Small businesses are taxed differently than corporations. While corporations pay taxes on profits distributed to the shareholders, small businesses pay taxes on the income of the owner. Corporations are also subject to tax when the profit is distributed as dividends which create a double tax on the profit of the corporation.
You as a small business owner have it much easier compared to corporations. The Internal Revenue Service allows small business owners to take certain itemized deductions to reduce their taxes. However, you will have to pay taxes on the profits you made during the year regardless. So there isn’t a way for a small business owner to have $0 tax liability for any given year. The deductions you claim simply won’t cut it.
The deductions will help you reduce the taxable profit of your business, therefore, reducing the amount of tax you owe to the IRS when the tax season comes. So everything works the same as federal income taxes.
Here are the most common tax deductişons for small businesses. The deductions below are for deductions a small business owner can claim aside from their federal income taxes.
Salary and Wage Deductions
If your small business is an LLC or a sole proprietor, the salaries and wages you pay your employees are tax deductible. This isn’t limited to the salaries and wages though. You can even deduct payments like meals, per diem, allowances and employer-paid taxes on behalf of the employee. However, as a sole proprietor or an LLC, small businesses mostly cannot deduct income taken from the business and draws.
All and all though, being able to deduct wage and salary paid to employees is possibly the best way to reduce the taxable income of your business.
Employee benefits that you offer to your employees are definitely going to boost the motivation of your team. The benefits you give to your employees will also benefit you in taxes. The contributions you make on your employees’ pensions, reimbursements, health insurance, etc. are all tax deductible.
There is no doubt that the rent has increased substantially in recent years. Luckily, you can claim the rent you pay on your business location. Although this will not apply to most, you cannot deduct rent as an expense if you have or will receive equity on the property. Other than that, rent is 100 percent tax-deductible.
If you or your employees have an office at home, the expenses that go for maintaining it are tax deductible. The qualification for this deduction is simple. You must strictly use your home office for your business. The same applies to your employees.
Even though you won’t be able to deduct all of the expenses, a portion of expenses that go towards repairs, real estate taxes, mortgage insurance premiums, and interest are deductible.
Office Supply Expenses
Pretty much all of your office supplies can be tax deductible. But the “office supplies” here isn’t only for the traditional office environments. Let’s say you have a food place and the take out containers run you quite a bit money when added up.
Expenses like that can be deductible as long as they are used within the year of the purchase. This also includes expenses that go towards delivery services.
Your insurance premiums are expenses that can be tax-deductible as long as it is ordinary and necessary. This classification must be done by the insurance company. So before you claim the insurance premiums, make sure that they fall into either one of these categories by your insurance provider.
Generally, coverage for vehicles used in the business, health, malpractice, and theft is going to be tax deductible.
Advertising is certainly a big part of owning a business. Even if the products and services you offer are top-notch, without a marketing strategy, things can go sideways quickly. If you fear the cost of marketing and advertising, no worries. Every single penny that goes towards ads and marketing are tax deductible.
So cutting expenses on your website, business cards, or any form of advertisement isn’t necessary at all.
Other Small Business Tax Deductions
On top of these deductions, there are a few other ones that might be attractive to you. Most small business owners are going to be able to claim these deductions. These deductions include fuel and excise taxes, expenses for business property repair or maintenance, charitable contributions, and costs of starting your business. The expenses related to starting your business cannot be deducted all at once. Instead, you can claim one fifth of it each year, for five years.