may be well worth it at tax time.
How Tax Reform Modified Taxes On Small Businesses
The Tax Cuts and Jobs Act of 2017 made one big adjustment to how small businesses pay taxes. It lets small businesses that qualify take 20% of their income off their tax bill. In other words, taxes will be calculated based on the filer’s business income less 20%.
This deduction, known as Section 199A, is available to self-employed individuals, sole proprietorships, LLCs, S corporations, and partnerships.
It is available to eligible taxpayers whether they use the standard deduction or itemize deductions.
Who Qualifies
For the tax year 2023, single filers with taxable incomes of less than $182,500 and joint filers with taxable incomes of less than $364,200 can take the full deduction.
1. Write Off Lunch Meetings
If you frequently eat business lunches, you may be eligible to deduct 50% of your meal costs.
Consider holding lunch meetings with partners, staff, and business contacts. As long as the meal expenses are reasonable, you may deduct 50% of meal costs incurred while dining with business partners and workers in the course of conducting business.
Hence, if you purchase lunch daily and spend approximately $8, you can deduct $4. If you do the math, you’ll find that this totals over $1,000 each year in tax deductions.
Having trouble keeping track of business expenses? Accounting software is also deductible if it is utilized for business purposes.
2. Use Your Mobile Phone And The Internet For Business
You can deduct the cost of using the phone and the internet for business when you do so. But, if you use the phone and internet for both business and personal purposes, you can only deduct the proportion of the expense that is attributable to business use.
3. Deduct Health Insurance Premiums
If you have an individual health plan (not a group plan) and pay your premiums out of pocket without tax breaks or subsidies, you may be able to claim those premiums as a tax deduction if you are a sole proprietor, a partner in a partnership or an LLC, or an S corporation shareholder who owns more than 2% of company stock.
If you are a sole proprietor whose business and personal revenue for the year totaled $60,000. Your combined state and federal income tax liability is around 30%. You may deduct the $10,000 spent annually on health insurance premiums for you and your family. Your taxable income will go down from $60,000 to $50,000, which will save you about $3,000.
Variations on this Theorem
As a business owner who meets the above requirements, you can get a $10,000 tax break, but your self-employment tax stays the same at $60,000 of taxable income. (Tiny companies pay both)
But you can receive both if your spouse is an employee of your company. The two of you and your dependents can be covered under a plan purchased in your spouse’s name (not in the name of the business). Since this individual is both an employee and your spouse, you can deduct the whole $10,000 from both your business income tax and self-employment tax if you file jointly.
In this situation, you might save a total of $4,530 in income tax and self-employment tax savings.
4. Arrange Your Major Expenditures
Your tax bracket can differ dramatically depending on your taxable income. If your business is a limited liability corporation (LLC), you must pay taxes on your share of the company’s profits.
You examine your taxable income a few weeks before the end of the fiscal year and discover that it has been approximately $100,000 so far, putting you in the 24% tax bracket for 2023.
If you purchase $20,000 worth of new equipment, your taxable income will decrease, and your tax bracket will likely drop to 22%. If you plan your luxuries carefully, you can get the most out of your deductions and save money every year.
5. Deduct Travel Expenses
Many company owners accumulate points on their travel mileage cards to save money on future business flights. This is an error. Business travel expenses are entirely deductible as an expense for the business. Personal travel charges are not.
The smart thing to do is to save frequent flyer miles for vacations and write off the full cost of business trips.
What Tax Deductions Are Available For A Limited Liability Corporation (LLC)?
If you have income from an LLC, you may deduct costs like you would for any other firm.
A limited liability corporation (LLC) may distribute all of its income to its partners, who will then be responsible for paying all taxes. Most businesses are set up this way to avoid the dreaded “double taxation” of the business and its partners.
Depending on how the LLC was set up when it was created, the IRS will classify its profits as coming from a corporation, a partnership, or a single partner.
What Kinds Of Company Expenses Are Deductible In 2022?
As you might expect, the solution could fill an entire bookshelf. The IRS defines deductible business expenses as “ordinary and necessary” charges associated with conducting business.
It divides these into two basic categories: cost of goods sold (raw materials, freight, storage, labor, and manufacturing overhead) and capital expenses, which include initial costs, firm assets, and renovations.
In more detail, deductible business expenses include rent, salary, travel expenses, telephone and internet bills, legal fees, advertising and marketing expenses, and loan interest and fees.
Don’t forget about this significant change for the 2018 tax year: the 20% deduction from business income for qualifying businesses.
How Much Profit Can A Small Business Earn Before Having To Pay Taxes?
You owe no tax on annual income less than $400. This is true regardless of whether you are selling old items on eBay or managing a huge organization.
Can I Deduct My Automobile As A Business Expense?
Yes. If a vehicle is used primarily for business, all operating expenses are deductible.
If you use your car for both business and pleasure, you can only deduct business-related costs.
This one is a bookkeeping nightmare. There are two methods for calculating the cost, one of which is easier than the other:
- For the remaining six months of the 2022 tax year, you can claim the standard deduction, which is 62.50 cents per mile. When driving for business, you must keep track of your mileage. Increase the standard deduction by the proportion of your total mileage used for business.
- You may utilize the actual expense technique, which requires you to keep account of all business-related car expenses, such as leasing payments, gas, oil, maintenance, insurance, and registration fees. Multiply the total amount by the percentage of your annual mileage that you use for business.
Small Business Tax Deductions: The Conclusion
The tax reform law that eliminated numerous individual deductions did not affect the reality that business owners must subtract their expenses from their revenues to determine their taxable income.
The IRS’s own rule of thumb states that “ordinary and necessary” company expenses are deducted.
Calculating your costs and proving their accuracy, should an audit be necessary, demands precise record-keeping. Even further, you can time your main business expenditures to maximize your tax advantage.
You may want to talk to a tax expert about the eligible deductions for your small business.
