Business Tax Categories to Claim Deductions

Reading Time: 6 minutes

Businesses and startups may not pay enough attention to expense deductions in their financial planning processes, and that could be costing them money. The costs of operating a business and producing sales are known as business expenses. Given this broad requirement, the IRS does not offer a comprehensive list of allowed startup and business deductions.

A few simple changes could considerably lower your tax obligation.

Consider the scenario where you drive your vehicle 100 miles every week to deliver goods to your customers and pick up supplies, that’s 5,200 miles in a year eligible for tax deductions you might be missing. Maintaining a log that separates work and personal use may seem time-consuming, but if you don’t take advantage of that deduction, you are missing out on over $2,900 in deductions.

Or perhaps you closed your office and began managing your business from a spare room in a home you own. You can typically write off up to $1,500 for space that is utilized solely for business along with other utilities.

An expense is deductible if it is “ordinary and essential” for operating a business in your sector.

It is therefore very worthwhile to structure your expenditures so that your company can take advantage of all legal write-offs, develop an efficient financial plan, pay the correct amount in quarterly taxes, and avoid worrying about an audit.

Why Business Tax Categories Are Important?

1 – Better Tax Filing Method

It is more accurate to file your taxes accurately and costs less money to do so when you categorize and maintain track of your business spending for tax purposes.

For instance, your tax preparer will spend hours sifting and categorizing your receipts into the appropriate IRS categories if you (figuratively) provide him a shoebox full of them.

The more assistance you provide, the less time it will take your tax preparer to do your taxes (and charge you), including calling you to inquire about specific expenses you’re deducting.

2 – Advance Planning for Taxation

After you have completed the first planning phase to establish your bookkeeping and accounting records, sit with your tax preparer to determine whether the system you’re going to employ will make it simpler or more difficult for her to accurately do your taxes each year.

Your preparer may be able to offer you more beneficial advice, such as altering the method you depreciate specific assets depending on your revenue or loss estimates, in addition to ideas for greater accuracy.

How To Categorize Business Taxes

The process of categorizing your business expenses is pretty straightforward, but many small business owners put it off until it is required, which adds to the workload.

Remember, you will need to have an exact estimate of your normal business expenses and the right categorization whether you are searching for investors, external financing, or need to generate financial projections. 

How To Categorize Business Taxes

Here are some suggestions about how to simplify the procedure:

  • Step 01: Create expense accounts that accurately represent your business.
  • Step 02: Invoices from vendors with the appropriate expense account code.
  • Step 03: Replace spreadsheets with accounting software.

Different Business Tax Categories

Category 1: Income

Wages, Salary, Tips, Bonuses

Tax-deductible expenses include employee salaries, gross wages, commissions, bonuses, and other forms of compensation.

If payments were made via payroll and the recipients supplied services for your company, compensation may even extend to salaries paid to wives and children.

There is a requirement that the payment is deemed reasonable.

IRA/Pension distributions

A wonderful approach for self-employed people to lower their taxable income is to make contributions to tax-advantaged accounts like an IRA or 401k.

Foreign Earned Income

The overseas earned income exclusion, also known as the foreign earned income exclusion, may be available to you if your company is situated abroad.

You must fulfill specific standards, such as earning less than a particular amount.

Category 2: Deductions

Mortgage Interest

You might be able to write off the interest paid if you loan money to build something new or upgrade your house for commercial use.

Real Estate Taxes

You might be able to deduct part of the taxes you pay if you itemize your taxes and work from home.

Property Taxes Paid

Property taxes paid on one’s primary residence and any additional real estate owned by the taxpayer are deductible for homeowners who itemize their tax returns. This includes any property taxes you have to pay ever since the day you buy the house.

Category 3: Exemptions

Medical Expenses:

Self-employed people who cover their insurance premiums or medical costs can write these costs off on their tax returns. Examples include medical costs and prescription medications.

Books and Magazines Subscriptions:

Specialized publications that pertain to your business, such as magazines, books, and journals, may be tax deductible. Newspapers, for instance, might not qualify, but trade journals might.

Child or Dependent Care

You can deduct qualifying expenses for the child or dependent care as long as you comply with the IRS regulations.

Category 4: Miscellaneous

Alternative Minimum Tax

Nonrefundable personal tax credits, such as dependent care and foreign tax credits, can be used to offset any AMT liability. If you had previously paid AMT, you might also be eligible for a minimum tax credit.

