When it comes to owning a small business, every dollar that you save can help grow your company. One of the easiest ways you can retain more of your revenue is with tax deductions. Also called tax write-offs by many, tax deductions help lower your tax liability (reduces your taxable income) and lessens your tax bill at the end of the year.
Determining what meets the IRS’s definition of a tax deduction isn’t as cut and dry as some may think, however. A Reno bookkeeper can help your small business manage your financial statements and organize your tax write-offs for maximum savings. Learn more about tax deductions below, and connect with a Reno bookkeeper from Prosperity Concierge for small business bookkeeping services that are customized to meet your needs.
What are Tax Deductions?
As stated above, tax deductions lower your taxable income and, as a result, the amount of taxes owed. Deductions, or write-offs, are expenses that a business owner incurs over the course of the fiscal year that can then be applied against their gross income. Typically, tax deductions are expenses that have been made to produce additional income. These tax write-offs are essentially subtracted from your taxable income to determine how much tax will be owed at the end of the year. It’s important to note that tax deductions are subtracted from your income before you calculate your tax and are not subtracted directly from the taxes you owe.
The IRS has determined that tax deductions must be deemed as either ordinary or necessary for the functionality of your business in order for it to pass as a legitimate write-off. Let’s clear up some of the ambiguities of tax deductions.
Ordinary business expenses
An ordinary business expense is one that’s classified as being “common and accepted” in your industry. This may include advertisement expenses, purchasing common supplies, and business travel costs. A majority of businesses in any industry have these types of expenses, making them ordinary.
Necessary Business Expenses
A necessary business expense is classified as being “helpful and appropriate” for your trade or business. These are expenses that need to be made for you to operate your business but aren’t essential for all businesses. Each industry has different needs, so what might be necessary for one business may not be necessary for another. For instance, if your business is related to the construction industry, you’ll likely have to purchase expensive heavy-equipment to operate accordingly, whereas a hairstylist needs shears and hot tools to do their day-to-day job. Each example is used to help boost profits in their respective industry’s but wouldn’t be an appropriate expense in a different industry.
So, What Qualifies as a Tax Write-Off?
Many business owners are worried about what the IRS considers to be a plausible tax deduction that they simply don’t record any deductibles and wind up owing much more on their taxes than they should. If you have a legitimate business expense, don’t be afraid to claim it for your taxes. If the expense is truly ordinary or necessary for your business then taking the deduction is worth it. To determine what qualifies as an ordinary or necessary business expense, ask yourself a few questions:
- Is it directly related to my business?
- In what way is this expense related to my business operations, services, or products?
- Has the expense been deemed non-deductible by the IRS?
- Can I justify the expense to an IRS auditor?
Examples of Tax Deductibles for Small Businesses
- Home office costs including utilities, insurance, etc.
- Startup costs for your first of business
- Interest on borrowed money
- Advertising and promotions/marketing
- Charitable contributions
- Wages and payroll taxes
- Retirement plan contributions
- Education and training
- Health insurance coverages
- Travel accommodations
Connect with a Professional Reno Bookkeeper
Christine Matlock, owner and founder of Prosperity Concierge, knows just how important accurate financial management is for your small business. As a small business owner herself, Christine has spent much of her time prioritizing financial recording for maximized earnings.
Christine is a local Reno bookkeeper and financial coach who’s proficient in handling business expenses, creating budgets, using QuickBooks, and developing financial confidence. See how she can help your business improve its bottom line!