A large number of small business owners dread tax season, and just want to file their tax returns and be done with it. They would rather spend time on business activities, such as creating a new product or service.
By rushing to file your taxes, however, you could leave a lot of tax deductions on the table.
Here are 15 tax benefits for self-employed individuals, such as sole proprietors, independent contractors, and LLC members.
A small business loan can be used for a number of business purposes, including real estate, equipment, inventory, acquisitions, and more. A business loan has to be paid back with interest, and the interest portion of the loan can be hefty in many instances. The good news is that those interest payments are typically tax deductible, as long as a) the loan is used to cover business expenses and b) a lender, like Biz2Credit, provides the financing – not a friend or family member.
A nice new piece of equipment or business vehicle can be a great addition to your small business. But it’s likely going to experience a lot of depreciation. With that in mind, the IRS has made depreciation expense a tax write-off. You are typically permitted to write-off depreciation for your equipment over its useful life – not in one tax year.
The rules around business vehicle tax deductions are a bit complicated, but it’s worth learning them because you may be able to save a lot of money come tax time. You have to track your miles driven for business purposes and then choose between the actual expenses method and the standard mileage method. The actual expenses method is likely a better option for business owners who have high car expenses (fuel, maintenance, and auto insurance). The standard mileage rate, set at 56 cents in 2021, often results in higher savings for cars with below-average expenses.
3. Salaries and Benefits
Do you have employees? If so, their salaries are tax deductible, assuming they aren’t a sole proprietor, partner, or LLC member in your small business. In addition to base salaries, you can write off bonuses and commissions.
You may also be able to write off employee benefit programs, including education expenses and qualified retirement plans. These programs are often overlooked as deductions but can save you a lot of money on your taxes.
It seems like there are more and more subscriptions being offered by companies every year. You may be able to write off your subscriptions if they are business-related expenses. A few common examples would be bookkeeping software, website hosting, and trade publications. An individual subscription might seem really cheap, but many small business owners have several subscriptions that add up to hundreds of thousands of dollars per month, an amount that can dramatically lower a small business owner’s tax bill.
5. Business Meals
Do you ever take your clients out for lunch? If so, you may be able to write off 50% of the meal costs. This small business tax deduction has the potential for abuse, so you have to provide documentation to prove that the meal was for business purposes. Make sure that you hang on to the receipts and write down the business purpose of the meal.
6. Business Travel
Since the onset of the pandemic, business travel has taken a backseat – no pun intended – for many small business owners. But the country and the world are opening up, and business travel is becoming a possibility for small business owners again.
To qualify for business travel tax deductions, you have to take a business trip outside of your area of business, and stay away for longer than a full workday. There are a number of deductible business travel expenses including flights, taxis, tolls, and hotels.
7. Professional Fees
As a small business owner, you are likely to face legal, tax, and other situations that you can’t figure out with your own research. A few common examples are choosing the right business structure, writing contracts, and atypical tax events. To navigate these situations, you may want to hire a Certified Public Accountant, lawyer, or freelancer. These professionals may charge you an hourly or fixed rate, but in any case, their fees are tax deductible.
For new entrepreneurs, online ads, web design, business cards, and business logos can make up a large percentage of startup costs. If you are an established business owner, you may make different types of marketing purchases, but they can still add up at the end of the year. You are allowed to write off any marketing expenses, however, which can significantly reduce your tax liability.
9. Home Office
The coronavirus pandemic forced companies to adopt work-from-home policies, and many companies have decided to continue working from home as we move past the worst of the pandemic. If you or your employees work from home, you may be wondering if you can write off your home office expenses. The answer to that question is “yes.”
As with business vehicles, you can choose from two possibilities: for home offices, there is the simplified option and the regular method. With the simplified option, you take the square footage of your home office space – up to a maximum of 300 square feet – and multiply it by $5 per square foot to get your small business tax deduction. Under the regular method, the value of your home office tax deduction is based on your expenditures, including mortgage interest, insurance, utilities, repairs, and depreciation. The IRS website has more info on the two possibilities, as well as the requirements to claim the home office deduction.
10. Office Furniture and Supplies
If you are one of the many small business owners who created a home office setup over the last two years, you may have purchased office furniture, like a desk and chair, for the space. A small business owner who works in an office with several employees may not have made a recent purchase – but could face a higher bill when they make improvements. In any case, you can write off the costs of your office furniture and reduce your taxable income.
The pace of digitization has rapidly accelerated since the onset of the pandemic, but there is still a need for office supplies like paper, pens, and notebooks. They might not cost much, but you could easily save a few bucks on your small business tax if you write them off.
11. Your Health Insurance Premiums
We’ve been seeing rising health insurance premiums for many years, but fortunately, medical expenses are tax deductible for the self-employed. You can write off medical expenses for you, your spouse, and your dependents.
The utilities used for your business, including water, electricity, and gas, are tax deductible.
If you work at home, however, you can only write off utilities that are used for your home office (if you are using the regular method). For example, you might have to calculate the electricity costs for your business by calculating the percentage of your home that is used for business activities and multiplying it by the total electricity costs for your home.
13. Your Retirement Contributions
There is a lot of information out there about retirement plan options for employees, but it can be more challenging to find information about retirement accounts for small business owners.
The good news is that there are a few excellent retirement strategies for small business owners. The self-employed pension (SEP) IRA is one of the most popular options, as it allows small business owners to make large, tax-deductible contributions.
That said, there are a lot of variables that go into selecting the right retirement strategy for you. So, you should talk to a financial advisor to see what plan is the right choice.
14. Charitable Contributions
You may be able to write off your charitable contributions, but only if the donation is made to a qualifying organization. You can use this IRS tool to determine if an organization qualifies. The type of your business impacts how you report your charitable contributions. If you are a sole proprietor, for example, you report the deductions on your personal tax return. There are also special rules around contributions of food inventory. If you are unsure about how to record your donations, you should talk to a tax professional.
Do you want to buy gifts for your employees or clients? You can deduct the costs, but there are limitations that prevent you from writing off lavish gifts. According to the IRS, you can only deduct $25 of the cost of business gifts that you give to each person during the tax year.
The Bottom Line
Now that you know 15 tax benefits of owning a small business, you can significantly reduce your business income tax payments, and give yourself more cash to re-invest into your business.
Your tax savings can be a game-changer, but in many cases, you’ll need more money to take your business to the next level. Biz2Credit has a number of funding options that can match your needs.