If you’re a small business owner, you may want to consider deducting some of your costs as business expenses. For example, you may be able to write off the costs of meals for clients and rewards for employees. Similarly, you can deduct the cost of coffee and food when you work from a coffee shop. But you should make sure you keep your invoices for these expenses. Listed below are some tips to maximize your deductions:
There are two types of business expenses. Fixed and variable. Fixed expenses are regular and stable, while variable expenses can change monthly. Variable expenses include employee commissions and utilities. Periodic expenses are those that come and go periodically, such as annual bonuses and emergency equipment repairs. You can deduct certain business expenses that are necessary for the organization. The IRS defines them as “ordinary and necessary.”
Rent for a storefront, warehouse, or office space is an example of a deductible expense. Insurance for business needs is another example. You can also deduct certain expenses on Schedule C, including accounting and tax preparation fees. Expenses for employee benefits are not deductible if they exceed 50% of your income. You should keep detailed records of all business-related expenses, including gas. While it’s difficult to keep track of every single expense, it’s necessary to track them so that you can take advantage of tax breaks.
Typically, general business expenses are deductible in the year they’re incurred. Startup costs, however, must be capitalized and deducted over five years. If your business is expected to lose money for the first two years, depreciating startup costs can be advantageous. You can also delay payments on invoices and conduct trivial business to avoid triggering capitalization requirements. Once you’ve made this decision, you can begin calculating your expenses.
When determining which expenses are business expenses, you should consult an accountant or an industry expert. While you’re unlikely to be audited, keeping track of all business expenses can help you reduce your tax liability. Using the right tools and technology is essential for tracking business expenses. There are various expense software available in the market that will automate your expenses and improve your accounting processes. Using a spreadsheet is a basic requirement for tracking business expenses.
As mentioned, the tax year used for determining business expenses is the calendar year. As such, if you send a bill for $600 to a plumbing company in December 2020, but don’t receive the payment until January 2021, you may be able to deduct that bill on your 2020 tax return. The accrual method requires that the work is completed, the liability is determined, and the business performs economic performance.
Another expense you may be able to deduct is automobile expenses. Your car expenses can include commuting to and from work and even the drive to and from a supplier. The IRS allows you to deduct mileage using two different approaches. The first method uses the standard mileage rate and multiplies it by the number of miles you drive. A small business owner who drives 1,000 miles per year would gain approximately $400 on their annual tax bill.