How to Organize Small Business Tax Deductions
Published on February 22, 2018
The best small business owners can wear many hats—meaning you have a lot of roles to play within your company. You’ve probably found that staying organized and keeping track of all the different roles you play is essential to keeping your small business running.
One role you might have to play as a small business owner is the tax specialist. Get some tips for how to organize small business tax deductions, and make this particular role easier for yourself.
Understand tax deductions
Before you get your tax deductions organized, it may help to begin with defining what they are. The Tax Policy Center explains that tax deductions are able to reduce taxable income. Essentially, you can deduct certain business expenses that you spent on your small business, meaning they are subtracted from your annual taxable income, so that when tax season comes around, you may owe less. You can either claim a standard deduction or itemize deductible business expenses on your small business taxes. Making tax deductions in one of these ways could help to decrease your taxable income, and could possibly make tax season easier on you as a small business owner.
How to Organize Small Business Tax Deductions: Know what to deduct
An important part of knowing how to organize tax deductions is knowing what you are allowed to deduct in the first place. The IRS sets out the limits for what expenses are deductible, and a good start to understanding the limitations are these two rules:
- The business expense must be ordinary. “Ordinary” is defined as an expense that is both common, and accepted in your trade. For example, an ordinary small business tax deduction for a business owner who runs a local flower shop might be the cost of trimming shears and flower food.
- The business expense must be necessary. This essentially means that the expense must be helpful and appropriate for your trade or business. So the same florist who deducts his or her flower shears might have trouble expensing out a pricey meat-cutting machine…but if you are a small deli, this expense may very well be deductible for you!
What can I claim as a small business tax deduction?
Now that you know some general guidelines the IRS has for claiming tax deductions, let’s look at some of the more common ones that small business owners like you might be able to claim:
- Cost of goods sold (if you manufacture products or purchase them for resale)
- Business use of your home
- Business use of your car
- Employees’ pay
- Retirement plans
- Various types of insurance
- Federal, state, local, and foreign taxes
- Rent expense for buildings used for your small business
- Interest on loans for business activities
This list of deductions is neither comprehensive nor certain. Being able to deduct the costs listed above may depend on where your business is located, what type of business you have, and other various factors. This is a general list meant to inform you on common deductions made by business owners. There may be more small business tax deductions you will be able to make, and you can consult a tax specialist in order to see what you can or cannot deduct.
Small business tax deductions vs small business tax credits
As a small business owner, you should know about all the benefits available to you. Saving on taxes and getting refunds for certain cost could be a game-changer for your small business.
On top of small business tax deductions, you may have heard that you can get the small business tax credit if you meet certain qualifications. The Tax Policy Center describes the difference between deductions and credits as follows: deductions reduce taxable income, so you may end up owing less on your taxes. Credits, on the other hand, make reductions to your taxes directly. Learn more about the small business tax credit on eHealth.com and see if you qualify for it.
When it comes to health insurance, some small business owners might get more back if they qualify for the tax credit, so make sure to talk to a tax specialist in order to see how to get the best tax break for providing health insurance to your small business employees. You can shop for quality group health insurance plans on eHealth.com, and get free quotes instantly.
Organize your small business tax deductions with the help of a payroll service
Small business payroll is a great way to keep your deductions in order as the owner of a business. Unless you own a small payroll or accounting office, doing taxes probably isn’t what you specialize in. By sending your small business taxes off to the professionals, you may avoid fines from mistakes, and you will get to spend more time running the parts of your business that you’re best at.
Small business owners wear many hats—but you don’t have to wear all of them. If you are easily able to keep track of your small business tax deductions, then let that be one of the hats you wear within your company. But if keeping track of all your deductions takes too much time, or seems too confusing, you have plenty of options for small business payroll.
This article is for general information and may not be updated after publication. Consult your own tax, accounting, or legal advisor instead of relying on this article as tax, accounting, or legal advice.