Handling your business finances is no easy feat, especially when it’s something you don’t have much prior experience. Not only that, but you need to ensure that you get it right every time when you’re officially reporting figures to the government. Otherwise, there could be dire consequences. It can be stressful and overwhelming trying to get everything in order but once you have the basics in place, it should make it easier each year.
When you have gotten to grips with tracking your cash flow, you can more easily report your taxes to the government. Organization is key here, as you want to ensure that your records are accurate, up to date, and accessible to you. That’s why updating this as you go along is so important. It means that you’ll be able to input the right information and get back the tax deductions that you are owed when the time comes.
Tax deductions are never something to be overlooked, especially if you have a small business or you’re just starting up. Any savings you can make can go back into your business and help you to succeed and grow. It can also boost the financial health of your business and put you in a better position going forward, as it reduces your tax liability. Therefore, it’s definitely something you should be making the most of where possible, even if it’s for lower-cost items.
Do you know what tax deductions you can claim? There’s plenty of different expenses for you to claim back, which we’re going to explore in this article.
Why tax deductions are important for small businesses
Tax deductions are valuable to businesses of all sizes but they can have more of an impact on smaller businesses that aren’t making money on the same scale as larger corporations. As they reduce the financial burden you face from taxes, it means you have more of a financial buffer in place should you need it. It’s up to you what you put this extra money towards, but it could help you with business expansion or creating a substantial emergency fund to fall back on in unexpected circumstances.
Being aware of the tax breaks available to your business means you can claim back on your expenses and drastically minimize the amount of taxes you have to pay. This helps you retain more of your hard-earned revenue. However, you must understand what deductions you are eligible for and how to claim these so that you can maximize your tax savings.
Essential Tax Deductions for Small Businesses
There are a number of different tax deductions you can claim for as a small business. The general rule is you are likely to be able to claim tax breaks on them as long as they are a necessary business expense. Here are some of the tax deductions that can significantly reduce your taxable income:
- Startup Costs
If you’re a startup then we have some good news: The IRS lets new small businesses deduct up to $5,000 in startup expenses and an additional $5,000 in organizational costs, as long as the total of these startup costs doesn’t go over $50,000. This can help cover a lot of the initial business expenses you have, such as legal fees, market research, business incorporation costs, and so on. It’s best to do your research to find out the specific terms and conditions relating to this so that you’re always compliant and able to claim the money back successfully.
- Transport
Whether it’s public transport, a business vehicle, gas, or vehicle repairs, you can claim taxes back on the costs. With this in mind, you must always keep detailed and clear records of transport costs, whether that’s train receipts or how many miles you’ve driven. You should also be able to justify why you needed to make the trip for your work if more detail is needed. For instance, you might have been meeting a client in another state or visiting a supplier.
- Workspace
Whether you rent a business space or work remotely, there are savings to be made on this. You can save money on office bills from utilities to internet, and any equipment that you use for your work, whether that’s a desk or laptop. Your office rent costs are eligible for tax deductions.
However, keep in mind when you have a home office: To qualify for the home office tax deductions, the area you utilize must be used exclusively for your work. With this, you can claim back taxes on the space you use. There’s a simplified method of doing this, which equates to a deduction of $5 per square foot (up to 300 square feet), or the actual expense method, which lets you take off a portion of home expenses like mortgage interest or insurance based on the percentage of your home dedicated to business use.
- Employees
If you’re at the stage where you employ people, then you can claim back tax relief on a lot of related expenses. This could include employee wages, bonuses, and benefits you offer your team. As wages are often one of the largest expenses businesses handle, it’s definitely worthwhile to get your tax deductions here.
Don’t forget about your own wage too - you can also claim tax deductions on your personal income from the business!
- Business Insurance
There are a variety of different types of business insurance available to you, from employers’ liability insurance to commercial property insurance. What you need often depends on what you do, and you should be able to seek business advice on this. Whatever insurance you do have, you can seek tax deductions on.
- Travel and Meal Expenses
If you, or your employees, need to travel as part of work, then these costs can be eligible for tax deductions. This could relate to transport, accommodation, and meals whilst working away from home. However, you need to keep receipts for all payments, or you may not be able to claim deductions.
- Marketing and Advertising
Promoting your business can make or break you, especially in the early days. You need to get your brand, product, or services noticed. However, this can come at a cost, as some marketing efforts are costly. Whether it’s PPC or social media ads, flyers, business cards, or anything that falls under the marketing category, you can put this down as an expense.
- Third-party Services
If you outsource any work, whether it’s a Virtual Assistant, business advisors, or accountants, then you can report this to the IRS to claim tax deductions. Third-party services are often pricey, especially when ongoing, so wherever you can make savings here is definitely worthwhile.
- Qualified Business Income (QBI) Deduction
The QBI deduction means certain small business owners can deduct up to 20% of their business income. This tax break applies to particular entities like sole proprietorships, partnerships, and S-corporations. The figure you can deduct may be limited, depending on your total income and your business, so be sure to consult with a tax advisor to get the most out of this benefit.
This list is just scratching the surface of tax breaks you can utilize. Remember: you need to always keep track of these costs and provide evidence if needed. Also, try to ensure you’re never claiming for personal expenses, as this can get you into trouble with the law or result in fines. It’s best to ensure that all expense information you submit is for necessary business costs only.
How to Maximize Your Business Tax Deductions
There are plenty of ways to take advantage of the tax deductions available to you, and it mostly boils down to thorough organization. By keeping detailed records with receipts and invoices attached throughout the year, you’re on the right track. You want to keep on top of this and ensure it’s always up to date and every payment is accounted for. There are various ways of doing this.
Using accountancy software, or getting the help from an in-house accountant/outsourced expert, can be greatly beneficial. This will help you to stay compliant and should mean that you’re avoiding any mistakes. If you need support, you can speak to a finance or tax advisor to get started. They should also be able to keep you up to date with all the latest tax regulations and rules so that you’re always approaching tax deductions in the right way.
Keeping your personal and business expenses separate can also give you clarity in managing your money. If you get a business card that automatically creates reports and payment information for you, this can also be really useful.
While navigating your finances and tax deductions can seem tricky, with the right help and knowledge, your life can be made a lot easier. Make sure to do your research to get an understanding of what you can claim back, as you don’t want to make any assumptions and fall short.
With a financial record-keeping strategy in place, you can more easily report your expenses and ensure that the information you declare is correct. Then, you can put your tax deductions back into helping your business to be the best that it can be. It’s always recommended that you seek the advice of a financial expert so that you can go forward with confidence in your money management, knowing that you’re tax compliant while applying strong practices.
