Taxes are a part of many levels of business ownership. These include an average tax rate for small business sole proprietorships of 13.3%, small business partnerships 23.6%, and 26.9% for S corporations.
Small business taxes are a reality for every owner. Additionally, all businesses must file timely annual income tax returns except for partnerships.
Effective management and prompt payment of small business taxes are possible with solutions like a merchant cash advance and consulting with professionals.
These approaches allow owners to take full advantage of the benefits of being entrepreneurs. Tax season is not always exciting, but it can be less painful with an intelligent approach.
The benefits of owning a business are numerous and include:
- The flexibility to make changes in a way larger companies can’t
- An opportunity to achieve substantial financial gains compared to traditional employment
- Freedom to contribute something truly unique from your business to the marketplace
- A chance to build equity which you can pass on as inheritance, retained, or even sold
- More customer-centric service than a larger outfit may offer
Taking ownership of your future as a business owner can be invaluable. Operating your company means assessing income, losses, expenses, and among those things are taxes.
There is nothing quite like small business tax deductions to sweeten the incredible experience of small business ownership.
Tax Deductions for Small Business Taxes
Small business taxes have deductions that can help shelter more of your hard-earned income from tax burdens. The IRS has also laid out the types of write-offs and how much of each your business can deduct.
Many taxpayers carry the misconception that deductions are money coming back to them in the form of a tax return. In reality, a tax deduction is an eligible expense that you can deduct from your income for tax purposes when filing.
Reducing your taxable income can reduce small business tax as a result. You may even change the tax bracket in which you are taxable. In addition, business expenses that are a part of your business’s ordinary and necessary operation can also be deductions.
Let’s explore how business owners grow their finances with some necessary deductions.
Startup and Org Expenses
A substantial small business tax deduction for new business owners, startup, and organization expenses are often deductible. This arrangement allows for the write-off of up to $5,000 of startup costs and $5,0000 of organizational expenses—things like creating entities and legal fees for creating corporations or partnerships.
Office Expenses, Technology, and Supplies
100% of office tools and technology expenses that you require to operate your business can be write-offs. From printer paper, pens, computers, and sticky notes, you have options for what to deduct.
Your merchant account to collect payments or accounting software is also part of the technology you should probably be writing off. These may help reduce your tax bill.
Home Office Deduction
If you are a taxpayer using space in your home to generate income for your business, you may be able to write off that space and its expenses. This qualification applies to both renters and homeowners.
Business owners who use a portion of their home for business can deduct expenses for that use.
These expenses may include:
- Rent
- Property taxes
- Mortgage
- Wi-Fi
- And utilities (includes gas and electricity)
As a homeowner, you can also deduct mortgage expenses if you use your primary residence for business purposes.
In an example, you will calculate the portion of your home that is personal use and the amount for business. Only the part you use for business potentially qualifies for write-offs. At the same time, you can’t write off the entire property. For example, if your office occupies 250 square feet and your home is 2500 sq. ft., you can write off 10% of that space.
Cell Phone and Cell Phone Service Expenses
You would be hard-pressed to find a taxpayer that does not have a cell phone. However, if you use your phone inside your business more than 50% of the time, you can list your cell phone as a deduction. This listing includes your cell phone and your cell phone service cost in the tax year that you incurred those expenses.
Storage requirements to store digital files and mobile applications to run your business might be eligible for a deduction, so long as you use these resources for legitimate business purposes.
Cost of Goods Sold
You may deduct the cost of goods sold or their raw materials if you sell products. Additionally, you can write off the storage cost, factory overhead, and direct labor. If you sell boxes of donuts, for example, you can deduct the cost of each box you sell.
All Labor Costs
If your business pays anyone, including employees, to deliver a specific service to your business, it may qualify as a deduction. Service-based companies are going to want to look very closely at this option.
W-4 forms are required to deduct the W-2 wages from employees. W-9 forms on record are crucial for contractors who do anything for your business. For example, if the contractor designs a logo, builds a website, or moves some furniture, you should get a W-9. You should also provide contractors with a Form 1099, so they can recognize the income you deduct from your business.
Business Mileage
Car expenses and the depreciation (write-offs of the purchase price over time) of your vehicle can be a part of your small business tax deductions.
Again, this is a category of deductions that require expressed use for business. Business conferences, client meetings, and other business reasons are qualifying activities for tax purposes. No mileage for personal use should be under consideration.
Business Travel Expenses
If you travel for a business conference and need to stay on-site, you can deduct your total flight costs and a portion (5 days) of the lodging costs. No personal use time for leisure should be a part of this deduction, as it is not for the expressed purpose of business.
Business Meals
You can write off 100% of business meals from your income. This amount has grown from the previous rate of 50% eligibility for meals as part of the CARES act. Personal dining does not qualify as business meals. Dining with your business partner, clients, or employees can be written off for business use.
Keeping up with receipts and even maintaining a log of discussions over meals is a good part of this deduction, as it can help with any recordkeeping.
Business Interest Expense
Any business debt incurred may carry interest. Even so, while you can’t write off a portion that applies to the principal, the interest may qualify as a deduction.
In addition, principal payments are not an expense since they count as part of the investment into purchasing tools or equipment for business use.
Retirement Contributions
Qualifying retirement accounts contributions to a traditional IRA or employer contributions into a 401k plan may be eligible for a small business tax deduction.
In addition, for those who qualify, self-employed retirement accounts allow contributions up to 25% of your net earnings or $61,000 for 2022.
Health Savings Contributions
Contributions to accounts used for health-related expenses can be deductions as well. Setting up an HSA is a win for your earnings and health, as money taken out is not subject to taxation for qualifying health expenses.
Pass-Through Tax Deductions
As a part of the Tax Cuts and Jobs Act, business owners can write off up to 20% of income on small business tax deductions. For example, $40,000 written off on $200,000 of earnings can save thousands in income taxes. Consequently, it’s vital to know that this only applies to specific entity types.
Utilizing deductions requires the tracking and aggregation of reasonable expenses. Therefore, a system that manages these values is vital to your financial future as a small business owner.
Timely Payments and Late Penalties
Penalties for late filings can be hefty. When you do not file your income taxes on time, you may face fines and back taxes. Also, you could see the IRS take action through collections to recapture lost tax dollars. Having a robust accounting system to help ensure you aren’t losing dollars unnecessarily due to delinquent tax filings.
Working with a professional can help you make the most of your available deductions, so you don’t simply require extensions to avoid late filings. However, while a write-off does not inherently mean that money is coming back to you, it is best to plan to keep more of your money at tax time.
Business expenses that are a part of your business’s ordinary and necessary operation can be under consideration for a deduction. Moreover, be sure you aren’t overpaying your small business taxes like millions of people do every year. Make the most of your available benefits and do your homework about what qualifies for your business.
Additionally, when money is necessary due to unforeseen circumstances, options are available, like a merchant cash advance. Being self-employed can be richly rewarding, and with proper strategizing, you can make success a planned event for your enterprise.
