Everyone has heard that it’s not about how much money you make; it’s about how much you keep. Understanding tax laws can save your company from going out of business. Here are some major keys to enhance your tax strategy.
We all know that gas, repairs, parking, and mileage add up, so taking advantage of the standard mileage rate, or deducting your actual expenses, is a no-brainer way to put some of that money back in your pocket. Just make sure you keep records diligently to avoid mixing personal expenses with business ones.
Items like running errands in your own car or making deliveries in your business van, track the mileage and run some numbers to see which method gives you the higher deduction. If you drive a lot of miles each year, it makes more sense to use the standard mileage deduction when filing taxes. However, if you have an older vehicle that regularly needs maintenance, or isn’t fuel-efficient, you might be able to get a larger deduction by using your actual expenses vs. the IRS mileage rate.
To prove the use of your car, truck or van, for business, especially if you also use the vehicle for personal reasons, keep records during the year. When it’s time to pay taxes, you can choose to deduct your actual expenses (including gasoline, maintenance, parking, and tolls), or you can take the more straightforward route of using the IRS standard mileage rate — 57.5 cents per mile in
Do you run part of your small business out of your home, maybe doing the books in the evenings after you’ve parked your cab at your house at the end of the night? Or perhaps you run an entirely home-based business. For many self-employed individuals and sole proprietors, it’s pretty standard to have a space at home that’s devoted to your work. The key here is the word devoted. Sometimes doing work at the kitchen table doesn’t count as a home office. You must have a specific room that’s dedicated to being your office in order for it to be tax-deductible.
Calculating the size of your deduction is primarily related to the amount of your home that’s used as an office. For example:
Total square footage of your home / divided square footage used as an office = the percentage of direct and indirect expenses (rent, utilities, insurance, repairs, etc.) that can be deducted.
Read the IRS’ guidance on this deduction, and/or speak with a tax professional before filing taxes with this deduction. This deduction is one of the more complicated ones available to small business owners. When dealing with the potential for a costly audit, it pays to be safe by consulting a professional tax preparer.
Client and Employee Entertainment
Yes, you can take small business deductions for hosting lunch for your clients, as long as you discuss business with them, and as long as the meal occurs in a business setting and for business purposes. In some cases, you can’t deduct the full amount of your entertainment expenses, but every bit helps.
Here are some tips to guide when and what you can deduct:
- For client meals and entertainment, you can typically deduct up to 50% of the cost provided that at least one employee was present and the meal was not lavish.
- You can also deduct office meals and snacks.
Freelance/ Independent Contractor Labor
If you bring in independent contractors to keep your checkout lines moving during the holidays or to create new marketing materials for your shop, you can deduct your costs. Make sure you issue Form 1099-MISC to anyone who earned $600 or more from you during the tax year.
Rent on your Business Location
The rent you pay for your store’s physical space. Make sure you deduct it.
You can deduct the full cost of business software as a small business tax deduction if you purchased it during the year you’re filing for. This includes your POS software and all software you use to run your business.
If you’ve just opened your gift shop or convenience store, you may be able to deduct up to $5,000 in start-up costs and expenses that you incurred before you opened your doors for business. These can include marketing and advertising costs, hiring costs, and the cost of setting up a legal entity.
Don’t miss the small business tax deductions for your electricity, cell phone, and other utilities.
Deducting taxes is a little tricky because the small business deduction depends on the type of tax. Deduct all licenses taxes, as well as taxes on any real estate your business owns. You should also deduct all sales taxes on purchases you made for your business. If you have employees, you can deduct the business portion of your payroll taxes.
Some of the insurance premiums you pay for coverage on your business is tax-deductible. This could include coverage for:
- Employee theft
- Business-owned vehicles
There are a few insurance types that you can’t deduct. If you’re not sure whether you can deduct a certain type of insurance, and that deduction is an important factor in your decision, speak with a tax professional.
Any seminars, workshops, classes, courses in the past year that were designed to help you improve your job skills? Your work-related educational expenses may be deductible, especially if they’re required to keep up or renew a professional license. Remember, they have to be work-related. If you own a cafe, you won’t be able to deduct Piano lessons.
Advertising and Marketing
Run an e-commerce store fortunately Advertising and marketing dollars, are all tax-deductible. This is great news since advertising and marketing are often the biggest business expenses that small businesses need to deal with as they get off the ground. Rest assured, you can deduct everything from flyers to a new website. Political advertising is the biggest exception to this rule. Those expenses are not deductible.
Donations to charity were greatly needed in 2020. If your small business donated supplies, money, or property to a recognized charity, you may be able to deduct them. Check with the IRS before you make a charitable deduction to make sure the organization you want to support qualifies for the deduction.
Intangibles and Licenses, Trademark, & Other Intellectual Property.
Expenses related to the registering or protection of intellectual property can be deductible. However, the process you go about it can differ depending on what you’re trying to deduct. Some costs must be depreciated over multiple years, while others can be fully deducted within the year in which they were incurred. We recommend working with a tax professional to ensure you’re in compliance with the regulations governing your specific situation. Check out this resource for more detailed information.
Intangibles and Licenses, Trademark, & Other Intellectual Property.
You may file your taxes quarterly or holding off for the next annual deadline, you should begin preparing for your taxes by keeping records of your expenses as of January of each year. Make sure to document each of these small business tax deductions by keeping physical receipts and writing down the business reason for the expense on your receipts as soon as you receive it. A good rule to follow is to scan copies and file monthly receipts with notes.
This comprehensive list is just my favorites of small business tax deductions, and with it, you’ll be well on your way to saving on your taxes this year. However, deductions can be hard to document, it’s always best to consult a tax expert for any questions that might arise to ensure you are complying with all regulations and avoid any penalties.
How to apply for Tax Credits
Download the General Business Credit form (F3800) to get started filing your business taxes.
For a full list of business tax credits, check out the IRS’s website.
***this is not intended as legal advice, be sure to seek legal counsel if you are unsure about any forms or regulations.***