Business expenses can be a major help when it comes to tax time. Becoming more familiar with what a “write off” is defined by, you can then identify what would be the top write off you can claim on your own business taxes. While the write offs may differ based on the structure of your business, most are similar in nature. Let’s take a look at the top write offs, you as a small business owner can look to capitalize from.
What’s a Deduction?
First, it’s important to define a deduction. In order for an expense to be deductible, the company must use it as an ordinary and necessary item. For instance an ordinary item is something usually used in the trade. Carpenters using hammers and nails is common- using low profile rims and custom leather seats for a Ferrari may not count. A necessary expense is one that helps your business. This can be an upgrade to software, a computer or even a tablet if you accept payment in the field. When starting out, it’s best to separate your expenses from personal. In addition, separating business expenses from certain “business operations/transaction” costs is key as well. The following expenses are used to figure out a company's “cost of goods”:
- Capital Expenses, and Personal Expenses.
- Cost of Goods Sold
In addition, there are types of expenses that go into figuring the cost of “goods sold” which include the cost of products or raw materials, including freight, storage, labor costs (including contributions to pensions or annuity plans), and facility overhead.
While deductions are one thing, Capital Expenses
are another “write off” must follow. In this case, businesses must capitalize, rather than deduct, some of their costs. These costs are a part of the investment into the business which is why they are called capital expenses. Capital expenses are considered “assets” not deductions. Some types of costs associated with capital expenses include:
- Business start-up costs
- Business assets
Generally speaking you can not deduct personal expenses such as living space or family expenses unless it’s tied to the business. For instance, if you use your home office for business purposes you can deduct that portion on your taxes.
Some of the most common business write offs for the small business owner:
- Business Use of Your Home
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include:
- mortgage interest
- Business Use of Your Car
If you use your car for business, you can deduct car expenses. Note that you must divide expenses if you also drive that same car for personal use.
- “Other” Business Expenses
- Employees' Pay
- Retirement Plans
- Rent Expense
- Business interest expense is an amount charged for the use of money you borrowed for business activities
- Taxes - You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses
- Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession
Filing your claims
Knowing what constitutes a deduction and what is considered a legit “write off”, it all needs to be filed at tax time. There are some ways in which business taxes are reported and vary based on the business structure and setup. If you are looking for more ways to maximize on your tax breaks, want to learn more about how to plan for tax time, or have general accounting questions we are here to help.
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