By no means is the above a comprehensive checklist on your state’s tax requirements. It’s best to visit your state and county’s local treasurer's website to get the latest tax rules and filing information.
What Can You Write Off As a Small Business Owner?
Got all the paperwork and dates lined up? Now, it's about identifying areas you can reduce your tax burden via exemptions, credits or deductions. We know it's frustrating to see your hard-earned income go away to the government. Here are a few strategies you can employ to reduce your tax liability and maximize your deductions as a small business owner.
Track Expense Receipts
This might sound like a no-brainer. But we can’t stress this point enough. Making the best of tax season for a small business owner comes down to how well you tracked your expenses. Why? Because the IRS allows for business expense-related deductions.
The top expenses you can write off include:
Startup Costs
If you stepped into entrepreneurship in the latest tax year, you can deduct as much as $5,000 in startup expenses. This amount can include costs associated with any training or travel you took, along with any money spent on marketing your startup.
Business Meals
You can deduct up to 50 percent of your qualified food and drink expenses. What does qualified mean? The meal was related to business. Jot the following in an expense log:
- Date and location of the meal
- The business relationship of the person or people you dined with
- The total cost of the meal
Travel Expenses
Expenses that can be written off for travel include airfare, accommodation cost, rental car expenses, dry cleaning, tolls and tips. However, any work-related travel expenses must meet the following requirements:
- The trip must be necessary for business.
- The trip must take you away from your tax home (city/area where business is located).
- The trip should require you to travel away from home for longer than a business day and require rest or sleep to meet the demands of work. If you rent a car to visit a customer for a day and require to refuel or stop for a meal, this could be deductible.
The IRS website offers a detailed overview of what qualifies as deductible work-related travel expenses.
Home Office and Supplies
Under the simplified home office expenses, if you’re running a home-based business or are a freelancer, then you can deduct $5 per square foot of your home that’s used for business purposes, up to a maximum of 300 square feet. But that area must be exclusively used for work. So if you’re working off your dining table, you can’t write that off even if you want to.
Under office supplies, anything purchased like stationery, computer, printer, work-related software, postage and shipping can be written off as long as you have used them for business purposes in the year of purchase.
Bank Interest and Fees
If you’ve taken a startup loan or line of credit for your business, you can write off the interest charged on the loan or line of credit. You can also deduct any additional service fee or annual fee expenses on your bank account or credit card.
Child and Dependent Care
The work hours of a business owner don’t stop at 5 p.m. Luckily, any costs related to child (those under 12) and dependent care (like parents or family members) are tax-deductible.
The IRS website gives more guidance on which deductions apply to small businesses.
Hire Your Kids
One of the best ways to shelter your income from taxes is by hiring a family member, especially your kids. By doing this, you can reduce the tax paid on the income given to them.
Here’s how it can work if your minor kids are up to the job.
- Legitimately employ your kids. Draft up an employment agreement with job responsibilities, adequate compensation and benefits information.
- Set up their W-2 and state taxes.
But a word of caution: Don't abuse this as the IRS is on the lookout for those using the benefit without actually employing their kids. If you're found guilty, you'll lose your tax deductions for their salary and benefits.
Save for Health Expenses
Medical costs are going through the roof. One way to reduce your tax burden is to set aside money towards medical and health expenses, no matter how healthy and fit you feel today. How to accomplish this? Explore a Health Saving Account (HSA) plan if you have a high deductible insurance plan.
The HSA also yields the following benefits:
- Your contributions are 100 percent tax-deductible from income — making it a powerful deduction that can potentially put you in a lower tax bracket.
- Contributions grow tax-free.
- Any amount deducted for legitimate medical expenses is also tax-free.
Become a Legal Structure
As a sole proprietor, you don’t have an employer paying the portion of Social Security and Medicare taxes. You’re the one on the hook for paying it all.
One way to change this payout is to explore changing your business structure to that of a legal entity that typically offers more tax savings. For instance, if you form an LLC (limited liability company), you might be able to eliminate the employer portion of these taxes.
Start a Retirement Plan
As a business owner, you don’t have the benefit of a retirement plan, which is ideally matched by an employer. It’s your job to ensure you have enough in the bank for retirement. Starting a retirement fund is one way to maximize savings and reduce the potential tax you’d pay.
A few retirement fund plans that you can explore are:
- IRA
- Simplified Employee Pension Plan (SEP)
- 403(b) plans
File Away the Right Way
Whether you like it or not, paying taxes is one of the responsibilities of being a small business owner. Also, doing taxes wrong can be a costly mistake. The IRS can and most definitely will hand out hefty penalties if they find you skimping on taxes.
With a little bit of planning and help from an accountant or a tax professional, you can reduce your taxable income and ensure more of your money is working for you.
Incfile’s bookkeeping and accounting services can help reduce the burden associated with preparing and filing for taxes. Our qualified tax professionals can work with you to understand your business and file taxes in a manner that will give your business the best plan for success.
