When it comes to taxes, there’s a lot of information to take in. But one thing that all small business owners can benefit from is tax deductions. What are tax deductions, you ask? Simply put, they’re expenses that you can subtract from your taxable income. This lowers your taxable income and therefore reduces the amount of tax you owe. There are many different types of tax deductions, so it’s important to familiarize yourself with them all. In this blog post, we’ll go over some of the most common tax deductions and how they can help you in your business. So let’s get started!
This post is meant as an educational and informational read, not tax advice. Always consult your lawyer or accountant before filing anything!
What is a deduction?
The first step to figuring out your deductions is knowing what they are! A tax deduction isn’t just any expense – it’s a business cost. The price you pay for running and maintaining your own company.
The deductions are an important part of your taxes. They get subtracted from the gross income and reduce what you owe in taxable expenses, which is why they’re called write-offs!
Taking look at the Tax Return
You may be familiar with this or you might just give your tax professional a box of receipts every year, but either way, look at Schedule C (usually the third page) and go to Part II. You’ll find all those categories in which you’ve taken deductions – contract labor!
Are they what you expected? Are there any surprises?
The numbers on these lines might seem confusing, but if you see any of them it’s worth talking to your tax person about how they are calculated. For instance, depletion and depreciation will only apply in certain circumstances where a company uses up its resources through running various aspects such as equipment or vehicle for example.
You should also take note of the Other Expenses line (27a) because these are deductions specific to your business that don’t fit into any other category. In order for you to be as claimed on Schedule C, make sure and check them out too!
List of Your Deductions Categories
The Schedule C is a great way to track your deductions and it’s super helpful if you have the statement from when payments were made. You can use this list as input for next year, by writing down what expenses belong in each category!
Let’s use Advertising and promotion as an example. Going through your bank statement you might see Flodesk (email marketing), Name Cheap (domain name registration -website), Showit (web hosting -website), and VistaPrint (business card printing). All of these items would go under Advertising & Promotion.
How do you know if it is a Deduction?
Here are questions to ask yourself:
Does this expense have anything to do with my business?
Yes, then it’s deductions. If it’s no, then it is not.
What does it have to do with my business?
So I was thinking about this really simply. How is it connected to your business? If an IRS auditor asked you will be able to give them the good reason that is believed able. If you can’t then no it is not a deduction.
Would you be spending this money if it weren’t for your business?
For example, you take a Uber to get to a business meeting. You wouldn’t be taking that Uber if it were not for the business meeting this is a deduction. Let’s say you get a haircut to look good for a business meeting. You would still eventually get a haircut, regardless of the meeting. It’s not a deduction.
Walk through all your expenses and ask these questions. The more you do it the easier to know what you can deduct and what not.
Tax deductions can be a great way to save money on your taxes. But, it’s important to make sure you are taking the correct deductions for your individual situation. By familiarizing yourself with the types of tax deductions available, and asking yourself some key questions, you can make sure that you are taking advantage of all the deductions you qualify for. If you want help tracking your deductions throughout the year, QuickBooks is a great software option that can make managing your finances easier. Have you taken any tax deductions this year?
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