As a business owner, the easiest way to reduce your taxes is through small business tax deductions.
Yet, 90% of business owners overpay their taxes because they fail to write-off expenses they already pay for.
Why? Because many small business owners (and sadly, accountants too) are not fully aware of the various tax deductions available.
In fact, most do not even know what tax deductions are and the role it plays in reducing your taxes.
In this post, we guide you through everything you need to know about business tax write-offs and the top 30 tax deductions for small business owners.
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Also known as a tax write-off, the tax law defines a tax deduction as “any ordinary and necessary expense” incurred to carry on any trade or business.
Eligible expenses are deducted from the business income reported on your tax return, resulting in lower tax liability.
The tax law does not define what is meant by an ordinary and necessary expense, leaving the door open for interpretation. The IRS provides some clarity in various publications but the definition remains wide-ranging.
As a result, the broad definition of small business tax deductions makes it possible for businesses to deduct almost any expense as long as it meets the criteria.
Yet the vast majority of entrepreneurs are not maximizing their deductions, resulting in millions in overpaid taxes.
To help you avoid missed tax deductions (and more taxes), start with the top 30 small business write-offs below.
The home-office deductions allows you to deduct a portion of your home expenses as a business expense.
If you do any work from home for your business, you may qualify for this deduction. The amount of your deduction is based on the percentage of space in your home that is used exclusively for business .
If you qualify, you can deduct a portion of the following home expenses:
To illustrate, let’s look a very simple example.
Let’s assume that your annual home expenses will be $100,000 this year.
If you use 20% of your home exclusively for business, you could write-off $20,000 of your home expenses.
It’s that simple. Yet, 90% of small business owners miss this deduction because they are unaware of it, or they are afraid to use it in fear of the IRS.
However, this deduction is completely valid per the tax code. In fact, the IRS provides the necessary guidance on when and how you can take the deduction.
If you need assistance, you may want to consider consulting a tax professional to determine if you qualify. They can advise the best calculation method for maximal, legal deductions.
If you to pay the least amount of taxes, you should pursue every tax reduction opportunity you deserve. The home office deduction is a low-hanging fruit for substantial tax savings.
Self-employment tax is a 15.3% tax that is used to fund Social Security and Medicare programs.
Sole proprietorships, partnerships, and limited liability companies are subject to this tax by default.
Self-employment tax is twice as much as employees who pay social security and medicare tax through their employers.
This is because both, employees AND employers pay into these programs. So when you are “self-employed” you have to pay both sides of this tax.
As an employee, you only pay 7.65% of your wages in social security and medicare tax. Then, your employer is required to pay another 7.65% on the wages they pay you.
Because of this, self-employment tax can be burdensome. However, you can reduce your self-employment taxes in two ways:
Changing your business structure will come with more requirements, like payroll and separate tax forms. Before making any change, you should weigh the pros (tax savings) against the cons (costs, time, etc.).
Consult an expert tax coach to analyze the options side-by-side. They can provide a customized comparison showing which approach to self-employment tax minimizes your obligations legally.
If you buy any tangible assets for your business, you may be able to deduct a large portion of the cost in the year you made the purchase.
Typically, the cost of purchased assets are spread over several years due to IRS depreciation rules.
However, Section 179 allows you to supersize deduction on asset purchases.
This tax code provision lets you deduct up to the 100% of the cost of tangible assets.
But what are tangible assets?
Tangible assets are assets that can be physically touched.
Examples of tangible assets include equipment, machinery, furniture, vehicles, or other types of property.
And if you buy tangible assets for your business, you write-off a sizable portion of the cost.
Let’s illustrate this concept with a very simple example:
Let’s say you buy $100,000 of new equipment with a 5 year lifespan.
Typically you could deduct $20,000 each year over 5 years. Because normally, you are only able to deduct a percentage annually based on the asset’s useful lifespan.
But with Section 179, you could have deducted the entire $100,000 upfront in Year 1.
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