As a small business owner, you usually have to spend money to make money. The bright side ? You can deduct qualifying business expenses from your taxes to reduce your overall tax payable. But how does radiation work? Here’s what you need to know.
How do I write off small business expenses?
Writing off small business expenses starts with tracking them throughout the year. You can streamline the tracking process by separating your business and personal expenses. For example, most business owners open a dedicated business bank account or business credit card and use it exclusively for business purchases.
As for receipts, the IRS can audit you and ask to see proof of all your business expenses, so you should record them as you go. “One way to organize receipts is to keep a folder for each of your vendors with all of the receipts for that year. Another option is to attach electronic copies of your receipts to transactions in your accounting software,” says Tim Yoder, CPA.
At tax time, you will report the amounts you spent on various expense categories on your tax return. Any eligible expense that does not fit into a listed category can be added in the “other” section. Then you subtract all of your expenses from your gross income, reducing the amount subject to tax.
What small business expenses can you deduct?
For a business expense to be deductible, it must be ordinary, necessary and common in your line of business. For example, the IRS lists the following expense categories on its Schedule C form:
- Advertising costs.
- Vehicle costs.
- Fees and commissions.
- Contract labor.
- Employee benefit programs.
- Insurance (not health).
- Interest charges.
- Mortgage payments.
- Legal and professional services.
- Office expenses.
- Retirement and incentive plans.
- Rent or lease payments.
- Repair and maintenance costs.
- Taxes and licenses.
- Travel and meal expenses.
What small business expenses cannot be deducted?
While the above types of expenses can usually be waived, here’s an overview of what can’t:
- Capital expenditure: Business start-up costs, business assets and improvements are not deductible. Instead, you can recover them through depreciation, amortization or depletion.
- Personal expenses: You cannot deduct personal, living, or family expenses. However, if an expense is partially used for business purposes, you can deduct part of it.
- Cost of Goods Sold: COGS refers to the costs involved in delivering products to customers (eg, raw materials, storage, direct labor, factory overhead). These expenses are deducted from your gross receipts to calculate your gross profit for the year.
- Customer entertainment: Entertainment costs for customers are also irrelevant. “The Tax Cuts and Jobs Act of 2017 made guest entertainment non-deductible, even if you attend it with a guest and business is discussed,” Yoder says.
“When in doubt, do your research or ask a CPA.” says Moira Corcoran, CPA. “Even though an expense may be ordinary and necessary, you might not be allowed to deduct it in the year you paid for it, or at all. Taking deductions you shouldn’t is a potential invitation to a audit.”
How to Deduct Small Business Expenses on Your Tax Forms
When you file tax returns for your business, how you report business expenses will depend on your business structure.
Sole proprietors report their business income using Schedule C (Form 1040). The majority of business expenses are added to Part II on lines 8 to 30. Expenses that do not fall into any of the expense categories listed in Part II can be entered in Part V.
Partnerships are required to file Form 1065. Business expenses are claimed in the “Deduction” section on lines 9 through 21.
Both C and S corporations are required to complete Form 1120. Expenses are claimed in the “Deductions” section on lines 12 through 29c.
Limited Liability Companies
The form required for an LLC will depend on the business structure it chooses. LLCs can be treated as corporations, partnerships, or disregarded entities.
How much of a business expense can you deduct?
You can often deduct 100% of eligible ordinary and necessary business expenses. However, according to Lei Han, CPA, “It is important to be aware of the limitations of certain types of deductions. For example, meal expenses provided by restaurants for business purposes can be deducted 100% in 2021 and 2022 (due to the Consolidated Appropriations Act), but the normal limit is 50%. Also, you can only deduct up to $25 in business gifts per person per year.
When to deduct small business expenses?
When you use the cash method, you deduct expenses from the tax year in which you paid them. For example, you will report expenses that were paid in 2022 when you file your 2022 tax return.
On the other hand, if you use the accrual method, you deduct expenses when you become responsible for them. For example, if you hired a web designer and he completed the work in December 2022, but you didn’t pay him until January 2023, you deduct the expenses for the 2022 tax year. .
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