If you are running a small business, you should know how crucial tax filing is. Although, sometimes tax filing can be an overwhelming and time taking process. Besides this, you cannot ignore this aspect since it can protect your company from unnecessary legal matters. Most business owners give this tax filing responsibility to their company’s accountant so that they can file taxes with no errors and on time.
Although, accountants are aware of a few tricks of business tax deductions that effectively reduce tax liabilities for the company. Also, it can assist in saving tons of money that can be utilized for the company’s operations. Multiple methods for business tax deductions can help in decreasing tax liabilities.
Keep reading this article to find out what a business tax deduction is and how you can decrease this to reduce tax liabilities.
Overview of Business Tax Deduction?
A Small Business Tax Deductions is an Internal Revenue Services licensed expenditure that you can eliminate from your taxable income.
These tax deductions can assist in decreasing the income amount of federal and state taxation, as per the Internal Revenue Service laws, that business expenditures have to be both ordinary and necessary to be deductible.
For example, a company’s annual taxable income was $50,000, but you used $10,000 on licensed deductible expenditure. So your company’s taxable income decreases to $40,000.
How Does Business Tax Deduction Work?
There are two methods to affirm tax deductions while you file your small business taxes.
- Take the Basic Deduction: Taking the basic deduction is the faster method to collect the amount from taxable income, but you can be excluded on a few chances to restore the money.
- Itemize Your Deduction: Itemizing your tax deductions is time taking process and needs well-organized records, but it is one of the methods to take full benefits of small business tax deductions.
The first procedure for itemizing is to list all the tax deductions you want to affirm. The following step is to collect all important records that show the business tax deduction, including receipts, property tax documentation, and employee benefits records. You have to attach these financial statements while filling out a Schedule A form with your tax return because these financial statements will be your first protection if the Internal Revenue Service audits you.
What are the Updates in 2023?
Before jumping into the entire business tax deduction, you should aware of what are the updates of 2023 which can be required while filing taxes.
Employee Salary Deduction
The employee salary deduction for contribution to health flexible spending arrangements is hiked from $2,750 to $2,850. The maximum amount for cafeteria plans will be $570 for the 2022 tax year and $20 increased from the prior year.
Medical Saving Account (MSA)
The maximum expenditure of Medical Savings Accounts or MSA rises from $4,800 to $4,950 for those employees who only pay for a Medical Savings Account.
Basic Mileage Rate
The basic mileage rate for every mile of business use rises from 56 cents per mile to 58.5 per mile for half of the year if you use your car for business reasons. The business travel will be 62.5 cents per mile from July 1, 2022, to the end of the 2022 tax year.
Small Business Tax Deduction Every Business Owner Should Know
Here is a list of business expenditures that can give you access of reduce business tax liabilities to save some of the amounts which can be utilized in running a business.
Business Meals
If you are a small business owner, you can subtract 50% of food and beverage purchases that the Internal Revenue Service allows. To claim the business tax deduction, the meal is required to be associated with your business, and you have to keep some receipts which are mentioned below:
- Location and day of the meal
- Business connection for the people or person you were having a meal with
- The overall cost of the meal
The simplest method to track business meal expenditure is to keep the receipt and write down notes on the back of the receipts of the meal details.
Work-Associated Travel Expenditure
Overall expenses related to business travel can be subtracted during tax season, including airfare, hotels, rental car expenses, meals, and many more. You can check the Internal Revenue Service websites to see the list of business tax deductions. To claim those work-associated business tax deductions, you must have the following things:
- The trip should be required for your business.
- The trip has to be far away from your tax home, suppose the location or area in which your organization operates the business.
- You have to travel far away from your tax home for more than a normal work day, and it should need you to sleep on the route.
Read more: Recognizing the Financial Statement Effects of Deferred Revenue
Home Office Expenditure
According to the Internal Revenue Service’s guidelines for home office expenditure, home-based small businesses and freelancers may subtract $5 dollars every square foot of their home that is used for business reasons maximum of 300 square feet. Your work location must be used for only business, and you are required to utilize the home office regularly as your only place for operating business to claim this as a business tax deduction.
Wages and Advantages
If you operate a small business owner with employees, you can deduct their wages, benefits, and vacation pay on your tax returns. Here are some necessary documents you need to deduct business tax from, wages, and advantages of the employees.
- The employee is not part of the sole proprietor, partner, or LLC in the company.
- The wages are considerable.
- The service assigned to the employee was provided.
Experts Service Fees
Any expert services required for the operation of your business, including accounting and bookkeeping services, legal can assist in business tax deduction if you have accounting or bookkeeping software for your company that would also be allowed as a business tax deduction. If you cannot find expert service expenditures for work or personal use, then the Internal Revenue Service guidelines can assist you in knowing those expenditures.
Phone and Internet Expenditure
If the phone and the internet connectivity are essential to operate your business, then you can subtract these expenditures. Although, if you utilize the phone and internet for work and personal purposes, you can only deduct the calculated cost percentage that you utilize towards business uses. For example, if half of your internet usage is associated with a company, you can note down 50% of your internet expenditure for the year.
Summing Up!
Business tax deductions can save your company’s resources by reducing your tax liabilities. Also, maximum business tax deductions require an improved method of accounting and bookkeeping so that you can collect all your receipts as proof when the Internal Revenue Service audits you. Also, you can add several deductions, including home office expenditures, phone and internet expenses, expert services fees, etc.
