Legislators have added several provisions to the tax code over the years to lessen the impact of the additional expenses that self-employed taxpayers must bear to operate their businesses.
The self-employed tax deductions under the Tax Cuts and Jobs Act (TCJA) underwent several changes beginning with the 2018 tax year.
Some of these modifications are permanent, while others are only temporary and will end in 2025.
In particular, a qualifying business income (QBI) deduction for pass-through businesses—those that pay taxes via individual taxpayers rather than a corporation—has a significant impact on small businesses.
This deduction is extremely advantageous for owners of sole proprietorships, partnerships, S corporations, as well as specific trusts, estates, and limited liability organizations (LLCs).
Taxpayers who qualify may deduct up to 20% of their QBI. The net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business constitutes a pass-through’s QBI.
In this article, we will talk about tax deductions and business expenses that small business owners can consider. The major purpose of the article is to educate small business owners about tax deductions, and how can they write off for their small businesses.
What Are Tax Deductions/Business Expenses?
The costs associated with running a business are referred to as business expenses. The revenue statement contains a record of them.
Tax deductions are the costs that can be disclosed to the IRS to lower the tax burden as long as it is thought to be normal and necessary.
When expenses are necessary, it signifies that they support your company’s operations and are reasonable for your firm.
To determine a company’s net profit or loss and taxable income, business revenue will be deducted from these costs.
Section 162 of the Internal Revenue Code (IRC) contains guidelines for business costs.
The Major Tax Deductions for Your Small Business
If you own a small business, claiming a portion of your income in tax-deductible business expenses can increase profits and save you money at tax time.
Even routine expenses like trips to the post office by automobile or your home office’s electricity bill could be costing you less money if you note them in your small business accounting records.
You may subtract the following 10 major write-off categories from your qualified business income to generate a strong revenue:
1. The Cost of Going Into Business:
Advertising, utilities, office supplies, and maintenance are all expenses that can be written off as current business expenses if you’re operating a small business.
But, not before you actually, open your doors for business.
You might be able to get around this regulation if you expect your business to turn a profit right away by postponing the payment of some bills until after you’ve opened, or you could start small.
But if like many firms, you expect to lose money in the first few years of operation, it may be better to spread out the deduction over five years so that you can offset it with some profits.
Interest and carrying costs incurred while financing business purchases with credit may wholly be tax deductible.
The same holds if you obtain a personal loan and invest the money in your business. However, you can only write off 30% of your interest costs if your company’s profit is greater than $25 million.
Businesses that deal in real estate and have gross receipts of more than $25 million might choose to opt out of the 30% restriction by agreeing to extend the depreciation term for their real estate.
Keep thorough documents that show how the funds were used for your company.
3. Professional Fees:
Business books, particularly those that enable you to conduct your affairs without hiring an attorney or tax advisor, may entirely be deductible as operating expenses.
In general, you can deduct the costs of hiring consultants, tax experts, or lawyers in the year that they are paid.
However, they must be subtracted from the benefit you receive from the lawyer or other professional if the job relates to future years.
4. Health Insurance:
You can be qualified for a health insurance premium deduction if you own a small business. The Small Business Jobs Act introduced a new deduction in 2010.
This pertains to the health insurance premiums paid by independent contractors.
For the following individuals who are self-employed, you may adjust your taxable income by deducting 100% of your health insurance costs: yourself, your partner, your reliant, and your children under the age of 27, at the end of the tax year.
On Line 29 of Form 1040, you may claim the health insurance deduction as an above-the-line deduction.
Find out more by speaking to a tax expert.
Reduce your tax while supporting the growth of your business. The expense of advertising is deductible from your taxes, whether you promote your company on Instagram or in your local newspaper.
This includes the cost of advertising as well as any costs associated with having it written and developed.
6. Commute Expense:
You may deduct all operating and upkeep expenses if you only use your car for business-related activities.
You can only deduct expenses for the commercial use of the car if you use it both for business and personal purposes.
You have two options for deducting the miles you drive for work: either you take the standard mileage deduction of $0.56 per mile driven, or you deduct the actual miles you drive for work.
Depreciation is the process of writing off the cost of an expensive item, such as a car or piece of machinery, throughout its useful life rather than doing it all at once for a single tax year.
For longer-term, more expensive expenditures, small businesses typically deduct depreciation so they can be compensated for the cost throughout the asset’s useful lifetime.
8. Real Estate Taxes:
You can write off state and local real estate taxes paid while filing your income taxes. These deductions include property taxes, which you can deduct up to a maximum of $10,000.
All utilities used for your small business are completely deductible. This covers expenses including those for water, power, trash, and phone service.
The expense of the first landline, however, is not deductible if you work from home, but future landlines are.
10. Employee Gifts:
According to IRS Publication 463, employee gifts up to a total of $25 per year, per employee, are fully deductible.
Expenses that You May Deduct 100%
Some of the costs that are fully deductible for small enterprises include the following:
- In the year of purchase, furniture bought only for office usage is fully deductible.
- Computers, printers, and scanners are all fully deductible office supplies.
- All expenses related to business travel, including lodging, automobile rentals, and other expenses, are fully deductible.
- Your yearly business phone expenses are fully deductible.
Should I use an Automated Tool to Record Business Expenses?
You can lower your tax liability by keeping track of your expenditures. However, it’s also crucial to retain thorough records of these costs in case an audit is conducted or account reconciliation is required.
Even if you run a small business or startup, going paperless and adopting business accounting software can help you save time, automate tasks, and maintain more accurate financial records.
The program will grow with your firm as it expands.
However, it is extremely critical that you speak with a professional tax expert who understands all the legalities and procedures. He may get you extra benefits and save your money while filing your taxes.
Although there are many more deductions than those listed here, these are some of the most significant ones.
Deductions for office supplies, credit card processing costs, tax preparation costs, and equipment and property upkeep are also available.
Still, you can write off a portion of other company costs by depreciating them or amortizing them over some time. And if you’re unsure, get certified public accountants (CPAs) or other qualified tax preparers to help you with your business tax return.