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Small Businesses and Tax Deductions

As small business owners, we know that you do your best to keep costs to a minimum. One way to save money that many business owners overlook is tax deductions. Tax deductions that sole proprietors, partnerships, and LLCs may be able to take add up to a significant amount of savings. Understanding which deductions you can take for your small business will ensure that you don’t miss out on a potential tax write-off.

Here is what you need to know about optimizing your taxes for your small business. How do business tax deductions work? What can be written off as business expenses? What is a 100 percent tax deduction? Can you write off previous years’ taxes?

Getting help from a Denver tax professional can ensure that you claim the proper deductions on your tax return. 

What’s A Tax Deduction?

Tax deductions are expenses that are subtracted from your taxable income. Deductions take certain expenses into account in calculating the amount of taxes you’ll have to pay, allowing for a lower tax bill. But, the IRS has guidelines for tax deductions that you’ll need to follow. 

Small businesses have many ways to reduce their taxes. One of them is through writing off certain expenses as tax deductions. These deductions can be taken advantage of when filing your taxes each year. 

Business Meal Tax Deductions

As a sole proprietor, you can deduct 50% of your meals and drinks purchased during the year. If you’re a partnership, LLC, or corporation, you can deduct 100%. You must also keep records of any business relationships at the time of purchase.

The total costs of the meal. The best way to track business meal costs is to keep your receipts and write down notes on the back of them about the details of the meals.

Business Insurance Tax Deductions

You can deduct the insurance cost from your taxes if you own a home office or rent an office space. You can also deduct the cost of your renters’ insurance if you use a portion of your house to run your business.

Home Office Tax Deductions

Under new IRS guidelines for home office deductions, small businesses and freelancers will be allowed to deduct $5 per square foot of their home used for business purposes, plus 25 percent of any costs related to using the space. The amount of space that qualifies for a deduction depends on whether the taxpayer lives in a house or apartment. For example, single-family home with two bedrooms and 1,500 square feet of living space could qualify for a deduction of $15,000. However, a studio apartment with 200 square feet of living space would only be eligible for a deduction of $2,500.

Office Expenses Tax Deductions

Business expenses are deductible if they relate to your job. If you buy office supplies like pens, paper, and computers, you can deduct those expenses as long as you use the items for business purposes. You can also deduct postage and shipping costs related to sending documents to clients. Keep track of all receipts for business expenses for proof.

Phone and Internet Tax Deductions

You can deduct the costs of a phone and internet connection if you use them primarily for business purposes. You can also deduct the percentage of the total cost for your business use. For instance, if you spend $100 per month on phone and internet services, and 50% of those bills go towards your business use, you can deduct $50 per month.

Business Interest and Bank Fees Deduction

If you lend money to someone else, you will get paid back plus interest. If you borrow money to invest in a business, you may be able to deduct the interest you pay on the loan. You can also deduct any other fees or charges associated with using your business credit card.

Services From Outside Professionals Tax Deductions

Professional services expenses are deductible if they are related to your trade or business. These expenses include costs incurred to obtain advice, counsel, expert testimony, accounting services, bookkeeping services, legal services, advertising, marketing, research and development, travel, and other similar activities. If you use accounting software for your business, you may also deduct those expenses.

Salaries and Wages Tax Deduction

You may deduct your business expenses, including salaries and wages if you own a business. Salaries and wages are deductible if they are reasonable and necessary for running the business. You must keep records to prove the expense incurred while operating the business.

Charitable Contributions Deduction

If you donate money to qualified charities, you may be able to claim deductions for those contributions on your federal income taxes. You must itemize deductions on Schedule A of Form 1040 if you want to deduct any charitable contributions. Charitable contributions are not deductible on your state income tax returns.

Energy Efficiency Expenses Deduction

You can get a tax credit for installing solar panels on your roof. If you install a solar panel system, you may be eligible for a federal tax credit worth 30% of the total cost of the installation. The IRS site provides further information about the tax credits available for homeowners.

Investments Tax Deduction

If you invest your own money in an investment fund, you can write off any dividends or capital gains you earn. However, you cannot claim the interest paid on the loans if you borrow money to invest. If you pay back the principal, you may be able to deduct the interest. But if you default on the loan, you will not be able to write off the interest.

Client and Employee Entertainment Deduction

You can deduct 50% of the cost of entertaining clients if you talk about business while doing it. If you entertain your employees at a company function, you can deduct 100% of the costs.

Moving Expenses Deduction

You must meet two requirements. First, your move must be primarily due to a change in employment. If you’re moving because of a change in employment, you may be able to deduct all expenses associated with the move. Second, your new job location must be at least 50 miles further away from your old job location than your previous home was from your previous residence. If both conditions are met, you may be able to deduct 100% of the moving expenses.

Child and Dependent Care

If you’re married and your spouse is not working, you may be eligible for an additional deduction if you pay for childcare expenses. You can deduct any amount spent on childcare for your kids under age 13. Childcare expenses for older kids are also deductible. You can deduct the cost of childcare at a center that provides education and training for preschoolers through high school students. Costs for childcare centers that provide preschool programs are generally higher than those for centers that offer elementary school programs.

Property Taxes Deduction

You can deduct up to $10,000 annually on your federal income tax return. State and local property taxes are deductible on your federal tax return. State and local sales taxes are deductible on your federal income tax returns. These taxes are not included in the $10,000 limit.

Retirement Contributions Deduction

Contributing to an Individual Retirement Account (IRA) can help reduce your tax bill. You can deduct any amount you contribute to an IRA account. For example, if you contributed $4,000 to an IRA last year, you could claim a deduction of $2,000. If you’re under age 50, you can deduct up to $5,000 ($6,500 if you’re married and filing jointly).

Business Startup Costs Deduction

In the United States, if you start a new business in the current tax year, you may be eligible for an income tax deduction of up to $5,000 in expenses related to getting started. These expenses include advertising, legal fees, accounting services, office supplies, rent, utilities, insurance, and other miscellaneous items. You can also write off any equipment purchased to get your business going.

How Do Tax Deductions Work?

Tax deductions work by lowering your tax bill. You can deduct expenses related to running your business from your taxes if you’re self-employed. A McGuire Tax Law Denver business attorney will help you determine what kind of business expense is deductible and how to properly claim them.

You can contact The McGuire Law Firm to speak with a Denver Business Attorney or Denver Tax attorney. 720-833-7705 or John@jmtaxlaw.com

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