SMALL BUSINESS AND TAX DEDUCTIONS THAT YOU NEED TO KNOW!
- Valerie C.
- Nov 20, 2019
- 12 min read
**IMPORTANT**
ATTENTION
• To take advantage of deductions, you must provide of the associated fees and costs. In other words, KEEP YOUR RECEIPTS - ALL OF THEM ... in an organized fashion To ensure that you are not overpaying or paying less, it is always a good idea to consult with an experienced tax advisor on when to use the deductions and to guarantee Deductions apply to you.
ADVERTISING
The US Small Business Administration recommends spending between 7% and 8% of your gross income for marketing and advertising. These expenses are incurred to promote a business, such as
flyers (including the cost of distributing them)
radio promotions
Facebook, Instagram and other media ads
Business Cards etc...
COMMISSIONS AND RATES
A reference fee is what you pay to the person who provides you with an advantage, HomeAdvisor, Thumb tack, Angles List are main examples of reference rates associated with the construction industry.
Reference rates or occasional amounts paid to people who are not employees or independent contractors may be deductible. This does not include commissions paid to employees. A sales commission is what you pay a seller to close a sale.
Attention: If you paid an independent or freelance contractor $ 600 or more for commissions on a project and did not withhold any taxes, you must send that contractor and the IRS a 1099-MISC.
WORK CONTRACT
An independent contractor is a person or entity hired to perform a job or provide services to another entity as a non-employee. As a result, Independent contractors must pay their own Social Security and Medicare taxes. The payer must correctly classify each beneficiary as a contractor independent or employee. Another term for an independent contractor is an independent professional. Payments paid to independent contractors (not employees) for services rendered are deductible. (Required to issue 1099)
EMPLOYEE BENEFIT PROGRAMS
5 benefits of employee benefits
Recruit and retain key employees
A healthy workforce is a productive workforce
Culture and moral
Tax advantages
basis for growth
For most small businesses, there comes a time when it is more expensive not to offer benefits to employees than to offer them. Once your small business reaches this turning point, advantages such as recruitment, retention, cost savings and positive culture become important ingredients for business growth and success.
Contributions to employee benefit programs include:
Education
Recreation
Health programs
wellness
INSURANCE
Premiums paid to protect the business against losses are deductible as expenses. Current or previous year's premiums can be deducted in the year paid. If cash or the accrual accounting method is used, advance payments can be deducted only in the year in which they are applied.
Types of insurance for which premiums are deductible include:
Fire
Theft
Flood
Commodity
Inventory
Credit
Public Responsibility
Workers Compensation
Interruption of business
Errors and omissions
Disability (for employees)
Malpractice
Responsibility of the Product
MORTGAGE LOANS
The interest portion of the mortgage payments on the property used in the business is deductible.
** Notice ** If you work remotely for an employer, deduction from your home office is no longer available, as of the 2018 tax law
Note: If the small business is in the home of the owner, the commercial part of the mortgage interest has to be deducted based on the area used for your small business.
EXAMPLE •• Imagine you have a $ 500,000 mortgage in your home of 4,000 square feet and pay $ 24,000 in mortgage interest for the year. In addition, it uses 400 square feet (10% of its total area) exclusively as its commercial office. The regular method would allow you to deduct 10 percent of your mortgage interest, or $ 2,400. This would be only part of the total deduction from your home office. The simplified method would provide a total tax deduction of only $ 1,500 for your home office, based on the 300 square foot size limit. You can also say home use!
There are strict requirements in home offices; Make sure you understand the restrictions.
OTHER INTERESTS
Interest rates that are tax deductible include mortgage interest for first and second mortgages (mortgage capital), mortgage interest for investment property, student loan interest and interest on some commercial loans, including credit cards commercial. Personal credit card interests, car loan interests and other types of consumer financing personal interests are not tax deductible.
Other interests include:
all interest on commercial indebtedness for which the business the owner did not receive a Form 1098.
This includes financial charges on the credit card
purchases made for commercial purposes, interest paid on installment purchases.
Other types of business loans.
LEGAL AND PROFESSIONAL SERVICES
You can deduct the fees paid to accountants, lawyers or other professionals who are independent contractors, for the "ordinary and necessary" expenses of your business.
This includes:
Appraisers
System Analyst
Consultants and bookkeepers.
The IRS specifically lists accountants and attorneys in the category of legal and professional fees, but other professionals may be included. Costs for legal and professional services such as lawyers, accounting and taxes.
Preparation fees that are ordinary and necessary for the operation of the business are deductible.
OFFICE EXPENSE
Also called office operating expenses, office expenses are costs that are directly related to the operation of the business. The costs of office may include ...
1. computer software
2. Postage
3. Phone
4. Internet
5. Pads
6. Books of orders
7. Books of receipts
8. Supplies for equipment (for example, cash records, computers and copiers)
9. Logbooks and related supplies.
Any cost of office equipment. The Internal Revenue Service allows small business owners to deduct 100 % of office expenses, assuming they retain all receipts. Office expenses are the costs of consumable office supplies, such as. Office Supply and Expense are not the same!!
