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The 8 most important tax deductions for small businesses

Business Management

It is crucial for small business owners to take advantage of tax deductions for multiple reasons, including reducing their tax burden, increasing their profitability, encouraging investment, and enhancing their growth. Let us look at these tax deduction aspects in detail

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Reducing tax liability:

Small company tax deductions can assist to minimize the amount of taxes payable to the government, which can help to save money and improve cash flow for the firm.

Increasing profitability:

Small business tax deductions can boost a company’s profitability by lowering taxes owing. This is especially crucial for small enterprises with low-profit margins.

Encouragement of investment:

Small business tax deductions can also stimulate investment in the firm by making it more appealing to potential investors seeking methods to minimize their tax obligation.

Supporting growth:

Tax deductions can encourage business development and expansion by reducing the tax burden on small enterprises. This can result in the development of new jobs and increasing economic activity in the neighborhood.

Small businesses that operate on thin profit margins can benefit from these deductions. It’s important for small businesses to work with a qualified tax professional to ensure that they are taking advantage of all available deductions.

But what are the tax deductions for small businesses?

Small businesses can use tax deductions to reduce their taxable income and minimize their tax obligations to the government. Sole proprietorships, small companies, C corporations, S corporations, partnerships, and limited liability companies can take advantage of these benefits, but regulations vary from one to another. Keeping detailed records and itemizing costs is essential to reaping the benefits of these deductions.

Small businesses can take advantage of the following eight tax deductions

1.  Qualified Business Income:

The QBI tax deduction is a tax relief for some pass-through business organizations such as sole proprietorships, partnerships, limited liability companies (LLCs), and S corporations. 

It enables qualifying company owners to deduct up to 20% of their qualified business revenue on their personal income tax returns, excluding capital gains, dividends, and interest income. The business must be a qualifying trade or company to qualify for the QBI deduction, which normally excludes many service enterprises.

 The QBI deduction is calculated on the owner’s personal income tax return and is normally accessible to persons with taxable incomes less than specific limits. It is subject to specific restrictions and is phased out for some higher-income individuals.

Businesses should consult with a knowledgeable tax expert to assess their eligibility and how to claim it correctly on their tax filings.

2. Work-Related Travel Expenses

Business travel expenditures that can be deducted during tax season include flight, luggage, lodging, vehicle rental charges, gratuities, dry cleaning, meals on business trips, tolls, petrol, and more. To qualify as tax-deductible work-related travel costs, the journey must fulfill the following criteria: it must be essential for business purposes, it must take place away from your tax home for longer than a regular work day, and it must need you to sleep or rest en route. It is strongly advised that you maintain all of your travel receipts and full records of all costs incurred during the business trip as documentation for tax season in the case of an audit.

3. Employee Expenses:

As an employee, you may be eligible to claim tax deductions for some work-related costs that you paid for out of your own pocket. Some frequent employee costs that may be tax deductible are work-related automobile expenses, uniforms, protective clothing and laundry charges, home office expenses, self-education expenses, union fees, professional memberships, and tools and equipment. It is critical to keep precise records of your spending and to check that the expenses are directly connected to your work and that you have not been paid for these expenses by your employer.

4. Home office expenses: 

If you work from home, you may be able to deduct a portion of your home expenses. To claim a deduction, you must meet certain requirements, such as having a distinct workplace, incurring the expenditures personally, maintaining records of all expenses linked to your home office, and appropriately assessing the expenses.

Among the expenses that can be claimed as home office expenses are heating, cooling and lighting, depreciation of office equipment and furniture, cleaning costs, phone, and internet fees, computer consumables, printer ink, and paper, stationery, as well as occupancy expenses, such as rent and mortgage interest.

5. Advertising and marketing expenses: 

These are expenses related to promoting your business, such as print ads, online ads, and social media marketing. As a business owner, you may be eligible to claim tax deductions for advertising and marketing expenditures incurred while running your company. 

However, not all of these costs are tax-deductible, and there are certain restrictions and circumstances that must be met. Advertising expenditures include the cost of advertising in newspapers, magazines, radio, television, billboards, and internet platforms. 

If you sponsor an event or charity, you may be able to claim a tax deduction. The sponsorship must, however, provide you with a direct business benefit.

Surveys, focus groups, and other research methodologies are examples of marketing research costs. Promotional costs include the creation and distribution of promotional materials.

Expenses for website development include the creation and upkeep of a website. There are some limits and limitations on claiming tax deductions, such as private or domestic costs, as well as special laws regarding the advertising of alcohol and tobacco goods.

6. Depreciation and Amortization:

These are deductions for the loss in value of business assets such as equipment and real estate over time. Businesses can claim depreciation and amortization as tax deductions to reduce their taxable income.

 Depreciation is the process of reducing a tangible asset’s cost over time. For the duration of the asset’s useful life, businesses can deduct a portion of its cost. For example, when a business purchases a piece of equipment for $10,000 and the equipment’s useful life is 5 years, it can deduct $2,000 per year for 5 years in depreciation expenses.

On the other hand, amortization is the process of deducting the cost of an intangible asset over its useful life. Patents, trademarks, copyrights, and goodwill fall under this category.

Like depreciation, businesses can deduct a portion of the cost of an intangible asset each year for the length of its useful life.

In other words, depreciation and amortization are non-cash expenses. In any case, they can still offer significant tax benefits to businesses by reducing their taxable income.

7. Legal and professional fees: 

These are fees paid to lawyers, accountants, and other professionals for business-related services. Legal and professional costs may be deducted based on the nature of the services and the circumstances surrounding their occurrence.

Generally, legal and professional fees can be deducted as business expenses if they are used to earn money or perform company functions. For example, an attorney’s fees for business assistance, or an accountant’s fees for tax preparation, are tax-deductible.

There are several restrictions and limitations on the deductibility of legal and professional costs.

As an example, fees associated with the acquisition or disposal of a business or property must be capitalized and deducted over time. Similarly, legal fees in lawsuits or other legal proceedings are deductible, but only to the extent they are not considered personal or capital expenses.

8. Business Bad debt deduction

Business bad debt is a debt that a business is owed but is unlikely to be paid. If a business has a bad debt, it may be able to claim a deduction for the amount of the debt that is considered uncollectible on its tax return.

To claim a business bad debt deduction, the debt must meet certain criteria.

A legitimate business debt must have been created as part of the business’ ordinary trade or operations. Secondly, the debt must be worthless during the year the deduction is claimed.

To establish that a debt is worthless, the business must be able to demonstrate that it has taken reasonable steps to collect the debt and that the debt is unlikely to be paid in the future.

If the debtor is bankrupt, you may need to provide proof of collection efforts. Businesses can claim tax deductions if their debts are uncollectible.

However, the deduction must be taken when the debt becomes worthless, not when it was acquired or created.

When claiming a tax deduction…

The IRS establishes criteria for tax deductions. The preceding list is not exhaustive.

It is critical to keep proper records of bad debts and to contact a tax professional or accountant to verify that you are taking advantage of all possible deductions and obeying all applicable tax rules and regulations.

Do you need an easy way to track your taxable income? BFG can help you by providing valuable consulting in matters of tax management.

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