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Utilizing Small Business Tax Deductions

Utilizing Small Business Tax Deductions

If you’re self-employed, chances are you worry about reducing your tax burden as far as legally possible. While the attached infographic contains some helpful information about tax brackets and deductions, you are probably left with a lot of questions. In this article, we’ll go over some of the things your small business can – and can’t – deduct on your tax return.

Business & Personal Deductions

According to IRS regulations, a business may deduct “ordinary and necessary” expenses. These include the costs of running your business, the cost of any goods you sold, capital expenses, and even some work-related personal expenditures. Before claiming any of these deductions, you need to make sure that your business and personal expenses are separate. Schedule C is the form you will need to use to detail profits and losses. For personal deductions, you must use Schedule A to itemize them. However, doing this requires you to give up the standard deduction. Your accountant can help you decide which is most beneficial in your case.

Possible Deductions

This isn’t meant to be a complete list – for that you’ll need to consult your tax preparer – but here are some of the business deductions you might be able to claim:

  • Travel costs / mileage
    Using your car for business travel? You may be able to deduct for each mile, or for the actual expenses incurred in business-related gas, maintenance, insurance, and depreciation. Out-of-town business trips are also deductible.
  • Home office
    You could deduct for each square foot of your business-exclusive home office space, up to 300 square feet.
  • Equipment and office expenses
    Computers and furniture for your office are just some of your allowed deductions.
  • Food / entertainment
    Be sure to keep your receipts and record the purpose and nature of meetings where business-related expenditures occur. You can only deduct 50% of what you spend, including tax and gratuity.
  • Unpaid work
    If you have delinquent invoices and don’t expect to be paid everything you are owed, you could help offset some of that by claiming the amount as bad debts. Bad debt must be included in your gross income total.
  • Marketing expenses
    Much of these costs can be deducted, including things like business cards, brochures, and more.

Deductions That Don’t Work

Claiming any of these deductions — and others — when you aren’t really eligible could result in complicated audits and painful penalties. That’s why it’s important to work with a tax professional who can help you decide what you can and cannot claim. However, here are a few of the things you simply aren’t allowed to deduct for:

  • Commuting
    While business mileage is deductible, the commute from your home to your office is not.
  • Toys and gadgets

    This is pretty simple; if the phone, tablet or laptop you’re itching for isn’t required for running your business, you can’t claim it.
  • Clothing
    If you’re required to purchase a uniform or protective clothing for work, you might be able to deduct that. However, you aren’t allowed to claim other business attire, such as suits, slacks, and shoes.
  • Lunches and coffee

    You can only deduct for food and entertainment only if you’re also meeting with a client.

The Bottom Line

When considering deductions, it’s always best to consult a CPA or other tax professional. They can help you get the most out of your yearly tax return and avoid sending up an red flags that could cause you a lot of trouble. The IRS actually allows for many deductions to reduce your tax burden. If you know how to recognize them, you can save significant money.

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