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Write-offs you might not know startups and SMBs can take

Posted by Shivali Anand

July 27, 2022    |     5-minute read (1008 words)

With inflation at its highest level in four decades, 58% of Americans are anxious about their emergency funds as opposed to 48% in 2021, according to a Bankrate poll. The combined uncertainty of stock market volatility, rising prices, geopolitical instability and supply chain constraints appear to be chipping away at people's confidence in the U.S. economy. 

As talks of a recession get louder, business owners too are considering how much cash to set aside. One way to augment profits, regardless of whether you own an LLC, sole proprietorship or a partnership, is through small business tax deductions.

Business owners may be unaware of the scope of tax deductions for which they may be eligible. Or, running the business may leave them with insufficient bandwidth to maintain the necessary business records, categorize expenses and perform the calculations required to take advantage of these deductions.

What is a tax deduction (write-off)?



The IRS generally considers business costs to be tax deductible if they are “common and necessary” to the company's operation. Tax deductions, which are also frequently referred to as tax write-offs, allow small business owners to reduce their tax liability by deducting expenses from their taxable income. In general, tax write-offs enable you to settle your tax liability for a lower amount. However, the cost must meet the requirements of a tax deduction as determined by the IRS.  

Tax deductions for SMBs and startups



Saving money is even more important in the current climate of economic uncertainty. As a business owner, you can avoid unnecessarily leaving money on the table (due to unclaimed deductions) by familiarizing yourself with these 10 often-overlooked small business tax write-offs. 

Startup costs

– Because startup costs are an investment in your business, the IRS classifies them as a capital expense. The money hasn't left the company; it's just become an asset. Startup costs for a small business can be deducted to a maximum of $5,000 each, but the permissible startup deduction is reduced by the amount your total startup costs surpass $50,000. The balance must be amortized; deductions for capital costs are usually spread out over several years. 

Home office costs

– One of the most common deductions for small businesses is home office expenses. The IRS established a streamlined method in 2013 to estimate home office cost deductions. You must use either the simplified or the regular deduction computation. 

Under the simplified method, for those who qualify for the deduction, up to 300 square feet of your home can be used for business at a deduction rate of $5 per square foot. 

Under the regular method, you are allowed to deduct based on the percentage of your home dedicated to your business activities. You must keep track of all the actual costs of taking care of your home, including mortgage interest or rent, utilities, real estate taxes, etc. You then apply the percentage of your home used for business to those expenses.

Insurance

– When you file business taxes, you can claim a deduction for certain insurance premiums, such as for theft, fire or accident losses. In general, workers' compensation, liability, unemployment, malpractice and business interruption insurance are also tax deductible, if they meet certain criteria.

Renter's insurance charges are deductible as part of a home office write-off if you have a home office or use a certain area of your house to conduct your business, subject to certain criteria. Auto insurance is deductible only to the extent the vehicle is used for business purposes.

Retirement plan contributions

– Tax deductions apply to contributions made to qualifying retirement plans, such as the Simplified Employee Pension (SEP) and the SIMPLE plan. You are entitled to take a tax deduction for any payments you make to the program on behalf of your employee. In addition, if you are a sole proprietor, you can generally deduct the money you put into your own retirement plan.

Phone and internet expenses

– Internet and phone expenses are deductible if they are directly business-related, even if you don’t claim the home office deduction. 

Vehicular expenses

– Vehicle-related costs are deductible only to the extent that vehicle is used for business. However, you must keep track of your mileage and retain documentation of its use for business purposes. If you use your automobile for work and your personal life, you’ll need to divide your spending according to the miles you drive.

Business travel

– Tax deductions are available for travel expenses only if they are ordinary and required for your business. To write off a business expense as travel, the travel must have taken you beyond the area of your normal place of business and last longer than a regular workday. 

The travel must also have required you to have a place to sleep or rest to perform your work obligations away from home. This deduction requires keeping detailed records of your business-related travel costs, including airfare, hotel stays and meals that aren't part of entertainment.

Self-employment taxes

Small business owners and independent contractors must pay self-employment taxes, which go toward Medicare and Social Security. While the total self-employment tax rate is 15.3%, as both employer and employee of the business, 7.65% of that amount is the employer share and 7.65% is the employee share. When you file your taxes, you can deduct the employer portion of the self-employment tax as a business expense.

Promotional expenses

– You can deduct reasonable costs incurred to advertise your business. This could include digital and print ads, designing and maintaining your website and printing business cards, for example.

Educational and training expenses

– Educational expenses that are required to maintain or to better skills that pertain to your business can be deducted. These expenses must be connected to your existing line of work, not a new field or business.

The importance of keeping records



Maintaining accurate business records is essential to ensuring you can safely claim all the tax deductions to which you are entitled. In the event of an audit, you will be required to furnish proof of the expenses you wrote off. 

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