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Minimizing tax expenses

Small Business Tax Deductions and Write-Offs

Every entrepreneur wants to maximize their business earnings, and one way to do that is through understanding and applying the proper business tax deductions. There are several expenses and tax write-offs that small business owners can take advantage of, and we’ve shared them below. 

Start with The Home Office Deduction

If you work from home, the IRS allows you to deduct a portion of what you spend on utilities, mortgage interest, property taxes and other areas from your business earnings. There are two methods to do this.

The IRS allows you to use a “simplified” method:

  1. Calculate the total square footage of the office in your home.
  2. If the total is more than 300 square feet, reduce it to 300 square feet.
  3. Multiply the result by $5.
  4. That amount is what you can claim as a simplified home office tax deduction.

You can also use the “regular” method, which requires you to track your utility and other home-related costs:

  1. Calculate the total percentage of your home that’s exclusively used to run your business.
  2. Apply this percentage to your utility bills and other expenses.
  3. That amount is what you can claim as a home office deduction.

The expenses you may claim include:

  • Interest on your mortgage payments
  • Rent payments
  • Real estate and property taxes
  • Home insurance and mortgage insurance premiums
  • Utility costs including gas, electric, water and trash collection
  • Cleaning services

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Include Other Work-from-Home Expenses

You can also claim other expenses if you work from home, including:

  • The cost of repairs and maintenance to the property, based on the percentage used for business
  • Broadband and internet services, based on the percentage used for business
  • Cell phone charges, based on the percentage used for business

Note that you cannot write off telephone costs for the first landline into your home, but you can deduct the cost of additional lines used for business.

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Minimize Business Taxes by Using a Vehicle for Work

If you use a vehicle for business, you can deduct expenses. As with the home office deduction, you have a couple of ways to work this out:

  • Firstly, you can use a simplified version. Just track how many miles you travel for business and multiply that by 57.5 cents (the standard mileage rate in 2020) for the total amount you can deduct.
  • Alternatively, you can track your actual expenses (for example, lease costs, fuel costs, repairs, maintenance, etc) then multiply that by the percentage of time you use the vehicle for business purposes. 

Write Off Part of Your Business Taxes by Funding Retirement Accounts

Retirement accounts are a great way to defer your income and get a tax deduction. You can use an Individual Retirement Account (IRA) to defer up to $5,500 in income, although you will pay tax when you withdraw money from the account on retirement. Note that if you also have a separate 401(k) provided by your business, you can only earn up to a certain amount before you lose this deduction. Additionally, you can’t deduct contributions made to a Roth plan, either as an individual or as part of a 401(k).

If you do have a 401(k) provided by your business, such as a SEP or SIMPLE plan, you can deduct contributions made to the IRA portion of the plan. These plans also have higher contribution and deductible limits than Individual Retirement Accounts. 

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Deduct the Costs of Business Equipment, Furniture, Technology and Other Assets

If you buy equipment, furniture, hardware, software, sundries or other assets for business use, you can deduct them from your earnings. This might include:

  • Computer hardware like desktops, laptops, tablets, monitors, printers, mice, keyboards and other equipment
  • Computer software like MS Office, Adobe Creative Suite, software purchase costs and subscriptions to specialist services
  • Furniture like desks, office chairs, filing cabinets, bookcases, etc.
  • Specialist equipment for the type of business you run like jewelry making tools, tradesman tools, art supplies, etc.
  • Sundries like toner cartridges, pens, paper, batteries and other consumables used by your business

Note that some of these expenses will need to be taken as “depreciation” over multi-year periods. Speak to your accountant for details of how to show these deductions.

Take Advantage of Business Tax Credits

The IRS provides incentives to businesses through tax credits. These credits do change from year to year, both in terms of availability and how much you can claim. Some examples of credits include:

  • Providing work opportunities
  • Research and development
  • Low-income housing
  • Disabled access
  • Electric vehicles
  • Renewable electricity

Tax credits are complex, so speak to a tax professional to find out what you can claim.

Understand and Write Off Bad Debts

If you have invoices that have gone unpaid, and you use accrual accounting, you can deduct the cost of those bad debts from your business earnings. 

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Deduct Interest on Business Loans

If you take out a loan for your business, you can normally deduct any interest on your repayments as an expense against business taxes, although there are some limitations.

Don’t Forget Professional, Legal and Accounting Fees

Professional services that you use for your business are deductible. For example, if you use a bookkeeper to stay on top of business transactions, or an attorney for your contracts, you can expense those fees. 

Specialist Business Insurance Is Deductible

Many businesses have extra insurance in place, whether that’s general liability, professional indemnity or something else. The premiums you pay for business insurance are tax-deductible.

Remember to Talk to Your Accountant or Tax Preparer

Every business circumstance is unique, and there may be situations where some of these deductions don’t apply, or where you could claim additional expenses. That’s why it’s always important to see a qualified account or tax professional and get their advice on your business affairs.

Incfile provides a Business Tax service that makes it easy for you to prepare and file your business taxes.

Try Incfile’s Business Tax Service