For a business owner, taxes can be overwhelming and cumbersome. Tax deductions allow you to save thousands of dollars each year on your taxes and make tax filing a much more bearable experience. In this post, we’ll list some of the tax deductions you can use to decrease your taxable income.
What Is A Tax Deduction?
A tax deduction is an amount that is subtracted from your adjusted gross income (AGI), allowing you to reduce your taxable income for that year. For example, if your taxable income is $40,000 and you claim a $1,000 tax deduction, your taxable income is reduced to $39,000. At tax time, you would only be taxed on $39,000, even though you would have made $40,000 in that tax year. With an effective tax strategy in place, tax deductions are a great way for you to save money on your taxes.
How Do Tax Deductions Work?
The IRS specifies a wide range of tax deductions from student loan interest and various investment and healthcare expenses. However, you must qualify for each deduction to claim it.
When you file your taxes, you first need to calculate your AGI and subtract your deductions. Then, you’ll be able to calculate your taxable income.
Tax deductions fall under two categories: standard deductions and itemized deductions. You have the option to take a standard deduction or to itemize deductions.
What Are Standard Deductions?
A standard deduction is the amount of money the IRS allows you to subtract from your AGI based on your filing status, your age, and whether you’re blind. Each year, the number is adjusted to keep up with inflation. In 2018, the Tax Cuts and Jobs Act significantly increased the standard deduction. Below are the standard deduction amounts for 2019:
- Single: $12,200
- Head of Household: $18,350
- Married Filing Jointly: $24,400
- Married Filing Separately: $12,200
If you are 65 years old or older and legally blind, you can receive an additional standard deduction. To calculate this additional amount, add your original standard deduction amount plus an additional amount, which is typically either $1,300 or $1,650.
What Are Itemized Deductions?
Although the standard deduction is now the optimal choice for many taxpayers, itemized deductions are another option for savvy taxpayers. Itemized deductions let you deduct the total amount of qualified expenses, like unreimbursed medical expenses and IRA deductions, from your taxes.
You may want to consider itemizing your deductions if the amount of your allowable deductions is higher than that of your standard deductions.
13 Tax Deductions You May Be Able To Use For Your Business
Below are some examples of tax deductions you may qualify for as a business owner.
TRAVEL AND HOTEL
You may be able to deduct traveling expenses for business-related travel, including transportation and accommodation costs (i.e., hotel stays).
The IRS allows a 50% deduction for business meal expenses. You may also get a deduction from other expenses like the cost of making telephone calls or using a fax machine and shipping items such as samples or displays.
In for your trip to qualify for this deduction, your trip must meet the following criteria:
- The trip must keep you away from your home/business for longer than a typical day’s work
- While away, you need sleep or rest to meet the demands of your work.
If you use a home office for your business, you may be able to deduct the expenses associated with establishing a home office. To qualify, you must have a specific area in your home designated for working and not use it for other purposes.
Your deduction amount is determined by the percentage of your home that is used as an office. To calculate this, you would divide the total square footage of your home by the square footage used as an office. The resulting percentage is the deductible area for your home office.
If your office is outside of your home, you can deduct 100% of your utilities, including gas, electricity, heating, air conditioning, and phone service. However, if you are working inside the home, you can still write off a portion of this cost. Again, only costs associated with your home office are considered tax-deductible.
COSTS OF GOODS SOLD
If your business involves manufacturing or reselling products, you may be able to deduct purchasing or manufacturing costs. Associated expenses that may be tax-deductible include materials, supplies, labor, containers, and packaging.
While you can’t deduct commuting expenses to your primary place of business, you can deduct expenses for gas, oil changes, repairs, and tires. You may also be able to deduct miles, parking fees, ferry fees, and tolls. You can either choose to deduct these expenses or use the IRS standard mileage rate — 54.5 cents per mile in 2018.
For buildings, equipment, or other assets you purchase, you can write off the cost of the asset and spread out the deductions over the life of the assets. The depreciation tax break allows you to deduct 50 percent of your costs upon purchase.
To qualify for this deduction, your asset must:
- Be directly used in the business or held to produce income
- Have a useful life greater than one year
- Be depreciable (capable of losing its value over time)
EMPLOYEE PAY AND BENEFITS
Sick pay, bonuses, and other forms of compensation may be tax-deductible as well. You may also be able to deduct business-related expenses like meals, lodging, some employer-paid taxes, and payroll software and systems.
Also, you may be eligible for a deduction if you provide benefits, like health insurance, 401(k) matches, HSA, and flexible spending accounts, to your employees.
ADVERTISING AND MARKETING
Advertising and marketing play integral roles in growing your business, but it can get quite expensive. You can write off the cost of flyers, web advertisements, business cards, print ads, and other marketing expenses.
If your business has a website, you can also deduct associated costs, including domain fees, web design, web building, and maintenance.
SELF-EMPLOYED HEALTH INSURANCE DEDUCTION
If you have a net profit for the year, you may qualify to deduct 100% of your health insurance premiums for yourself, your spouse, and your dependents. To be eligible for the deduction, you must meet the two following requirements:
- You have no other health insurance coverage. If you are eligible to participate in a health insurance plan maintained by your employer or your spouse’s employer, you are ineligible for this deduction.
- You have business income. You can deduct only as much as you earn from your business. If your business incurs a loss or earns no money, you are not eligible for this deduction.
LEGAL AND PROFESSIONAL FEES
Fees associated with hiring lawyers, tax professionals, accountants, or other professional services for your business can be deducted on your business return. Just make sure the fees you’re paying are reasonable and necessary so that you can count them as a deduction.
RENT FOR OFFICE SPACE
If you pay rent for office space or equipment for your business. You may also deduct co-working space fees and storage fees. When claiming this deduction, it’s imperative to follow the guidelines outlined by the IRS.
You may be able to deduct the following taxes you pay in the course of your business:
- Sales tax on business assets you purchase
- Excise tax
- Fuel taxes
- Personal property tax
- Vehicle tax
- Real estate tax
- State and local income tax attributable to your business
You may also be able to deduct FICA, FUTA, and state unemployment taxes that you pay on behalf of your employees.
Insurance costs related to your business that may be tax-deductible include:
- Fire, flood storm, crop, theft, and liability
- Worker’s compensation
- Health insurance premiums for your employees
Your insurance must provide coverage that is “ordinary and necessary” to qualify for the deduction. There are some insurance types, like life insurance, which are non-deductible.
Contact Us For Tax Help
At MBS Accountancy, we’re here to make accounting and taxes easy for business owners like you. We provide financial insights and strategies to help you achieve your company goals.