PENSION AND PLANS TO SHARE BENEFITS
Amounts paid by the company as employer contributions to a pension, profit sharing, or employee annuity plan are deductible.
A profit-sharing plan is a type of defined contribution plan that allows companies to help employees save for retirement. With a profit-sharing plan, employer contributions are discretionary. That means that the company can decide from year to year how much to contribute (or whether to contribute) to an employee's plan. If the company has no profits, it does not have to make contributions to the plan. (But a company does not need to be profitable to have a profit-sharing plan). This flexibility makes it an excellent retirement plan option for small businesses or businesses of any size. In addition, it aligns the financial well-being of employees with the success of the company.
RENTAL OR LEASE
Rental or lease payments for commercial properties are deductible in the fiscal year for which the rent is due.
The rent is the payment for the use of goods that the taxpayer does not own.
Net leases are leases that include rent for space plus payment of associated costs, such as:
property taxes and insurance
public services
garbage collection
sewer
water
Net leases are deductible as income that includes the associated costs.
** If a taxpayer rents his house and uses a home office for his business, then the percentage of the income = area of the company ÷ area of the house is deductible but limited by the income of the company. **
REPAIRS AND MAINTENANCE
The costs incurred to return an asset to a previous condition or to keep the asset operating in its current condition (instead of improving the asset). For example, if a company truck is damaged, the cost of repairing the damage is immediately charged to repair and maintenance costs. Routine maintenance, such as engine tuning, oil changes, radiator washing, etc., is also charged for repairs and maintenance costs.
Repairs and maintenance include the amounts necessary to maintain the property under ordinary operation and efficient like :
Labor
Supplies
the annual service cost and contracts or other items related to the maintenance and repair **It is important to distinguish between repair costs and improvement costs because the improvement must be depreciated, a capital expense increases the value of the asset and asset productivity extends the useful life of the asset or adapts it to a different use**
SUPPLIES
Office supplies are tangible objects that help in the operation of your business. Office expenses may include electronic equipment, such as:
a computer, printer or fax.
ink of printer
paper clips
paper and staples
Pencils, pens
Calculators etc.
Furniture, such as a desk or chair, is considered office supplies if the item is used for business purposes only. The IRS allows small business owners to deduct 100% of office supplies but requires that they retain all receipts for supplies.
All necessary supply items for the owner's business are tax deductible, including
gift wrap materials
cleaning or maintenance supplies
maintenance of a guardian (animals included) on commercial property
electronic security system
TAXES AND LICENSES
Small businesses must have several licenses and business permits to operate legally and most are tax deductible expenses.
Licenses, such as
county business tax licenseSunbiz.org rateLiqueurdriverBuildingRegulatory fees paid annually to state or local governments in connection with the business are deductible.
TAXES THAT ARE DIRECTLY ATTRIBUTABLE TO TRADE OR BUSINESS ARE DEDUCTIBLE.
To be deductible as a business expense, the payment of taxes must be related to the business. You cannot deduct personal taxes, such as taxes on your home or personal property or taxes paid on non-business-related activities.
Including ...
Real estate tax
commercial property tax. (Real estate taxes paid personally)
Residence with a qualified home office is deducted as commercial household use expenses.
Any state or local tax on gross income (as opposed to net income) directly attributable to a trade or business.
Personal property taxes property taxes used in a trade or business other than those for vehicles
Sales taxes, sales taxes on properties or retail services and measured by gross sale price or gross receipts.
•• If this tax is collected from the buyer, the amount must be included in the gross receipts. •• Note: Sales taxes paid on supplies or depreciable property are added to the cost of ownership basis.
Compensation of taxes on the use that are generally imposed on the use, storage or consumption of an item bought from another tax jurisdiction. Federal road use tax.
PAYROLL TAXES
A payroll tax is a tax that an employer withholds from an employee's salary and pays the government on behalf of the employees. The payroll tax is based on the employee's salary or salary.
The employment taxes that a company must pay on behalf of its employees are deductible, including:
Social security tax of 6.2 percent on the salary of each employee. Medicare tax of 1.45 percent on the salary of each employee.Federal unemployment tax (FUTA) ranging from 0.8 percent to 6.2 percent in each employee's salary up to $ 7,000.Tax state of unemployment.
BUSINESS TRIPS
Your trip must be primarily related to the business to be deductible. Pleasure trips are never deductible. You can deduct travel expenses only if you travel away from home in connection with the search for an existing business.
Travel expenses incurred in connection with the acquisition or start-up of a new business are not deductible as business expenses. However, you can add these costs to your initial expenses and choose to deduct a portion of them and amortize the rest for 180 months. The tax house is the entire city or general area in which an individual regularly works, no matter where he lives.
Deductible travel expenses include:
50% of the cost of meals when traveling air, rail and bus fares
luggage charges
hotel
operating expenses and maintenance costs of a car
operating and maintenance costs of domestic trailers
local transportation costs for taxi fares or other transportation
costs of cleaning and laundry
Rates for rental of computers
fees of stenographer
costs of telephone
tax advice on eligible expenses
MEALS
If you use the actual spending method, you should keep track of what you spend on meals (including tips and taxes) in route to and at your commercial destination. When you make your taxes, add these amounts and deduct half of the total.
