Why Write Off Business Expenses
In some instances, a self-employed individual or business owner may even be able to write off enough taxes to lower themselves into a more desirable tax bracket. When done according to the accounting rules and regulations of the IRS, this is perfectly legal. In fact, its illegal to avoid writing off certain expenses, since doing so can inflate the appearance of your income beyond what actually makes it to your bank account.
Lifetime Learning Credit Education Credits
The Lifetime Learning Credit allows people to take credits for taking classes at a community college, university or other higher education institutions. The maximum amount of expenses you can deduct is up to $10,000 for an unlimited number of years. However, the maximum you can receive as a credit is $2,000 per tax return.
The credit allows for a dollar-for-dollar reduction on the amount of taxes owed. The expenses can include tuition, fee payments and required books or supplies for post-secondary education for yourself, spouse or dependent child. The credit is not refundable, which means the credit can be used to pay any taxes you owe, but you cant receive any of it as a refund.
The 2020 credit amount begins to decrease if your modified adjusted gross income is over a certain threshold . The credit is not available once your income exceeds certain amounts . The IRS has yet to announce the thresholds for the 2021 tax year.
Note: This credit cant be claimed in the same year as the American Opportunity Tax Credit if the expenses are claimed as the Lifetime Learning Credit.
Expenses Related To The Property And Location
Business location expenses are deductible for tax purposes by an LLC. If the owner or owners of the LLC operate it from a home office, then such things as supplies and a phone meant specifically for business qualify as business expenses that can be written off. The LLC can also deduct any rent it has paid for property that it does not own.
The LLC cannot, however, write off any personal utilities and mortgage payments as business expenses. If part of a rental home is used for business purposes, such as by setting up an office, then the LLC should be able to deduct the portion of the rent that applies to that part of the home for tax purposes.
The LLC can write off the cost of property used in the business, including office equipment, computers and furniture. A depreciation schedule should be prepared for these, and they should be written off over time.
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Will I Get Audited By The Irs If I Take The Home Office Deduction
It is a common belief that claiming the home office deduction will automatically trigger an IRS audit however, while the IRS rules about home office deductions are very strict, it’s not automatic that you will get audited simply for claiming your home office. There are measures you can take to reduce your chances of getting audited.
Before taking the home office deduction, youll want to make sure your business qualifies to avoid claiming any deductions you arent eligible for. Maintain records of all your business expenses and purchases, and ensure that your residence, home office usage and type of employment qualify for this expense.
The IRS has an automated system that helps detect red flags. The system will compare your tax situation and deductions to others in your industry. If you claim something that others in your profession dont generally claim, the system may see that as a red flag, which could lead the IRS to investigate.
Additionally, the system will flag those who claim too much space for a home office. An example of this would be claiming your office space takes up 80% of your residence, as opposed to most people in your profession claiming their home office uses 10% of their residence. The IRS could see this as a discrepancy and conduct an audit.
Regardless, if you do decide to take the home office deduction, it’s essential to follow the IRS guidelines to the letter, as they change somewhat frequently.
Interest Expense On Loans
Have you taken a small business loan? Do you use a business credit card on which you roll over your monthly statement balance? If your answer to either of these questions is yes, then you can deduct the interest that you pay from your taxable income.
However, you need to be careful when claiming this deduction in your tax return. Interest on a bank loan or a line of credit from a financial institution would usually be deductible. But if youve borrowed money from your wife or a friend, the IRS is likely to look at the transaction more carefully.
For interest to be allowed as a deduction, there must be a legal obligation to repay the debt which means no personal loans from friends or family apply. Additionally, if youve borrowed money to buy something for personal use, the interest that you pay on the loan will not be allowed as a deduction.
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What Is The Benefit Of A Tax Write
You may be wondering if its really worth your time to write-off some of your expenses. And the answer is yes. Of course, its always nerve-wracking when doing something for the first time, but remember, with time itll get easier.
The benefits of a tax write-off can significantly help your small business. Tax write-offs can reduce your taxable income, which means you can owe less money to the government. And that is the biggest benefit when writing off your business expenses.
For Llcs Filing As An S Corporation
The LLC status of an S corporation is the same as a standard LLC in that it allows corporations to pass any income and deductions on to the owners on their personal tax returns.
Unlike sole proprietorships and partnerships that have to pay self-employment tax on 100% of the business profiles, by filing paperwork for an S corporation, the S corp owners only pay self-employment taxes on their personal salary from the LLC.
The paperwork required for this is Form 1120S, the U.S. Income Tax Return for an S Corporation. In addition to that, each owner will have to report their share of the business income on a Schedule K-1 and submit it along with their personal tax return.
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What About Other Business Expenses
Depending on the nature of your business, there may be other expenses you can claim on your tax return.
The IRS deems a business expense to be tax deductible if it is ordinary and necessary. Meaning, it is an expense you would incur ordinarily in the course of conducting business, and it is necessary for your business to operate.
When in doubt, remember this guideline, and hang onto the receipts attached to any business related expenditure. That way you can double check with your CPA to confirm what is, and what isnt, tax deductible before you file your return.
You may be tempted to get creative with tax deductions. Instead, focus on strategic tax planning for better cash flow management. The world of business expenses is full of grey areas, and it can be easy to overstep the boundaries set by the IRS. As always, talk to your CPA or tax adviser before claiming any expenses on your return.
Publications And Subscriptions Deduction
The cost of specialized magazines, journals, and books directly related to your business is tax deductible as supplies and materials.
A daily newspaper, for example, would not be specific enough to be considered a business expense. A subscription to Nations Restaurant News would be tax deductible if you are a restaurant owner, and Nathan Myhrvolds several-hundred-dollar Modernist Cuisine boxed set would be a legitimate book purchase for a self-employed, high-end personal chef.
