Whether you're a sole proprietorship, partnership, or corporation, tax deductions will often be your first line of defense against an over-sized tax burden. Tax deductions reduce the amount of taxable profit that your company has brought in, significantly limiting the amount of taxes that you'll need to pay. But in order to take these deductions, you need to track them -- and in order to track them, you must keep good records and know which expenses are deductible.
The Most Useful Small Business Tax Deductions
In general, business deductions encompass capital expenses and expenses related to goods and services sold. With that in mind, there are some business tax deductions that are more common or more significant than others.
Home office deductions
Home office deductions range from the office space itself (mortgage and rent) to the utilities that are used to keep the office running (gas for heating and power). Home office deductions are generally based on a percentage of space. If 20% of your home is dedicated to your business, then 20% of your home is considered to be your "office space." There are exceptions such as Internet access, which may be allocated by a different percentage. The IRS even provides a safe deduction were keeping track of expenses is unnecessary.
Cost of goods sold.
The supplies that you purchase that are eventually resold can be deducted out of the profits that you ultimately make. As an example, a candle maker may spend $3 a candle for soy, wicks, and other candle - making supplies. When the candle is sold for $6, the candle maker only actually profits $3. The other half goes into the "cost of goods sold" expense deduction.
Travel and automobile expenses.
Any time you're traveling for work, your expenses can be deducted. This includes airplane, train, taxi bus tickets, car rentals, hotels, gratuities, and yes, even the business use of a personal vehicle. Don't forget to track your mileage! If you use the actual expense method, your vehicle expenses must be allocated between personal and business use and only the business use portion id deducted as a business expense including vehicle depreciation. If you use the mileage method then you would only deduct the business miles times the standard mileage rate.
Office supplies and equipment.
Everything from paper clips to photocopiers can fall under office supplies and equipment -- as long as they are used primarily for business. Many small business owners forget to deduct their work phones, laptops, tablets, and other devices that they purchased to grow their company. Leased equipment is also included as a business expense.
Legal, accounting, and other professional fees.
Any service fees that are directly related to business operations are classed as a business expense. This can range from notary services to a legal consulting fee. It even includes the preparation of your taxes! The above list is by no means exhaustive. Business owners will need to track and keep separate their personal and business expenses, keeping mind those expenses allocated to personal use are not deductible as a business expense.
The Most Common Mistakes With Small Business Tax Deductions
Taking an excess of deductions or potentially illegitimate deductions.
When expenses fall into a gray area -- such as a "meals or entertainment" expense that could really go either way -- it's often better to be conservative. The IRS has been known to flag tax returns that have a suspiciously high amount of deductions. When in doubt seek professional help.
Not taking legitimate deductions due to the fear of an audit.
Not only is the risk of an audit quite low, but an audit of legitimate expenses will not yield any negative ramifications for a business or business owner. As long as you know that your deductions are legitimate, there is no harm in taking them.
Not taking carryover amounts.
For small, growing businesses, carryovers can be incredibly important. A carryover is any deduction or credit that you couldn't use the prior year, because there was no income to offset them. You can track these carryover amounts and apply them to your taxes the following year. Tax deductions get more complex the larger your company becomes. Tracking your expenses thoroughly and methodically from the start will protect you against future complications due to growth. Modern bookkeeping solutions will often aid you in coding your expenses appropriately, so that they can be brought into a tax preparation system at the end of the year.
If you are uncertain of what you can deduct on your taxes or want some accounting assistance from a skilled St. Petersburg professional, contact Tom Gargiulo, E.A. today at 727-345-7790 for help.