Business Tax Deductions 101 – Things You Should Know. The rise of modern corporations inspires more new businessmen to compete in the market. This also becomes the reason why many business owners are more aware of their cash flow, taxes, and business tax deductions.
Here is the key point. If your business can take more tax deductions, it can get lower taxable profits. You can also put more money into your pocket when the year ends and a smaller expense of a nice car to drive or other personal benefits.
Knowing the benefits regarding tax deductions, you should pay more attention to what is and is not deductible in your business according to IRS rules. Before that, let’s learn basic information about business taxation first.
Business Taxation Basics
What is business taxation? It refers to the taxes that any type of business should pay each year. It doesn’t matter what kind of corporation you run. These include a partnership, sole proprietor, limited liability, or others.
All should fulfill the obligation to pay the annual taxes. The thing is each type of business has different tax consequences. To understand business tax deductions better, you can learn them based on the types. What are they?
- Employment withholding tax
- Gross-receipts tax
- Excise tax
- Corporate franchise tax
- Value-added tax
Those are some basic tax types that apply in regular businesses. Those complement basic business taxes like sales, property, and income tax. In some industries like insurance and mining, though, the owners should pay extra taxes.
Learn the Basics of Business Tax Deductions
Here is the basic understanding. All necessary and ordinary expenses you incur in running a business are deductible from your income. This may reduce the total amount of tax that you need to pay in that year.
Spending on those expenses is not a big issue, as you can deduct them by fulfilling several conditions. Aside from the fact that those costs should be both ordinary and necessary, you must keep records of the expenses.
All records would support your claims when asked by the IRS later. What you need to do is to work smart on it. That means you should spend both energy and time to find legitimate deductions that you can claim.
This way, you have better success in reducing business taxable income as much as possible without any errors. This effort will help small businesses to acquire tax savings by maximizing their deductions.
Claiming business tax deductions sound easy, no? However, this requires more involvement from the owner of the business. Getting the deduction can be nice, but you should ensure that it is analyzed from the perspective of business operations. What does it mean?
You should not carelessly spend money on things that are not quite expensive. A business expense is any amount paid for products that won’t last long (at least a year).
Here is a simple example. A photocopying machine is not considered a business expense. On the other hand, the copy paper is. Any items that last for years are considered business assets instead.
You can also understand it by looking at the expense appropriateness. Is it necessary or ordinary for your business? It also needs to relate to any business activity. The IRS can easily find any nondeductible personal expenses that you include in the claim.
Next, you should keep adequate records. The IRS agent will ask you to show proof of the expenses during the audit. This is why keeping records of business costs is quite compulsory.
Having good records makes it easy to claim for business tax deductions. This proves that your deduction is correct. On the other hand, the IRS will put some effort and canceling the claim due to disputes.
Also, some types of expenses are tricky. These include political contributions and lobbying expenses. These also include illegal payments and parking tickets. Thus, having a tax expert to work for you is recommended to avoid the business tax deductions misunderstanding.
Some expenses that you need to pay attention to are:
1. Vehicle expenses
These are the costs for any types of vehicles used in your business, including trucks, cars, and others.
2. Capital expenditures
These must be distinguished from deductible business costs that you claim currently.
3. Travel expenses
These are any costs that you pay while taking business trips.
4. Entertainment and meals expenses
These expenses include any money you spent to entertain business guests or clients.
5. Startup costs
These are any expenses that you incur before you initiate and run a new business.
6. Business gifts
These costs are spent on any items or gifts you gave to your customers or clients.
7. Compensation and benefits
These are expenses that you spent on your employees and yourself.
8. Home office deduction
These expenses are specially made for those who run a home-based business.
9. Casualty losses
These expenses include any severe loss to business assets that happens suddenly.
How to Claim Business Tax Deductions
Now, let’s learn the basic method of writing off business tax reductions. The important thing is that you need to complete and file a form called Schedule C with your tax return.
The aim is to itemize your business tax deductions and to calculate how much income is left over after you write them off. In the 2019 tax year and earlier, the form is called Schedule C-EZ.
After you complete Schedule C, you need to file Schedule 1 line 3 of Form 1040. This represents your business taxable income. Calculate the total of Schedule 1 and transfers to Form 1040 line 8.
If you don’t want to face the hassles, hiring a tax expert is recommended. This person will do everything for you, especially related to writing off business expenses. As long as you find a good tax professional, you can avoid any issues.
This person will give you both information and advice related to business tax reductions. He helps you to keep records, so you don’t need to feel burdened with that task.
He will set up a record-keeping system that suits your company. Not to mention he does tax forms preparation. He can point out any business tax deductions that you missed and highlight some that are nondeductible.