Estimated Tax Payments

Any projected taxes paid to state or local governments as well as any state or local income taxes from a previous year may be written off as long as they were paid during the tax year.

Household Employee (Nanny) Wages

As long as the nanny is paid legitimately, the child is under the age of 13, and both spouses are employed, a taxpayer may partially deduct nanny expenses.

The two most common ways to use this tax benefit are through a dependent care flexible spending account or as a tax credit when paying income taxes.

Most Common Non-Tax Business Expenses

Understanding the differences between taxable and non-taxable expenses can be challenging. You can have a different list of itemized deductions that employees can use to reduce their taxable income depending on your firm.

If you are unsure, the most crucial thing you can do is to understand the distinction between personal spending and corporate expense.

Personal expenditures and activities are not eligible for tax deductions. As well as any political donations, travel expenses, and gifts worth more than $25. Though sometimes they appear to be related to business, sometimes they are not. 

Check your company’s taxable and non-taxable expense policy if you’re still unsure of which costs are excluded. It will describe all the different expenses that an employee is eligible for reimbursement as well as how to file a claim.

Frequently Asked Questions

What is a tax-deductible business expense?

The expenses can be deducted depending on the type of business you have. Start by reading Internal Revenue Service Publication 535, which covers general tax filing guidelines as well as the deductibility of typical business expenses.

An organization driven by profit must incur those “ordinary and necessary” costs.

Even if your small business is struggling financially and isn’t making a profit, the intention must be there. If not, the IRS might think your firm is just a hobby and won’t let you claim costs.

To ensure accuracy, the IRS also advises separating regular company expenses from those that come under the cost of goods sold (COGS) and capital expenses, as some business expenses cannot be written off in the year they are incurred.

Are job expenses deductible?

Before 2018, workers may write off the cost of work-related expenses that their employers did not cover. Employee business costs are no longer tax deductible for the year 2018 and thereafter. If the company reimburses the employee, they are deducted from wages, nevertheless.

What is the best accounting software that I can use?

Even while it is feasible to manage expenses using a spreadsheet or a list of business expenses, having the ability to quickly extract those expenses will be helpful when it comes time to file your taxes.

Additionally, you have the assurance that, should you ever be audited, you have a reliable audit trail and enough backup.

The top accounting software programs for managing your company’s expenses are Zoho Books, AccountEdge Pro, FreshBooks, and QuickBooks Online.

Conclusion

Remember, every tax circumstance is individual, and it’s always in your best interest to speak with a CPA who knows the ins and outs of your business before claiming any deductions.

Now it’s time for you to select how to track spending throughout the year now that you have a helpful checklist that contains the typical IRS business expense categories.

Moreover, consuting with a tax specialist is the most critical step you can take. A tax consultant brings years of expertise to apply on your financials and can make you to save money.

