While paying taxes is mandatory for all businesses, regardless of size, small businesses have several advantages that medium and large-sized businesses do not have. One of them happens to be tax deductions. Surprisingly, not many small business owners are aware of these deductions. So, they end up overpaying their taxes. This is so unfortunate considering that these deductions are critical in helping these businesses make profits and be able to grow. As a smart entrepreneur, you have to know what tax deductions you are entitled. This is the key to saving. To get you started, here are 10 tax deductions you should know:
1. Office Expenses
Even if your small business is not the conventional type, it has expenses that are deductible on your tax. For one, your day-to-day supplies are subject to deductions. However, they shouldn’t be older than one year. In addition, you can enjoy deductions on office deliveries, postages, and other relatable expenses. You just have to ensure that you track all the expenses. You should also not forget to deduct utility costs like water bills, power expenses, and phone bill.
2. Home Office
If you are using a part of your home as your office, there are several deductions that you should be aware of. They include:
- Utility expenses
- Cost of day-to-day office supplies
- Moving machinery
- Insurance cover
Additionally, if you paid for your meals during normal office working hours while in your home office, this still counts as a deduction. Generally, you need to distinguish between office expenses and home expenses.
3. Travel Expenses
Are you aware that you can deduct the expenses incurred by your employees on their business travels? Actually, you can deduct up to 50% on their meal expenses. However, you can no longer make deductions on transport benefits like parking and car passes. But still, you can make up to $20/month as deductions for those employees who choose to ride to work using their personal bikes. You just have to show the taxman some kind of proof to qualify for these deductions.
As an owner of a small business, you may not make deductions for personal withdrawals but you can deduct the payments that you make to the employees. The costs include wages and salaries. Whether you pay the employees on a full-time or part-time basis, you are entitled to these deductions. But it doesn’t stop here. You can also deduct bonuses and allowances that you give your employees. Other considerations here are lodging expenses, costs of payroll software, and system installation costs. If there are other payments that you are not sure of, just talk to a tax expert.
5. Professional Service
Though it’s normal for so many small businesses not to have in-house consultants like lawyers, business developers, and accountants, the professionals are very necessary for the running of the businesses. So, it’s quite common to hire them on a freelance basis. You may not be aware but such expenses are deductible when paying taxes. However, you have to be sure that what you are paying the consultant is reasonable enough to qualify as a deductible.
6. Startup Costs
If you have just started your small business, you may enjoy close to $5000 as deductions on your taxes. Basically, this applies to every cost incurred between the time of setting up the business and the first time that you opened its doors for the customers. The costs include:
- Travel costs during the startup phase
- Payments made to consultants during the startup phases
- Marketing costs before the business started its operations
- Cost of training employees prior to launching the business
7. Vehicle Expenses
When you are using a particular car for business functions, whether it’s personal or company property, you are allowed some deductions. For starters, you can deduct the costs of operating it. This includes the cost of driving and fuel. Other deductions that you should beware of are maintenance costs. The problem with these deductions is that it’s often hard to keep track of, more so when you are using a personal car. The secret, however, is to keep records of every office-related expenses. This is important since you need proof to enjoy the deductions.
In any business, there’s always the need for self-improvement. This is because things change quickly and so your employees need to stay updated. The costs for the improvement are deductible and include the cost of training the employees. It also includes the cost of buying training books and work manuals. The costs, however, have to relate to self-improvement and should be for the best interest of your small business. But if the self-improvement is not related to your business line, then the cost doesn’t count as a deduction.
9. Personal Items
Though you may not deduct the costs of your home desktop that you occasionally use to perform business-related functions, you are allowed to deduct the costs of your individual laptop that you have converted into an office supply. It also includes a personal phone that you use to make or take business calls. And of course, you also have to remember to include the cost of your personal car that you use for business functions. Simply, any personal item that you have converted into an office supply is subject to a deduction. You just have to show its proof.
10. Bonus Depreciation
This type of deduction applies to assets that are meant for long-term use. The cap is a little broader and involves depreciating assets like refrigerators, ovens, security systems, farm equipment, and roofing. In terms of percentage for the bonus depreciation, you can enjoy up to 50% depending on the purchase made. Nevertheless, your asset has to meet these requirements:
- Must have been bought for business use
- Should be something that depreciates over time
- Must come with the assurance of long-term usefulness
With taxes, you just have to know what deductions apply to your small business if you are looking not to overpay. Once you overpay, it may be hard to have your money back. That’s if you even realize it. Starting with the above deductions, you should start paying the taxman only what you are required to pay. This will allow you to use the saving for the growth of your small business.