According to Michael Raanan, a former IRS revenue officer, many small businesses overpay their taxes each year simply because they overlook various tax deductions. While some business owners are just not aware of the deductions, others simply don’t keep comprehensive records or avoid complex number crunching. Image source: https://blog.bankbazaar.com
As a small-business owner, it’s imperative that you know the various tax deductions that are available to you, lest you end up overpaying your taxes. In that light, we present you the top five top tax deductions that are available for small businesses.
If you work from home, you can claim your home office on your business taxes. However, the workspace must be fully dedicated to your business. Note that the deduction is not limited to an entire room. In light of the fact that your home office can be a small part of a larger room, you should measure your workspace and divide it by the total square footage of your house.
The percentage is a fraction of your home-related business expenses that you can claim, namely
If you are using your personal car for business, or the business has its own car, you can claim some of the costs of running it. While it can be difficult to master the rules of auto expense deductions, it’s worth every stress.
There are two main approaches to car expense deductions:
- Actual Expense Approach – This involves keeping track of and subtracting all of your business-related costs.
- Standard Mileage Rate Approach – This involves subtracting a given amount for every mile driven, in addition to business-related parking charges and tolls.
Business Operation Expenses
Once your business is operational, expenses like marketing, office supplies, utilities, as well as repairs can be claimed as current business expenses. However, you cannot deduct them before you start running the business. The costs of starting a business are capital expenses, and you can consider deducting $5000 in the first year of running your business; note that you must deduct the arrears in equal amounts over the next 15 years.
If you think your business will generate a profit immediately, you could work around this regulation by withholding some bills until after your business is up and running or by running a small business simply to formally start. Nonetheless, if you incur losses during the first couple of years in business, it would be advisable to take the deduction over five years in a bid to have a little profit to counterbalance things.
Bad debts may or may not be deductible depending upon the kind of business you are running. Namely, if you are selling goods, you can deduct the price of goods you have sold but are yet to be paid for.
Conversely, if you’re offering services, you cannot deduct the cost of the time you dedicated to a client who doesn’t pay. Another option is to use consolidation with your debt with one payment as the IRS says the interest with consolidation is tax deductible.
Loans and Overdrafts
Normally, interest costs that you incur personally cannot be deducted, while interests on overdrawn business accounts are deductible. Therefore, it’s advisable to borrow within your business as opposed to borrowing personally.
There is a wide range of tax deductions that are available for small business. Therefore, it’s imperative that small-business owners are aware of these deductions in order to avoid overpaying their taxes, something that can be costly to the business in the long run.