Understanding the ins and outs of tax write-offs is a massive advantage for every business owner. It helps you determine the correct amount of tax owed, and more importantly, what to write off to avoid paying any unnecessary extra money.
This article will cover what a tax write-off is and the 5 most common tax write-offs that might benefit your business.
What is a tax write-off?
A write-off (or a tax reduction) is an expense that you can deduct from total revenue to determine the taxable income for your small business. Essentially, tax write-offs lower your taxable income, which means you will pay less tax. That’s why small business owners always try to write off as many expenses as possible.
However, write-offs must be necessary to a business’s operation and be common in the applicable industry to be qualified, according to the IRS. For example, a tax advisor can write off their business cell phone bill because taking calls helps the business operate smoothly, and it’s a common practice in the tax consulting industry. So, the cell phone expense is qualified to be deducted.
How do small businesses write off?
Every business, except for partnerships, needs to file an annual income tax return which will include your business write-offs. All you need to do is visit the IRS website and get the correct income tax form for your business structure. You then fill your tax write-offs in and submit the form!
It’s also crucial to document your business spending, big or small. Your bookkeeping entries aren’t sufficient. You must keep all receipts and purchase records, whether physical or digital. This will help you stay ready if the IRS knocks at your door.
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Top 5 common tax write-offs for small businesses
The good news is most business expenses are either fully or partially deductible. Below, you’ll find a list of the top 5 write-offs commonly available that a small business owner should be aware of for the tax season.
- Advertising and promotion expenses
You can fully subtract the cost of advertising and promotion from your taxable income. It can be anything like:
- Ad fees on Google or social media like Facebook, Instagram, etc.
- Printing costs for business cards, brochures, and flyers
- Payment for designers to make logos, posters, etc.
- Software used for marketing purposes
- Website expenses
Remember though, any expenses spent to influence legislation like lobbying or to sponsor a political campaign can’t be deducted.
- Car and truck expenses
If you use your vehicle for both business and personal reasons, you can deduct all the business-related expenses from using it.
There are two ways to calculate your automobile expenses. You can choose whatever option gives you the most tax savings.
- Standard mileage rate: With this method, you just need to multiply the number of miles traveled for business by the standard rate, which is now $0.56 per mile.
- Actual expense method: This method entails adding up all of your vehicle’s operational costs such as gas, repairs, oil, tires, registration fees, leasing payments, and insurance charges. Multiply them by the percentage of miles you drive for business.
Keep in mind that you can’t deduct the miles driven while commuting to work because they are regarded as personal commuting expenses.
- Travel expenses
A business trip eligible for traveling tax deduction has to be ordinary, necessary, and away from the entire city or area where you operate your business, regardless of where you live (aka tax home). Plus, your travel must be longer than a normal day’s work, requiring you to sleep or rest during the trip.
The IRS approves some deductible expenses for business travel, including:
- Travel costs to and from your destination by plane, train, bus, or car
- Baggage and shipping
- Parking and toll fees
- Cost of transportation during the business trip
- Dry cleaning and laundry
- Other similar ordinary and necessary expenses related to your business travel. (e.g., a rental fee of a hotel business center, hiring an interpreter, etc.)
Again, remember to ask for and keep all the receipts and related documents as they are the foundation for writing expenses off.
- Bank fees
You may be able to deduct annual or monthly service charges, transfer fees, or overdraft fees from your bank or credit card. Also, you may be eligible to deduct transaction and merchant costs paid to third-party payment processors. For example, platforms like Stripe and PayPal fall within this category.
Keep in mind that any fees directly tied to your personal credit cards or bank accounts aren’t deductible. That’s why it’s best to separate your business bank account from your personal one, as it’s easy to mix things up when you file a tax return and you might end up losing money.
- Education costs
You can fully write off education expenses if they contribute value to your business and advance your expertise. The IRS will look into your classes or courses to decide whether they maintain or improve skills that are compulsory in your current business. If yes, they can be written off completely.
Below are some examples of education costs:
- Courses to improve skills in your field
- Seminars and webinars
- Subscriptions to trade or professional publications in your field
- Transportation expenses to and from classes
Any education costs that don’t serve your current career and business wouldn’t be qualified.
In short, maximize your write-offs
No one wants to pay Uncle Sam more than necessary. That’s why you really should understand tax write-offs and minimize the amount of income tax you have to pay. Don’t forget to keep good records of every transaction in case the IRS wants to audit you!.
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