Following up on the previous Tax Season Tip, where we discussed the reason why you should prepare your profit and loss statement early, this time we are going to talk about some of the deductibles that a small business owner has access to. There are a lot of them, with some more or less being dependent on the type of business you run, so we are specifically going to focus on some of the more common ones.
Self-Employment Tax: If you are working for yourself or are the owner of an LLC, then you will pretty much have to pay self-employment taxes to cover the Social Security and Medicare taxes that an employer would. The self-employment tax deduction mitigates this by allowing you to deduct up to half of this onto your income taxes as a business deduction. Specifically, it is the employer-equivalent portion of your SE Tax that is paid over the course of the year.
Phone and Internet Costs: If you have a dedicated business phone or an internet connection, the expenses relevant to this cost can be deducted from your taxes. Even if you don’t have an exclusive business line, you can deduct business-exclusive expenses like apps or long-distance charges and the percentage of time spent using it for business. The same applies to internet expenses, but you will need proof that it is used exclusively for business.
Advertising and Promotional Costs: If you have paid for business advertising, which can range from printing business cards or Google Ads, then it’s possible to reduce your tax liability using the collective expense. Even your website and social media costs can be considered an advertising expense and this deductible. However, these expenses cannot be for personal use, they cannot be related to politics, and they have to be strictly for advertising—for example, if your website also acted as a storefront, then it wouldn’t be an advertising expense but an operating expense.
Office Supplies and Office Expenses: Any office supplies cost or office expenses are deductible. The former includes things like writing implements, cleaning supplies, postage (to a certain extent), while the latter includes things like Cloud storage services, internet hosting, domain names, software, laptops, and office phones under $2,500. However, for these to classify they must be considered ‘ordinary and necessary’ expenses of the business and only for the cost used in the current year.
Qualified Business Income Deduction: For smaller businesses who have pass-through income earned by the business, reported on their tax return, and made less than $160,000 in total income, they can receive this deduction. It essentially allows Sole Proprietors, Partnerships, S Corporations, and LLCs to deduct up to 20% of their business’ net profit—with some exceptions. And best of all, you can take it even if you use Standard Deduction when filing taxes.
These deductions are among the most common that a small business will have, given that they are directly tied into growing their business in one way or another. Keeping track of your expenses and categorizing your transactions appropriately is essential for taking advantage of them when Tax Season comes around. Yet another reason you should have a proper chart of accounts set up if you have not done so already.
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