As a small business owner, taking advantage of all the tax deductions available is crucial to maximizing your profits and minimizing your tax liability. For example, many entrepreneurs have taken advantage of IRS Code 179 tax deductions for small business.
However, many business owners are unaware of all the deductions available or do not keep detailed records to claim small business tax breaks.
This guide will provide small business tax deductions you want to take advantage of. Here are five reasons why small business owners should take advantage of these deductions:
- Reduce your taxable income: By claiming deductions, you can lower your income subject to taxes, reducing your tax burden.
- Increase your cash flow: Lowering your tax liability will give you more cash to invest in your business.
- Stay compliant with tax laws: Taking advantage of deductions can help you stay compliant with tax laws and avoid any penalties or fines.
- Stay competitive: By keeping more of your profits, you’ll be able to invest in your business and stay competitive in your industry.
- Increase your chances of success: By maximizing your profits and minimizing your tax liability, you’ll increase your chances of success and longevity in your business.
We will cover deductions for startup and organizational costs, inventory, utilities, insurance, business property rent, auto expenses, rent and depreciation on equipment and machinery, office supplies, office furniture, software subscriptions, and advertising and marketing expenses.
Startup and Organizational Costs
Small businesses can take advantage of various tax deductions to reduce their taxable income and lower their tax liability. Although not classified as a tax deduction, startup, and organizational costs can be spread out over time using the amortization method. This method allows small business owners to write off a portion of these costs each year, making it easier to determine their annual profitability accurately.
According to IRS Publication 535, the costs of starting a new business, such as legal fees, accounting fees, and consulting fees, can be amortized over 180 months. In addition, organizational expenses, such as the cost of creating a corporation or partnership, can also be amortized for even greater small business tax breaks .
Small business owners need to keep detailed records of their startup and organizational costs to take advantage of these tax benefits. Keeping an open dialogue with a tax professional or referring to IRS Publication 535 is vital.
Small Business Tax Breaks from Inventory Expenses
If your business model involves manufacturing or purchasing products for resale, you can deduct the cost of your inventory or goods sold. To determine the cost of goods sold, you must record value inventory at the beginning and end of each tax year. This record includes the cost of products or raw materials, storage, direct labor, and factory overhead.
Small business tax breaks may apply to the cost of any supplies, tools, and equipment used in their operations. These costs include office supplies and shipping materials to machinery and computers.
It is essential for small businesses to accurately keep track of their inventory and supplies to take advantage of tax deductions. By calculating the cost of goods sold and deducting the cost of supplies, tools, and equipment, businesses can save money on their taxes and improve their overall financial health.
By staying organized and informed, small businesses can maximize their tax benefits and support their long-term growth.
Small Business Tax Deductions may even include Utilities
Small business owners can save a lot of money by taking advantage of tax deductions. Utilities like electricity, gas, and water are frequently among the highest costs for small businesses. For example, some office buildings find nearly 29% of operational costs are for utilities!
If a small business uses utilities to conduct its business, those utilities are fully deductible.
This deduction includes essential utilities such as water, electricity, trash, and telephone bills. Having the ability to deduct these from your taxes can make a big difference in the bottom line.
The home office should also be taken into consideration. As a result of the fact that many small business owners work from home, they can deduct the cost of their home office utilities.
There are certain limitations to small business tax breaks, though. The initial cost of a landline used for business purposes is not deductible for small business owners. This condition is because the first line is regarded as personal use only. However, the price of successive landlines is deductible if a small business owner needs them for their operation.
Enhance your Savings with Small Business Tax Deductions for Insurance
Small businesses maintain eligibility for various tax deductions for insurance costs. For example, these deductions may be available for health and business interruption insurance costs. In addition, some more conventional forms of business insurance, including property, liability, and workers’ compensation, have expenses that entrepreneurs can deduct, saving business owners precious funds.
In addition to the deductions above, small firms that offer health insurance to their employees may also qualify for the QSEHRA tax credit. If they have fewer than 50 employees, this can result in even more significant tax savings.
Keep meticulous records of all insurance expenses and consult a tax professional to see whether deductions and credits are appropriate for your firm.
Using available tax benefits for insurance payments, small business owners can lower their tax liability and invest the money they save to grow their companies.
Enhance your Savings when including Business Property Rent as a Tax Deduction
Small firms’ rent on commercial real estate is exempt from taxes. In addition, small businesses are permitted by the Internal Revenue Service (IRS) to write off the cost of leasing real estate utilized for commercial purposes as a business expense.
It doesn’t have to be intimidating with a few essential steps. First, remember to keep thorough records of all the rent payments you make over the year. Include the payment date, the sum paid, and the landlord’s name and address.
For small firms, leasing real estate for commercial purposes is considered a tax-deductible expense. Small company owners can benefit from this tax deduction to lower their taxable business income and tax burden by carefully recording all rent payments, figuring out the deductible amount, reporting the deduction on Schedule C, and documenting the business use of the property.
Tax Deductions for Small Businesses can include Auto Expenses
You can deduct anything considered a car expense if you have a car for business. However, you must have records that prove business usage and keep track of your miles. Alternatively, you can rely on the IRS standard mileage rate, which is currently $0.655 per mile.
Divide your expenses based on actual mileage if you use your car for business and personal purposes. For more information, refer to Publication 463 on travel, entertainment, gift, and car expenses.
Rent and Depreciation on Equipment and Machinery are Effective Tax Deductions
You can fully deduct these costs if you lease equipment or machinery for your business. This deduction applies to various equipment, from printers and copiers to vans and trucks. Business owners can also claim depreciation on equipment and machinery; however, you must deduct these costs over several years.
Claim a Section 179 deduction to do this. This unique deduction allows business owners to deduct up to $1,080,000 from a new or used property in service during the tax year.
Office Supplies & Office Furniture as Tax Deductions
Tax deductions for small business can include small items such as paper, boxes, pens, and staples can add up, and you can deduct these costs from your taxes. For example, office furniture is considered a type of office supply. As a result, it can be a small business deduction, just the same as printer paper or cleaning products.
Any software purchased or downloaded for your business is also subject to deduction. Instead, claim these expenses under the Other Miscellaneous Expenses of the Other Common Business Expenses on your Schedule C tax form.
Consider consulting with your tax professional to ensure your software subscriptions align with what is ordinary and necessary for your organization type.
Advertising and Marketing
Small businesses can maximize their savings by deducting marketing and advertising costs from taxes. Owners can accomplish this arrangement by keeping thorough records of marketing expenses. Maintaining records of all expenditures and ensuring that they are normal in character and directly related to the firm are practical steps to maximize savings.
Meet with a tax professional to ensure that all advertising and marketing expenses are accurately recorded and reported for optimal tax savings.
To stay compliant and optimize savings, it’s crucial to stay informed about any changes to the laws and regulations governing tax deductions for advertising and marketing expenses. Small businesses can successfully manage their finances and shift resources to other crucial aspects of their organization by using advertising and marketing expenses as tax deductions.
In conclusion, maximizing your savings as a small business owner is crucial to the success of your business. Take advantage of the tax deductions available to you and reduce your taxable income, increase your cash flow, stay compliant with tax laws, remain competitive in your industry, and increase your chances of success.
This guide covers deductions for startup and organizational costs, inventory, utilities, insurance, and much more. Log on to Small Business Bank to find out how funding solutions can help your business meet its goals today!