Tax Deduction Cheat Sheet For Small BusinessReading Time: 6 minutes
Every small business needs a tax deduction cheat sheet to minimize expenses on taxes and maximize revenue.
Google receives an estimated 2,000+ “how to avoid paying taxes” search volume every month– showing that people are constantly searching for tax loopholes.
While avoiding taxes is a common wish among entrepreneurs, it isn’t practical nor saves you from the reality of getting into the bad books of tax authorities.
Also, as a small business with growth plans, evading taxes could attract penalties.
The best-recommended option to not paying taxes is exploring legal ways to pay relatively less, increasing revenue while keeping your business accountable.
This article will discuss the following;
- The small business tax rate
- Tax write offs
- How do tax write offs work?
- The small business tax deduction cheat sheet
(Note: You can click on the texts above to jump to the section of this article that best satisfies your interest.)
At the end of this article, we hope you will reduce income tax expenses and speed up your tax filing process.
The Small Business Tax Rate
The amount of taxes small businesses pay to the federal government depends on income level and how the company is set up.
If your business is a C corporation, you’ll have a flat rate of 21% on net income. You get a tax imposed on your sales that allowable deductible expenses can reduce.
For small business owners who pay themselves a salary, taxes will typically get deducted as a legitimate business expense.
You’ll have to pay individual income tax on the money you earn as a salary at the official tax rate.
Pass-through entities pay a tax between the rates of 10% to 37%. These business types include sole proprietorships, partnerships, limited liability companies, and S corporations.
The larger your income, the higher the tax rate will be on pass-through income.
2023 Income Tax Brackets
|Rate||Incomes of individuals||Incomes of married couples filing jointly|
|10%||Less than or equal to $11,000||Less than or equal to $22,000|
|12%||More than $11,000||More than $22,000|
|22%||More than $44,725||More than $89,450|
|24%||More than $95,375||More than $190,750|
|32%||More than $182,100||More than $364,200|
|35%||More than $231,250||More than $462,500|
|37%||More than $578,125||More than $693,750|
What is a tax write off?
Tax write-offs are business expenses you can deduct from your taxable income when filing a tax return.
It lowers the amount of money you pay to the government and helps you save more for business operations.
Tax write-offs are sometimes tricky as many small business owners get caught in the dilemma of which expenses are deductible and which ones are not.
According to the US Internal Revenue Service (IRS), “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.”
How do tax write offs work?
The whole point of tax write-offs or deductions is to decrease the amount you pay to tax authorities.
You can apply the standard or itemized deductions when filing for tax deductions.
standard deduction is quicker because the government determines a specific amount based on your filing status.
The amount varies based on your filing status and is adjusted each year.
Itemized deductions take time and require you to keep receipts, property tax documentation, and employee benefits records (if you have employees).
And if the tax authorities audit you, these documents will be your proof of deductions.
To find out how to claim the most deductions, it’s a good idea to consult a financial adviser, like an accountant.
Small business tax deduction cheat sheet
Below is a list of items to help you with possible deductions when filing your taxes.
- Business Travel Expenses
- Business meals
- Business interest
- Contractor Labor
- Bad debt
- Legal fees
- Salaries and Employee benefits
- Home office
Business Travel Expenses
You can apply deductions to business-related travel expenses. Expenses include flight, hotel booking, tips, car rental, train or bus ticket, parking tickets, or costs of taxis, Uber, and Lyft.
To be eligible, you must meet the following conditions:
- The trip must be necessary.
- The trip must be away from your primary business city or area.
Meals served to employees, clients, or potential clients are tax deductible. However, some conditions apply.
- Meals at a company party (100% deductible)
- Personal meals that are business related (100% deductible)
- Business meals with clients (50% deductible)
Taking your clients out for dinner or drinks that aren’t business related isn’t deductible.
You’ll need the following details to claim deductions:
- Date and location of the meal
- The business relationship with individuals entertained.
- The total cost of the meal
The interest you pay on loans to fund business operations is 100% deductible (up to an amount equal to 30% of your taxable income).
You can deduct the interest charged on business loans, credit cards, bank accounts, or other additional charges, such as service and credit card fees.
Return eligibility includes legally binding documents for debt, proof of debtor-creditor relationship, and intent for debt repayment.
If you regularly work with Freelancers or Independent contractors, expenses on hiring them are 100% deductible.
To claims deductions on independent contractor expenses, you must issue form 1099-NEC to any hire earning over $600 or more from provided services to your business.
You’ll need to ensure that:
- The independent contractor doesn’t work for you.
- The provided services were strictly for your business.
Monies you spend on promoting your business to acquire new customers is deductible.
For example, the money you spend advertising your business on Google, social media platforms, banners, etc.
A bad debt is when an employee, customer, or vendor owes your business money, and there isn’t a way of recovering it.
Bad debts are deductible, with sufficient proof that it’s a business debt, not personal.
The cost of an asset your business uses to generate income is subject to tax deductions over its useful lifetime.
Depreciation deduction for an item doesn’t occur in a single tax year but spreads across the item’s lifetime use.
To calculate depreciation, divide the Total cost of the asset by the Useful lifetime of the asset.
It would be best if you considered the following before filing for depreciation deduction:
- The asset must be a source of generating income.
- The asset must be yours.
- The lifetime use of the asset must be over one year.
The cost of your business insurance is 100% deductible under certain circumstances.
Insurance premiums such as commercial property, business income, liability, fire, and flood are deductible. Employee medical insurance is also deductible in certain conditions.
The insurance policy must serve business purposes and be considered ordinary and necessary.
You can deduct any fees charged by legal practitioners related to your business operations.
To be eligible for deductions, the expenses must meet the criteria of being ordinary and necessary to the business.
See details for legal fees from the IRS.
Your charitable donations are 100% deductible on tax returns.
For a sole proprietorship, LLC, or partnership, you can claim returns on personal tax, while corporations can claim deductions on corporate tax returns.
The donation must be beneficial to a qualifying organization and be a cash contribution to qualify for deductions.
Salaries and Employee benefits
Monies paid to or on behalf of employees—salaries, wages, bonuses, education assistance, and commissions—are subject to tax deductions.
You need to ensure that:
- The employee is not a sole proprietor, partner, or LLC business member.
- The salary is necessary and reasonable.
- The employee provides the associated services paid for by your company.
The monies you spend on running your business—phone, internet, power, water, and heat bills—are deductible on tax returns.
You have to ensure that the bills for phone and internet are for work and not personal purposes. If there is a mix of work and personal reasons, you can only write off the cost for business use.
If you converted an area in your home to an office, you could deduct up to $5 for every square foot used for business purposes.
The IRS allows a maximum deduction of up to 300 square feet for a work area used exclusively for business.
Any part of your house that doubles as an office, guest, or dining room don’t qualify.
As a small business, there’s always the temptation to avoid paying taxes. However, it’s better to explore the legal means of reducing what you pay to the government than to evade it.
If you have challenges making sense of all the tax jargon, it would be best to hire a financial expert while you focus on growing your business. Akaunting can help you connect with accountants in your location.
Frequently Asked Questions
Who can write off expenses on their income taxes?
- Tax write-offs are open to individuals, freelancers, small businesses, and Corporations.
Should I itemize or take the standard deduction?
- Choosing a method that saves you the most money would be best. If the total of your itemized deductions exceeds your standard deduction limit, you’re better off itemizing and vice-versa.