As a small business owner, one of the key things you can do to reduce your taxes is to take advantage of all the deductions you’re entitled to. But what are deductions? And what are the different types of deductions that you can take? Here’s a quick overview. 

What Are Deductions?

A deduction is an allowable expense that you can subtract from your income before calculating your tax liability. In other words, it reduces the amount of money you’re taxed on. There are two main categories of deductions: ordinary deductions and special deductions. 

Ordinary Deductions 

These are expenses that are common and accepted in your line of business. They include such things as rent, salaries, utilities, and interest on business loans. Generally speaking, if an expense is necessary for you to conduct your business, then it’s probably an ordinary deduction. 

To deduct an ordinary expense, it must meet two criteria: 

·         It must be incurred during the current tax year 

·         It must be paid during the current tax year 

For example, let’s say you incur electricity costs in December 2021 but don’t pay the bill until January 2022. In this case, you can deduct the electricity costs in 2021 because that’s when they were incurred. However, if you don’t pay the bill until 2022, then you can only deduct the costs in 2022. 

Special Deductions 

These are expenses that are specific to your industry or business and not commonly incurred by other businesses. They include things like research and development costs, depreciation of equipment, and certain health insurance premiums. To qualify as a special deduction, an expense must meet three criteria: 

·         It must be incurred during the current tax year 

·         It must be paid during the current tax year 

·         It must be directly related to your business or trade 

Split Deductions

The third type of deduction is a split deduction. This is a deduction that can be taken by any business, but it must be split between personal and business expenses. An example of a split deduction would be home office expenses. To claim a split deduction, you will need to keep records of all your relevant expenses and income, as well as documentation from your accountant detailing how the expenses were split between personal and business use. 

Look for Opportunities to Deduct  

When it comes time to file your taxes, keep an eye out for opportunities to take advantage of both ordinary and special deductions—it could mean significant savings for your business. Stay organized by keeping track of your expenses throughout the year so that you have everything you need come tax time. With a little effort, you can minimize your taxes and maximize your profits.