Looking to save as much as possible this tax season? Of course you are. Check out this guide on how to maximize tax deductions for small businesses!
Did you know that small businesses employ 56.8 million people or nearly half of the private workforce?
If you own a small business, you know that you’re not just accountable for dealing with Uncle Sam every April. You need to stay diligent about your finances and track your finances and tax information all year long!
Fortunately, with the right planning and strategizing, there are plenty of ways to maximize tax deductions.
Let’s get into what you need to know!
Top Ways To Maximize Tax Deductions
If you want to take advantage of lowering your taxable income, you need to know about each of the tax deduction categories available to small business owners. Let’s get into the main ones.
Are you in the first year of your business? If so, it indeed may seem like your constantly opening your wallet. Starting a business isn’t cheap, and it can be hard to estimate or plan for the total startup costs.
The IRS actually gives you a break from the struggles that you may experience during those initial times.
That’s because the government likes new businesses; it’s good for the economy, and it’s good for the overall country’s health.
With that said, you can currently write off a maximum of $5000 on your business tax returns if your startup costs total to $50,000 or less.
This figure includes the costs associated with training material, new hiring, and contracting/legal fees.
When you own your own business, you can write off your health insurance premiums.
However, this doesn’t include your standard medical insurance. It also includes dental insurance and long-term care premiums. You can write off your individual insurance plan and the costs of your dependents or spouse.
Just remember this: when claiming businesses losses, you’ll claim your health insurance expenses through your Schedule A form. You’ll need to list your yearly premium as an itemized deduction (as opposed to standard).
Supplies and Equipment
You can write off any standard office supplies used for your business. These include typical items like printer ink, paper, pens, or clipboards. It can also include small pieces of furniture like desks, tables, or light fixtures.
You can deduct any office furniture over $2500 (under $2500 falls under a general supplies category) used for outside offices. If you are working out of a home office, you can deduct furniture and decor used in this space. You just need to make sure that it stays in the office and doesn’t travel to other parts of the home (that makes it a personal expense!).
You can deduct the full price of any business equipment financed, leased, rented, or purchased during the tax year. This includes both new and old equipment up to $1,000,000. If you exceed that amount, you may start qualifying as a larger business, and different tax implications will apply.
For all supply and equipment purchases, make sure that you hold onto any and all receipts.
No matter what kind of small business you run, whether you’re an LLC member or sole proprietor, you are eligible to deduct contributions you make from your income into your qualified retirement accounts.
If you are a sole proprietor or partner in an LLC, you can deduct personal income contributions you make to your retirement account.
If you have already incorporated your business, the corporation can deduct business contributions made on your behalf.
Furthermore, you’ll also receive tax deferral benefits. That means that you do not need to pay taxes on the investment earnings until withdrawing the funds. This can provide an enormous financial advantage for you!
To date, there are several different retirement accounts available for small business owners.
There are currently two different IRA options for business owners: traditional and Roth IRAs.
You can deduct your contributions to traditional IRAs. Withdrawals made after retirement are considered taxable income. With Roth IRAs, on the other hand, your contributions are not deductible, but you don’t pay income tax on withdrawals made after age 59.5.
Solo business owners can create their own self-employed solo 401(k), and these plans have several advantages.
For one, you can make substantial contributions up to 20% of your net profit, with business owners over age 50 being able to make additional catch-up contributions.
You can also borrow up to $50,000 from your 401(k) plan as long as you repay the loan amount within five years.
With a Sep-IRA, you can invest up to 20% of your net profit each year. You can write off contributions to these accounts from your income taxes. Furthermore, the interest accrues tax-free until withdrawing the money.
Your Home Office Deductions
Do you freelance or work directly from home? Not only do you (hopefully) have the excellent luxury of working in your pajamas, but you can also write off part of your mortgage and homeowner fees as part of your business.
To prove that your home office is qualified, you’ll need to demonstrate that it’s:
- intended for your critical business functions and purposes
- solely used for business-related purposes (and not also as a spare bedroom)
- used primarily and regularly as your office (instead of as a secondary office to another one that you use).
Not sure if your space qualifies? It’s usually a smart idea to consult with a professional. They’ll be able to run the numbers, consult with the right software, like UltimateTax, and get you the answers you need.
With that in mind, eligible business owners can write off $5 per square foot of your office at a maximum of 300 square feet. Additionally, you may also be qualified to write off a portion of your homeowners’ insurance.
If your space is looking somewhat lackluster, it’s time to consider some interior improvements.
After all, optimal office design can make you more productive!
Meal and Entertainment Expenses
Sometimes the best business success happens over a really good meal. But those expensive dinners can add up, right? It turns out, there are some advantages here!
Business owners can write off certain meals and entertainment expenses when they are intended to improve and boost the business. There are several restrictions to this category, so take that into consideration before dropping hundreds of dollars on your steakhouse dinner.
For one, the meals or entertainment need to be with vendors, clients, or partners (or potential people to fill these roles). No, it can’t just be you and a friend talking shop. For two, you need to purchase the meal or entertainment for the group.
If you choose to maximize these expense categories, you’ll need detailed records to prove the validity. This includes receipts, confirmations, or emails in case the IRS decides to audit you.
Furthermore, there are a few more nuanced rules. If you’re out having a meal with a client, you can write off only 50% of the total cost. The same applies if you’re on a business trip- you’ll be able to deduct 50% of the bill of your meal if out by yourself.
You can claim a full deduction only when purchasing meals or entertainment for the workplace at the workplace (such as a catered dinner at the office).
Bad Debt Deduction
Even though you may not be happy that you have bad business debt, you can actually deduct it on your Form 1040 Schedule C when calculating your gross income.
Obviously, this is constrained to your business only- this does not apply to any unrelated debt due to other expenses like your mortgage or student loans.
According to the IRS, qualified bad debt deductions include:
- business loan guarantees
- credit sales to customers
- loans to clients and suppliers
No, it’s not fun to think about your items or goods depreciating due to normal use and wear and tear. With that said, all successful business owners understand that it may be a necessary reality.
The following items and purchases will typically qualify for depreciation write-offs:
- Buildings and infrastructure
- Computer software
- Copyrights and patents
- Machinery and electronics
Consult with a CPA or check the IRS website to determine eligibility for other specific questions or concerns regarding your depreciating assets.
Maximize Tax Deductions This Year
Even though taxes may seem like a significant pain, they are an essential skill for any successful entrepreneur to master! Learning how to maximize tax deductions can help you save thousands each year when filing.
Are you interested in learning more helpful tips in making your small business prosper and thrive? Be sure to check out our dynamic blog today!
You can also leave us a comment if you have any thoughts on tax deductions.