Posted by Abundant Wealth Planning LLC

5 Valuable Tax Deductions for Small Businesses

5 Valuable Tax Deductions for Small Businesses

Self-employment brings freedom, responsibility, and a lot of expense. While most freelancers celebrate the former two, they are ashamed of the latter, especially when it comes to taxation. They may not be aware of the tax deductions to which they are entitled.

When the time comes to file your returns, don't hesitate to claim the benefits you get as a boss. 

Often a neglected deduction is educational expenses. If you take classes or buy research materials to be more effective in the workplace, it could be deductible. Below are some of the valuable tax deductions you can claim.


Individual Pension Plans (IRA)

The best tax cut for the self-employed is a retirement plan. A person without employees can create an individual 401(k) plan.

An individual can contribute $19,500 in 2021 as a 401(k) deferral plus 25% of net income.

If you have employees, it is recommended that you use a SIMPLE IRA (Savings Incentive Match Plan for Employees). This IRA-based plan gives small employers a streamlined way to pay employee pension contributions. Starting in 2021, an employee can defer up to $13,500, and employees over 50 can contribute an additional $3,000.

A third retirement plan is the Simplified Employee IRA (SEP-IRA). The employer can contribute 25% of the income or $58,000 in 2021, whichever is less. If the employer has the right employees, an equal percentage of their income must be paid.

Pension plans are absolutely the first tax deduction a small business owner should focus on. The government helps fund retirement.


Business Use of Home

Most independent businesses start as home-based businesses. These people need to know which parts of the business costs are deductible. It is very important to keep track of housing costs.

If your gross business income exceeds your total expenses, you can deduct any expenses related to the business use of your home. If your gross income is less than your total expenses, your deduction will be limited to the difference between your gross income and the amount of all business expenses you would pay if the business were not in-house. These charges may include telephone lines, Internet, and other business charges.

You should also have a home office that you use at work, as the IRS might ask you to document this.


Deducting Automobile Expenses

If you travel on business, even short distances in your city, you can deduct the dollar value of the business mile earned from your tax return. The taxpayer can report the expenses incurred or use the standard mileage rate prescribed by the IRS, 56 cents, in 2021. The mileage rates allowed by the IRS must be verified annually as they may change.

If you decide to use the actual expenses of the car, be sure to include payments, depreciation, registration, insurance, garage rentals, permits, repairs and maintenance, parking, and taxes. If you choose to use the standard mileage rate, you must keep a daily, weekly, or monthly mileage history to distinguish personal use from commercial use.


Depreciation of assets and equipment

Some self-employed people can buy goods and equipment for a business. If the property is expected to last longer than a year, it should be depreciated on your tax return.

According to the IRS, property claims must meet the following criteria: You must own the property, and it must be used or kept to generate income. The property must have an estimated lifespan, which means you must guess how long you can earn income from it. It cannot have one year or less shelf life and cannot be purchased and discarded in the same year.


It is also possible to deduct certain repairs to properties used for commercial activities.

Educational Expenses 

All tuition fees can be deducted for tax purposes. Often, an overlooked deduction is for educational expenses. If you take courses or buy research material to be more effective in the workplace, it could be tax-deductible.

Think about books, online courses, local college courses, or other courses or materials that you have purchased to improve your job or business. It's easy to forget a professional webinar or professional eBook that you bought online, so don't forget to save your email receipts.


Other areas to explore

Other easily missed deductions include advertising and promotional expenses, bank charges, and plane, bus, or train tickets. Restaurant meals and other entertainment expenses can be written off as long as business expenses are required.

Additionally, a business owner should consider health insurance premiums, which in most cases is a credit rather than a tax deduction.

A credit goes directly against a person's taxes rather than reducing income.

Whatever expenses you think you can afford, the most important thing is to keep accurate records throughout the year. Save receipts, including email receipts, and archive or save them for easy access at the time of imposition. Keeping receipts, mileage records, and other expense records not only makes paying taxes easier but also provides a system that lets you track changes from year to year.


Long-term tax-saving strategies

Don't just look for last-minute write-offs when considering your tax deductions. Think about long-term strategies to save money year after year, especially if you have a lot of income.

To reduce your gross taxable income, consider starting a defined benefit pension plan. This plan is based on your age and income - the older you are and the higher your income, the more you can contribute. An alternative plan is an age-based profit-sharing plan that is similar and can benefit those with more employees.

Another strategy for high-income entrepreneurs who own their building through a limited liability company or similar business structure is to pay the rent themselves. These fees are used to pay off the mortgage but are also considered a business expense for tax purposes.

Self-employed people who need liability insurance should consider starting their own insurance company. Captive insurance ensures the risks of the businesses or commercial risks in the case of a cooperative. Your premiums may be tax-deductible.

But, if the money is collected and the demands are minimal, the money withdrawn is taxed as a capital gain. This is not a retirement strategy, but that it can save you money, allowing you to "pay" instead of an insurance company and keep paying to deduct premiums.

Consult with a business lawyer or financial planner to ensure you have the best possible plan for your business with any of these more complicated long-term strategies.


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