If you want to efficiently reduce your taxable income, don’t miss out on maximising available tax deductions as a small business owner.
There are specific deductions available for your total income based on any type of business structure you operate. They make it a lot easier for you to squeeze out increased profit and comparatively lower taxes.
This article will guide you through 10 most common tax deductions you can utilize to reduce your small business tax without compromising on available resources. Explore accounting and business solutions Mississauga Ontario to get expert advice on optimizing your deductions.
UNDERSTANDING WHAT’S A TAX DEDUCTION:
A tax deduction is basically a legal edge on your taxable income. It means you can deduct a certain specific amount of expense from your total taxable income which reduces the tax you pay to the government through your business account.
According to the Internal Revenue Service (IRS), deductible business taxes are “ordinary or necessary” requirements of any business. Therefore, you can reduce the costs of basic resources you use for your business such as travel, meals, office rent, and many more with a legal right.
10 TAX DEDUCTIONS EVERY SMALL BUSINESS OWNER SHOULD KNOW:
If you are operating a sole proprietorship business or any other kind of small business, you are eligible for lots of tax deductions. It might be confusing at times to understand where to start, that’s why we’ve provided you with a list of basic tax deductions you can utilize for your business.
- INTERNET EXPENSES:
You might be using the Internet for either personal or business reasons. Or for both as well. You can deduct the percentage of Internet you use for business purposes from your total internet usage expense as a tax deduction.
For this purpose, you will need to keep records of the Internet usage to claim the deduction. It can prove to be helpful incase of any audits as well.
- TRAVEL EXPENSES:
Operating a business often requires you to travel a lot. Sometimes nearer and sometimes it’s far away from your tax home.
Tax home is the entire area/location where you conduct/operate your business. You are eligible for a tax deduction with regards to travelling for your business under certain conditions. If you have to travel outside the premises of your tax home, you can claim tax deduction on the total expense.
According to the IRS regulations, you can claim tax deduction on the following aspects of travelling for a business purpose:
- Using your own Car.
- Parking and toll fees.
- Meals.
- Business calls.
- Shipping of baggage.
- Laundry and dry cleaning.
- HOME OFFICE DEDUCTION:
If you work from home and have a space entirely dedicated for work, you can claim your home office tax deduction.
That space must be used for business purposes only to be eligible for the tax deduction.
- EMPLOYEE WAGES:
Hiring employees seems to be a costly task. However, it helps you to scale your business to elevated heights. As different and unique ideas and perspectives come to the forefront, there come ways to expand your business.
The tax you pay on your employee’s wages is a deductible amount. You can also write off their health insurance premiums, retirement plan contributions, team meetings and parties, and other benefits.
- MEAL EXPENSES:
You can deduct 50% of your total meal costs from your tax return. If you often have lunch or any meal while dealing with your business, or you have any business meetings, you can reduce the cost you pay by 50%.
You are required to keep records of location, date, time, purpose of the business meeting, and other essentials to claim the tax deduction.
Keeping the receipts is a plus point.
- ADVERTISEMENT AND MARKETING:
It is a very fundamental aspect of your business to promote it over different social media platforms. As the world is moving towards digitalization, e-commerce marketing is trending.
Businesses promote their products and services by running Ads and many other marketing tactics.
The expenses you have as a small business owner to advertise your business can be reduced by rightly utilising tax deductions for it. It includes photography, videography, shooting, and other expenses.
- HEALTHCARE PREMIUMS:
You can claim tax deductions on healthcare you receive as an individual or through any group plan.
If you are a sole proprietor or a business owner, you can claim a reduced tax. If you are a shareholder in any corporation, you must own 2% of its share to claim any tax deduction on healthcare support.
If you are a business owner providing a healthcare support plan for your employees, you can also claim deduction on your tax return.
In addition, small businesses enrolled in the federal government’s Small Business Health Options Program (SHOP) may be eligible for the Small Business Health Care Tax Credit. It can easily cover up to 50% of your total costs. Tax credits are even better than deductions because they reduce the tax you owe on a dollar-for-dollar basis instead of simply reducing the amount of income that you are taxed on.
- RENT OR LEASE PAYMENTS:
A tax strategy we call Augusta Rule can be applied to your rent or lease payments for your business.
If your business space is rented out or leases, you can deduct tax you pay for it. Furthermore, if your business space is entirely dedicated to work, you can use your home for business meetings. It is for 14 days or less in a year and tax-free as long as you follow the rules and regulations.
- DEPRECIATION COSTS:
If you want to save millions of dollars in the taxes you pay for the business assets you own?
Use the Bonus depreciation and section 179 depreciation rules. Right use of these rules can help you save thousands of bucks you pay as taxes.
If you own any tangible asset for your business such as machinery or other equipment, you can depreciate its cost. Any asset of your business over $2500 cannot be expensed, it has to be depreciated.
Therefore, take help from capable accountants for a smooth depreciation process.
- EDUCATION EXPENSES:
The education expenses are fully deductible when it comes to adding skills which increases your expertise. The IRS criteria for deducting taxes from educational expenses includes:
- Conducting classes to improve your skill set.
- Conducting workshops and seminars.
- Professional publications.
- Books related to your business industry.
- Transportation expenses to and from the point of education/class.
KEY TAKEAWAYS:
Paying taxes can transform from being hectic and stressful to easy and manageable by effectively utilizing available tax deductions. If you are a small business owner, you can deduct your taxable income for essential resources such as internet, food, education, rent, and more. For a deeper understanding of how these deductions work, check out our article on Canadian Business Taxes for Beginners. To make this process more accurate and reasonable, connect with a CPA who can provide affordable accounting solutions near Mississauga and guide you through the smart strategies to minimize your business tax bill that can be applicable to your small business.