Business taxes are an unavoidable part of running a company. In order to meet your tax commitments and avoid overpaying, you need to understand the kinds of deductions that small companies may qualify for.
While you should rely on tax advice from your accountant or tax preparer for the specifics of what your company may take as a deduction, a good understanding of available deductions can make it easier for you to track expenses and gather the paperwork you will need to claim deductions at tax time.
Review the following questions to learn about business deductions that may be available to your small business.
Can my business deduct the expenses related to running my company?
The short answer to this is “yes.” The detailed answer depends on the type of business you run and the expenses you incur in the course of doing business. Your tax advisor—tax preparer, accountant or CPA—will educate you about what your particular company can legally claim as a deduction. This important person will also update you on tax changes each year that may guide your expense tracking and ultimately determine what you claim on your tax forms as deductions.
What types of expenses are deductible?
Business expenses directly related to running your company can be deducted from the taxes you potentially owe, significantly lowering your tax bill. However, it’s important to note that just because you spent money that doesn’t mean you can take a deduction. Your business needs to document most expenses and have this information available to share either with your tax preparer or the IRS in case of an audit. Some common business deductions to discuss with your tax advisor include: a portion of start-up expenses, auto expenses, purchases of office supplies and furniture, business rent or home office expenses, educational materials costs, business-related travel expenses, interest on business loans or other business credit, insurance costs, retirement plan costs, technology investments, and moving expenses. Speak with your tax advisor about how to manage these deductions. The IRS provides an overview of business expenses and how things may change in the upcoming tax year at http://www.irs.gov/publications/p535/ar01.html.
Is the cost of paying my staff or vendors deductible?
Yes. The key to taking the deductions you are owed is to track and gather the paperwork the IRS will require in order to allow you to deduct staffing expenses. Always double check with your tax advisor to ensure that you are keeping up with changes in tax law, or specific requirements related to your business or staffing. Required information may include: a Social Security number or Employee Identification Number for each staff member; address, date of work and payment; money paid to employees or independent contractors; any benefits paid to people who work for you; and any tax documents related to work completed for your company. Gathering this information as you go is highly recommended to avoid difficulties in collecting it once work is complete. Filing taxes for payroll is tricky and most businesses rely on payroll companies to avoid mistakes and facing associated penalties.
What paperwork do I need to prove that I incurred these expenses?
Understandably, the IRS wants to see documentation that you in fact paid for the expenses you claim. Gathering this information as you go is much easier than trying to piece records together after the fact, so try to establish a system for gathering and storing this detail. You are not required to send proof of expenses to the IRS when you file business taxes, but your accountant may want to see these records, and you will need them if you are ever audited. Paperwork to hold on to includes: receipts for any expenses related to staff; receipts for business purchases; a travel log including mileage and other details if you plan to claim use of a vehicle for business purposes; records for any taxes you pay during the year; and receipts for business entertainment expenses, rent or mortgage payments for your office, equipment purchases, and business travel-related expenses.
What about the cost of my home office space?
The IRS has created tax rules to simplify the home office deduction for taxpayers. Check with your tax advisor about whether you qualify and how to calculate this expense if you work from home. New home office deduction rules—as of 2013—actually cut down on the paperwork and record-keeping associated with claiming the home office deduction. Your allowable deduction may now be easier to calculate using the new rules or the traditional means of calculating and claiming this deduction may be more advantageous to you, even if it is trickier to calculate. You and your tax advisor can make this determination. In either case, you are potentially eligible for this deduction if you meet any one of the following requirements for your home office:
- It is your principal place of business
- You use it regularly and do not have another location
- You meet clients or customers in your office
- You store inventory or samples at home
- As an employee, you are working at home “for the convenience of your employer”
What other tax deductions might my business qualify for?
Some deductions are most relevant to particular industries or types of businesses. By hiring a tax advisor who understands the type of business you run, you can be properly informed about the deductions available to you.Examples of other types of business deductions include: charitable contributions, credits for updating cooling or heating equipment to make it more energy efficient, education expenses, and tax credits for hiring veterans or people with disabilities.
An understanding of business tax deductions will make it easier for you to identify savings opportunities and collect the documentation you need to verify these deductions to tax authorities. Even if you work with a tax expert, your knowledge will make his or her job easier, which will ultimately benefit your company.
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