As a business owner, lowering your overall tax liability should be a top priority. One way to do this is to make sure you take advantage of all the deductions available to you. Over the years, accountants have seen entrepreneurs put a lot of money on the table. Here are six deductions that are often overlooked.
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1. Home office deduction
Given the circumstances of the past two years, it is more relevant than ever as more and more companies are permanently switching to working from home. If you use part of your home for business, you may be able to deduct a portion of your mortgage or rent, utilities, insurance, and other expenses. Two options are available:
† Simplified. The simplified option sets a rate of $5 per square foot, capped at 300 square feet, limiting the potential deduction to $1,500. This option is best for business owners who don’t keep track of all expenses, but still work from home and want to take advantage of the deduction.
† Normal. The regular or standard option allows you to itemize all your expenses. The maximum limit for deductions here would be your company’s gross income. However, there is a caveat: This option requires you to have detailed receipts and records of your business expenses. So if you have over $1,500 in home office expenses and you’re the type of person who keeps things organized, this may be the best deduction for you.
2. Vehicle and mileage costs
If you use your personal car for business, you may be able to deduct mileage and some of your gas, oil, repair and other maintenance costs. Theirs releases standard mileage rates on an annual basis. In 2022, you may deduct 58.5 cents per mile driven for business purposes and 14 cents per mile for each mile driven for charity.
However, if you choose to deduct your vehicle expenses using the actual expense method, you can also deduct a portion of your vehicle’s depreciation.
3. Meals and Entertainment
You may deduct 50% of the cost of business meals and entertainment, including customer dinners, business lunches, and tickets to sporting events or shows.
However, there are a few caveats. First, the meal or entertainment must be “directly related or related to” the active business of your business. Second, you can only deduct the cost of meals and entertainment if you have receipts or other documentation to cover your expenses.
4. Small Cash Expenses
Small change is the currency used for small purchases, such as bagels for an office meeting or parking and tolls. These small deductions can lead to significant tax breaks. To deduct loose change, you must keep a log of all your cash transactions for all your expenses. Many businesses choose to use small cash vouchers to track their cash transactions.
When you record your expenses, be sure to describe the transaction – include a relevant receipt, date and place of occurrence.
5. Business start-up costs
The IRS allows you to deduct up to $5,000 in “business startup expenses” and $5,000 in organizational expenses during your first year of business.
All costs associated with setting up and furnishing your business are eligible. This could be your fees for forming an LLC, corporation, or partnership. In addition, fees for attorneys, CPAs, and business brokers who help you start or buy a business may also be deducted. Your business start-up costs are categorized as a cost of capital and therefore must be amortized over a 15-year period.
6. Pension contributions
You can deduct contributions that you pay to a pension scheme for yourself and your employees. The deduction is deducted from your taxable income, reducing your total tax liability. According to Merrill“The maximum deductible contribution a business owner can make to an individual or small business 401(k) is $61,000 for 2022 (not counting catch-up contributions) — including your contributions as both an employee and employer.”
There are a few different types of retirement plans you can set up for your business, including SEP IRAs, SIMPLE IRAs, and 401(k)s. Each type of plan has different contribution limits, so make sure you choose the right one for your business.
By taking advantage of all the deductions available to you, you can lower your overall tax liability and keep more of your hard-earned cash. Talk to your accountant and make sure you take advantage of all the deductions available to you.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.