Facebook
Twitter
LinkedIn
Sign Up For Our Weekly Newsletter
*Email
AKIF CPA
5.0
Based on 107 reviews
powered by Google
Annie Phillips
Annie Phillips
12:35 10 Oct 21
Turn around time was amazing on the project I needed done. When you don’t understand all the different forms communication is key and you will get that here. They are there to explain what and why you need it.
Meru Kapadia
Meru Kapadia
23:33 01 Oct 21
I usually don't write reviews much as everyone has different experiences, but definitely wanted to share the positive experience I have had here and why I would recommend them to all my family, friends and co-workers.I got a referral for here from a friend, so thought of giving them a try over my old CPA firm. I have been going here for a couple years now and have to say they are top notch. They are always responsive and willing to work with me even when I am delayed. I generally like to ask a lot of questions and not once did I feel like they were annoyed by it and would very thoroughly and positively answer all my concerns with detail explanations. Even during the pandemic, they worked with me 100% virtual and it was seamless. Overall, I am very happy with this firm and will continue with them for the foreseeable future.
Kevan Shah
Kevan Shah
21:45 01 Oct 21
I’ve been going to them for 3 years now for multiple of my businesses. I changed to them after I had problems with my previous CPA firm and I’m so glad I did! Best decision I ever made for my businesses. They have saved me thousands of dollars over the years as well as deal with my immensely complicated tax filling issues. No matter when I call, they always help answer all my questions (and trust me I have a lot) and put my mind at ease on all my concerns. I feel as if I am family the way they take care of me. The quality of their work has not changed; very consistent and professional. It is an understatement when I say I highly recommend them.
Maunil Shah
Maunil Shah
16:19 01 Oct 21
AKIF CPA is the best place for your tax needs! Saim has been easily available for my all my questions and concerns. Couldn’t ask for a better firm that provides excellent service and a familiarity with their clients. I always recommend family and friends to AKIF CPA!!
Shah Hussain
Shah Hussain
03:58 01 Oct 21
Hello AKIF CPA,I wanted to share my experience with you, your team and whomever may be reading this message. My most humble thanks to you and your team for a being such great part of my success.You have done a fabulous job for us this year, and since you took over our books (during our most devastating times) you have literally taken weight off of our shoulders.Thanks for bringing everything up to date and also providing us with numbers or as you call it consultations, ahead of time so we could seal the holes.Great work!!!Shah H.
Sumit Dalwadi
Sumit Dalwadi
04:57 30 Sep 21
The professionals at Akif have been absolutely amazing! Quick to answer all the questions I had and always available to offer their guidance.
Calvin R
Calvin R
20:21 29 Sep 21
I recommend these guys! I will be going back next year. They made everything simple and we understood what was happening. There we issues with our taxes due to our previous accountant and these guys fixed everything. They answered our questions and service was always with a smile.
Ammoria Daniels
Ammoria Daniels
02:11 16 Sep 21
We contacted Akif with an urgent matter regarding corporate taxes. Akif immediately understood what was needed and within days had everything ready to sign. The level of service we received was amazing and unmatched. Waqar expertise in trucking industry made our situation seamless. His communication was outstanding; I heard from him daily and could have been completed sooner if I was as fast as he was 😃 Highly recommended!
Joe Paneitz
Joe Paneitz
18:30 18 Aug 21
What an absolute pleasure to work with this CPA firm. My business is already seeing such a positive impact and growth. I cannot believe I didn't connect with them sooner. This firm is helping in so many ways! 5 stars is an understatement! Thank you so much for your help AKIF CPA
Helptest ARCpoint Labs
Helptest ARCpoint Labs
15:02 18 Aug 21
The firm is quick, responsive, and has the latest technological software. Thus far, I have been with them for 3+ years and will continue to work with them even after relocating. They make it easy even when I'm miles away. Would highly recommend them.
Luz Tipaz
Luz Tipaz
16:06 13 Jul 21
Saim and his team are the best CPAs in town. I have been their client for years. All started when I needed help with company structure with multiple companies and then accounting and Taxes. I have been very happy ever since. Thank you AKIF CPA.
Maria perez
Maria perez
18:31 08 Jun 21
Me and my husband have been getting all of our personal Taxes, business Taxes, monthly bookkeeping, accounting and payroll done with AKIF CPA. Recently, we had more stuff come up and had detailed analysis done on capital gains, single family rentals (SFR) and business disposition. You will only know how great this CPA company is until you have worked with them and given them a chance. Words can’t describe our experience. AKIF CPA gets the job done every time - very reliable, professional and affordable.
Afnaan Amin
Afnaan Amin
22:14 02 Jun 21
Very good experience, we had unique situation in regards to cross border income as Canadians currently residing in the US. Income on both sides of the border through completely different channels. Everything was very easy and completed timely, I also had lots of random questions and Mohammad provided top notch service along the way and even after we finished our taxes!! Highly recommended.
Ryan Paton
Ryan Paton
10:56 08 May 21
I moved to the USA from Canada late 2018 as part of a promotion/relocation for work. For my 2019 returns, I used an accounting firm recommended by the local Canadian social club in my city, which was a terrible experience. They were slow to respond to inquiries and would follow up in piecemeal requests which dragged out my return process over several months, often asking for information I had already provided.For the price I paid, I vowed to find better service. I found Mohammad online and decided to reach out. Mohammad was extremely responsive, took care of my US and Canadian returns as well as my wife's business returns in a timely manner. Overall, it was a very positive experience and I would recommend him to another in my situation.
Tuan Vo
Tuan Vo
01:59 20 Apr 21
I relocated to Texas from Alberta, Canada and needed a CPA to help me with my cross-border taxes as I was not happy with the CPA that I used previously. During my interviewing process to find another CPA, I had good feedback from Mohammad as he was able to answer my questions regarding my unique tax situation with expertise, and importantly to me, in a timely manner. I decided to use his services for the current tax year and I have nothing but compliments for the work Mohammad provided. If you are in need of a professional cross-border CPA, I highly recommend reaching out to Mohammad Akif.
See All Reviews
js_loader
Archives

Crypto Tax & Accounting Newsletter Signup

*Email

Cross-Border Tax Newsletter Signup

*Email