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What Defines A Verbal Contract
A verbal contract refers to an agreement between two parties that’s made âyou guessed itâ verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don’t pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law âwhich is most of us, right?â due to the fact that there’s no physical evidence to support the claims made by the implemented parties.
Higher Deductions = Lower Taxes
So what are the expenses that can be deducted from your income?
The Internal Revenue Service , which is the government body responsible for collecting taxes, says that the expense must be both ordinary and necessary.
In simple language, ordinary and necessary means that the expense must be directly related to your business. Consequently, employee pay can be deducted from your income. On the other hand, personal expenses arent usually an allowable expense.
Keep reading to see a deep dive into the subject of small business tax deductions. Which are the tax write-offs that are allowed and which arent? Well also look at a few lesser-known tax deductions and some expenses that you wouldnt normally expect to find on a tax return.
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Preparing To File Taxes And Tracking Tax Deductions
Make sure to track tax deductions as you goit is much harder to recreate records later!Compile a list of these tax deductions and a mileage log so youre prepared to file. Tracking business expenses can also help you determine whether your driving is profitable.
Here are some tips to help you prepare your tax deductions for filing:
The Section 179 Deduction
When buying equipment and other lasting items for your business, youd typically deduct portions of the cost over time through depreciation. However, the Section 179 deduction is an effort to incentivize small business owners to purchase equipment and invest in their companies. Section 179 allows businesses to deduct the full purchase price of qualifying equipment bought or financed and put into service sometime during the same tax year. The deduction limit in 2021 is $1,050,000.
For example, lets say you spent $20,000 on a new car for your business in June 2021. You use the car for business purposes 75% of the time. If you were to claim the Section 179 deduction, you could take a $15,000 deduction on your 2021 tax return, which youd file in early 2022.
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Business Travel And Vehicle Expenses
As an ecommerce entrepreneur, youre probably mobile.
If you use your vehicle to transport packages , meet with clients, or carry out any other business operations, you have a range of business expenses you can choose to claim.
When your vehicle is used exclusively for business purposes, you can deduct the full expense of its operation. But if you use it for both business and personal purposes, youll need to calculate the percentage of the cost of operation that applies to business.
You have two options for claiming a business mileage deduction:
- The standard mileage rate deduction, as of 2017, is $0.535 per mile. Track this throughout the year with an app like MileIQ, and check the relevant IRS page every financial year in case the rate has changed.
- The entire cost of what you paid in vehicle costs over the course of the yearincluding fuel, maintenance, and repairs.
Other travel expenses you incur in the course of doing businessparking fees, cab fares, or conferences tickets, for examplecan be claimed.
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Section 179 And Other Vehicle Deductions
If you use a vehicle as part of your business operations, such as to deliver products or drive to worksites, your company may be eligible for certain tax deductions. But there are a few important details to consider so you know what you can include, when you can do it, and how to write off these expenses.
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Easily Overlooked Business Expenses
Here are some additional routine deductions that many business owners miss :
- bank service charges
- business gifts
- business-related magazines and books
Depreciation Of Property And Equipment
Some self-employed people may purchase property and equipment for a business. If they expect that property to last longer than one year, it should be depreciated on the tax return, Perkins advised.
Perkins said that claims regarding property, according to the IRS, must meet the following criteria: You must own the property and it must be used or held to generate income. The property should have an estimated useful life, meaning you should be able to guess how long you can generate income with it. It may not have a useful life of one year or less, and may not be purchased and disposed of in the same year.
Certain repairs on property used for business may also be deducted.
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How To Maximize Tax Deductions For Your Business
There are many ways to maximize tax deductions for your business. However, Mueller notes that the first step is to keep good records. Messy books often lead to missed deductions, or can cause the IRS to disallow a deduction in case of an audit, she explains.
Once you have good accounting software in place to manage your books, you can focus on the following tax deductions.
What Vehicles Meet Section 179
Vehicles put into service for business use the same year they were purchased or financed may qualify for Section 179 deductions. Vehicles must be used more than 50% of the time for business purposes. The IRS also has additional rules regarding sport utility vehicles and certain other vehicles, so its worth checking the guidelines before purchasing a car for your business.
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A Simple Guide To Small Business Write Offs
Business write offs are deductions from a businesss earnings. For income tax purposes, write offs are business expenses that get subtracted from revenue to find your total taxable revenue. For example, a freelance interior designer can claim car mileage as a tax deduction since they travel to meet with clients.
There can be some confusion when it comes to what you can or cant claim as a business write off. But the good news is that its fairly simple to understand when you have the right information. Heres a simple guide to small business write offs.
In this article, well cover:
For Llcs Filing As A C Corporation
In some cases, LLCs can lower their tax bills by opting to be taxed as a corporation.
If this sounds like you, then consider filing Form 8832, which allows the IRS to tax you as a C corporation.
What exactly does this mean?
It means that unlike how things work in the above situations personal tax returns), the owner have to file a separate corporate tax return that taxes the owners separate from the company. This form is Form 1120.
In order to file this form, you need the following financial information:
- Profit and loss statement
- List of all deductible expenses
- Balance sheet showing the beginning of the year and the end of the year
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The Top 16 Small Business Tax Deductions
Each of these expenses are tax deductible. Consider this a checklist of small business tax write-offs.
And remember, some of the deductions in this list may not be available to your small business. Consult with your tax advisor or CPA before claiming a deduction on your tax return.
The cost of advertising and promotion is 100 percent deductible. This can include things like:
- Hiring someone to design a business logo
- The cost of printing business cards or brochures
- Purchasing ad space in print or online media
- Sending cards to clients
- Running a social media marketing campaign
- Sponsoring an event
However, you cannot deduct amounts paid to influence legislation or sponsor political campaigns or events.