It is common knowledge that the sole aim of doing business is to make a profit. Thus, business owners are continually looking for ways to minimize costs and maximize gains.
One of the costs of running a business is tax payment.
We are sure you agree with us that taxes are complicated. If you don’t pay close attention to it, you will either not save enough costs, or run into problem with IRS because you’ve saved cost on a business item for which you are not eligible.
This article will explain the basic principle guiding tax deductions and give you examples of items that you can write off in your business.
What is a write-off?
Business expenses that are deducted from the total payable tax are referred to as write-offs. In other words, business owners are only supposed to pay tax on their profits, not on their gross income.
Most business expenses can either be completely or partially deducted from payable tax.
A business expense to qualify for deduction must satisfy the “ordinary and necessary rule.”
What is the ordinary and necessary rule?
The IRS doesn’t have a detailed list of tax-deductible business expenses. Instead, each business owner is expected to make the necessary deductions after determining if the business expense is “ordinary and necessary.”
A business expense is “ordinary and necessary” if it is indispensable to the business, and famous in that business’ industry.
For example, if you are a photographer, you need a camera, memory cards, different kinds of lenses, among others, for the smooth running of your business. Thus, you can deduct the cost of these expenses from your tax.
However, you may not deduct the cost of having a hair-cut, because it will be challenging to prove that having a new hairdo is essential to running your photography business.
What are the typical business expenses that can be written off?
As mentioned earlier, the IRS doesn’t have a long list of all the tax-deductible items. However, you can consider deducting any of the following business expenses as they relate to your business.
Salaries and Benefits – You can write off your employees’ salaries, vacation pay, and other allowances. To qualify for this tax deduction, the employee must not be a sole proprietor or partner of the business, the salary is necessary and reasonable, and the employee fulfilled the obligations delegated to them.
Business meal – A small business owner can deduct up to 50% of the total cost of purchasing food and drink that can be proved to be necessary for the business’s running. To avoid being flagged by the IRS, you must keep a record of the date and location of the meal, the relevance of the people that ate with you to your business, and the overall cost of the meal. To make record keeping of business meals easier, be sure to keep your receipts properly and make notes about the details of the meal on the back of the receipt.
Phone and internet costs – If you run a business that needs a phone and internet for smooth operation, you can deduct the costs of making phone calls and using the internet from your tax. However, if you use the phone and internet for other non-work-related purposes, you can only remove the percentage of their cost related to business use.
Car expenses – If you have a car that you use only for purposes related to your business, you can deduct all expenses associated with using and keeping the car in good shape. However, if your car is also used for other purposes, you can only deduct the expenses related to the car’s work-related usage. You can also deduct the mileage of the work-related use of your car either by using the standard rate, which is $0.545 per mile driven, or deduct the actual journeyed miles.
Dependent and child care – You can write off the costs of taking care of children and adult dependents. You can only write off the costs of taking care of twelve-year-old or younger children. You can also write off the costs of taking care of dependent adults like your spouse(s), and those who are mentally or physically disabled.
Travel expenses – You can deduct the costs of business-related travels from your total payable tax. These could include airfare, hotels, meals, among others. To deduct travel expenses from your tax, the trip you made must be fundamental to your business, the trip must take you away from the city where your business is located, and the trip must take you from your business location for longer than an official workday, and must require that you rest or sleep while on that journey.
Office supplies – The cost of computers, work-related software, printers, pens, paper, and other office supplies can be deducted from the total payable tax as long as the business owner uses these items for work-related purposes within the year that they were bought. Work-related postage and shipping costs can also be subtracted from the payable tax; however, be sure to file all receipts accordingly.
Investment – If you take a loan for investments, you can deduct the interest paid on the loan from your total payable tax. However, you cannot deduct beyond the amount earned in investment income.
Professional service fees – Costs of accounting, legal consultations, and other work-related professional fees are deductible from total payable tax. The costs of using bookkeeping or accounting software also qualify for a tax deduction.
Education – Costs incurred while equipping yourself with the knowledge that directly impacts your business can be deducted from your payable tax. Some of the educational expenses that you can write off are seminars, purchase of books related to your work, webinars, advanced courses, and classes, among others.
You can write-off several other expenses; however, be sure that they relate directly to your business.
If you have any questions on specific deductions, please reach out!
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