There are many obvious perks that come with owning your own business, including setting your own schedule, being your own boss, and having control over your career. But there are also many tax benefits business owners can take advantage of to maximize their profits.
Here’s a quick guide that covers important tax deductions for your business.
What Will a Deduction Save Me?
A deduction, or write-off, is a business expense that can help lower your taxes. For example, if your business made $75,000 last year but you invested $10,000 in new business equipment, you would deduct that $10,000 from your net income. That means when it comes time to pay your taxes, you would need to pay tax on only $65,000 instead of the full $75,000.
How much will that deduction actually save you on your taxes? It’s important to weigh out the costs versus tax savings when you’re making a business purchase. Luckily, we have a simple formula that can help you see the value of these deductions:
Business Expense x Tax Rate = Money You Save on Taxes
For example, if you spent $2,000 on a new camera for your business and your tax rate is 25%, your savings would be $500:
$2,000 X .25 = $500
If you don’t know your tax rate, you can always visit IRS.gov to see the latest tax rates and brackets for the year. Keep in mind that if you are self-employed, you will also need to pay self-employment tax, which is a little over 15%.
Of course, you can’t write off any expense as a business expense. According to the IRS, you should write off expenses that are ordinary (i.e. common and accepted in your industry) or necessary (i.e. helpful and appropriate for your business). That doesn’t mean you can’t be creative when it comes to a tax deduction. Think broad. Just be sure you know and document the business purpose.
What Are the Perks?
A great example of getting creative in maximizing your tax benefits comes from a client I work with who wrote off her houseboat at Lake Powell. She is a photographer who takes senior graduation photos, and she also loves Lake Powell.
She came up with a promotional idea of taking a handful of her clients down to Lake Powell each year for an exclusive photo shoot. Because of these promotional trips, she decided to purchase a houseboat as a business expense. While she can still enjoy the houseboat throughout the year with her friends and family, the reason for purchasing the boat was to grow her business, which makes it a business expense. The chance to win a vacation to Lake Powell and the stunning photos that result from these trips help build her client base and generate more revenue. Overall, it’s a win-win!
This example illustrates that business owners should not feel limited in the deductions they take. Below, I have listed several common business expenses you should consider as tax deductions, but this is by no means a comprehensive list.
- This includes plane tickets, transportation, gas, rental cars, meals, conferences, etc. If you have questions about what constitutes a business trip, check out our complete guide to writing off your vacation.
- These include meals where you discuss business or meet with clients, partners, prospects, etc.
- Business owners have more flexibility that allows them to strategize around their retirement contributions. At the end of the year, you can determine how much you want to contribute to your retirement to help lower your taxable income. If you have questions, reach out to our team to come up with the best game plan.
- This can include purchases, leases, mileage, repairs, maintenance, insurance, etc. As we saw from the example above, it can even include houseboats!
- This can include the initial purchase, repairs, and monthly phone bills.
- Some examples include tools, furniture, cameras, computers, monitors, printers, and machinery. Again, this can be broad depending on your business needs, so don’t limit yourself.
- Do you need office supplies or marketing materials like brochures, business cards, or posters? What about cleaning supplies or hardware like memory drives, routers, or servers? Keep track of all these expenses because they are all great tax deductions.
Employee Expenses or Contract Labor
- Whether you have employees or pay someone to help set up your office or website, you can count those payments as a deduction. In addition, any money you spend on business equipment, education, travel, meals, etc. for employees can be written off.
- This includes health insurance as well as business-related insurance expenses, such as data breach insurance, liability insurance, property insurance, etc.
- If you finance expensive equipment, vehicles, or more for your business, you can write off the full purchase price of the asset using bonus depreciation in the year you financed it, even though it might take you years to pay off.
Website and Software
- Are you paying to maintain your website or domain? Do you use editing software, subscriptions, or Microsoft products for your business? Make sure you write those expenses off!
- Say there’s a seminar, class, or workshop that could help you gain important skills for your business. Take advantage of the learning opportunity and then take advantage of the tax deductions by writing off the expenses related to that education. That includes books, travel to and from seminars, meals purchased while attending a workshop, etc.
- Since you are self-employed, you will need to pay self-employment tax, which covers Medicare and Social Security taxes and is roughly 15%. While there’s nothing fun about paying extra taxes, you can deduct half of the self-employment tax to lower your tax bill.
Marketing and Advertising
- This is another great area for thinking outside the box. You’ll likely have expenses related to ads, signs, logos, brochures, etc. but you could also sponsor community events, host a client retreat, or hold a promotional treasure hunt to build up your business.
Home Office or Rent
- Whether you rent an office space or work from home, you can take advantage of tax deductions. With rent, it’s easy to calculate your business expense because you have a monthly bill. For a home office, that can get a little trickier. Check out our guide for getting the most from your home office tax deduction.
Internet, Phone, and Other Bills
- Water, heat, air conditioning, internet, phone, hotspots, monthly subscriptions for marketing tools or video conferencing—these could all be important for your business to function. Don’t forget to add those as tax write-offs.
- Do you have to maintain a license for your job? Or do you need permits to operate? Those are additional tax deductions you’ll want to take advantage of.
Have additional questions about how to write off your business expenses? Reach out to our team for advice. At Mazuma USA, we help small businesses save time, money, and stressing stay on top of their taxes and finances. We’d love to help you any way we can.
Ben Sutton is the founder of Mazuma USA, an accounting firm providing tax, bookkeeping and payroll services to small businesses. Since founding Mazuma, Ben has established himself as an expert in the small business world. He’s still driven by that same desire to provide accounting help to all small businesses – from photographers, bloggers and creatives to lawyers, doctors, and dentists, everyone needs affordable accounting help. Ben is a Certified Public Accountant, and a member of the American Institute of Certified Public Accountants. But Ben considers his greatest achievement and credential to be his happy wife and four children.