• Example: Frank takes a business trip from Santa Fe, New Mexico to Reno, Nevada. Arrive by car. Along the way, spend $ 200 on meals. While in Reno, spend another $ 200. Your total meal expense for the trip is $ 400. You can deduct the half of this amount, or $ 200.
If you combine a business trip with a vacation, you can deduct only the meals you eat while in business, for example, meals you eat while attending business meetings or doing other business-related work.
For food expenses to be deductible, there must be a clear business purpose for them.
Substantial business discussions must take place before, during or after the meal.
The expenses cannot be fancy or extravagant, and the tax deduction is generally limited to 50% of the expenses incurred.
GIFTS
The cost of commercial gifts to current or potential customers is deductible up to a maximum of $25 per customer per year. Tickets to shows or sporting events for clients to promote business are deductible. Gifts that are not below the $25 limitation. Tax - free scholarships Awards and recognitions tax free, and awards achievement to employees in recognition of length of service or safety achievement. Keep in mind that employee awards should not be compensation undercover to avoid misinterpreting a compensation award, do not present them at the same time as annual salary adjustments are made.
UTILITIES
The deduction of public services includes charges for electricity, gas, telephone, water and sewage on commercial property.
The cost of the basic local telephone service (taxes included) for the first home phone line is not deductible. The cost of an additional line added for commercial purposes is deductible as is any long-distance charge incurred for the small business.
Public services and rent paid at a commercial location, such as a retail store or office, are deductible business expenses. However, the Internal Revenue Service considers rent and public services as personal expenses, which are generally not deductible items in your tax return. Only in very special circumstances can you claim rent and public services as a tax deduction on your personal statement.
SALARY
To be deductible, compensation in general terms, wages, salaries, commissions and bonuses that you have paid to your small business employees are tax deductible expenses are considered:
• Ordinary and necessary
• Reasonable in quantity
• Paid for the services provided
• Paid or incurred in the current year
• The year in which you claim the tax deduction depends in part on whether your company uses cash or accrual accounting methods.
• Gross wages, salaries or other compensation paid to family members (including the spouse of the business owner and children) are deductible provided all these requirements are met.
• The actual cost of meals and accommodation provided to employees is deductible as compensation paid independently if the value is taxable to the employee.
• The value of meals and furnished accommodation for the employer's convenience is not included in the employee's gross salary.
• If provided as additional work incentives, the value is included in wages.
OTHER EXPENSES
Definition: other expenses in substantive accounting
Other expenses are expenses that are not related to a company's main business.
In addition to operating costs, the company must consider other expenses, including interest expenses and losses for the disposal of fixed assets.
Examples of other expenses include interest expenses and losses from disposal of fixed assets.
Examples of tax deductions that can be listed as other expenses are:
Charges for banking services (including the service charge for accepting credit cards).
Commercial fees or professional organizations
Subscriptions to publications
Garbage disposal fees
Laundry and uniform cleaning expenses
Credit card processing fees
Software.
STARTING EXPENSES
The IRS allows you to deduct $ 5,000 in business startup costs and $ 5,000 in organizational costs, but only if your total startup costs are $ 50,000 or less. If your initial costs for any area exceed $ 50,000, the amount of your allowable deduction will be reduced by that amount in dollars. And if your initial costs are more than $ 55,000, the deduction is eliminated.
For example:
If your initial costs were $ 53,000, you would lose $ 3,000 of the deduction and would only be allowed to deduct $ 2,000. And if your initial costs were $ 55,000 or more, you don't qualify for the deduction. The remaining costs after deduction must be amortized (paid over a period) annually in equal parts over the next 15 years.
You should always claim the initial deduction for the fiscal year that the company officially opened.
Examples of costs that may qualify as initial expenses include the following:
A survey of potential markets
Analysis of available facilities
labor
supplies etc.
Ads for the opening of the business
Wages and salaries of trainees and their instructors
Travel and other costs necessary to ensure possible distributors, suppliers or clients
fees for executives and consultants and for other professional services
**Initial expenses do not include deductible interest, taxes or research and experimental costs. Non-deductible expenses within the first year can be amortized in 15 years.
CAR AND TRUCK EXPENSES
The costs associated with the operation of a car, truck or other vehicle are only tax deductible under certain circumstances. You must drive for commercial, medical purposes because you are providing charitable services or, sometimes, because you are moving. The amount of your deduction is based on the number of miles you have spent driving for any of these tax-deductible purposes.
A business owner who uses his car or reimburses an employee for using a car has two methods available to claim car and truck expenses.
The two methods are actual expenses or the optional method.
Real expenses: the owner of a company that uses the real expenses method will claim the commercial part of the actual expenses paid to run the vehicle. Actual expenses include the cost of gas, oil, insurance, tires, licenses, repairs, garage rental and cleaning.
If the car is rented, the rental or rental amount can also be a tax deduction (within the limitations). If the business owner owns the car, he or she can claim a tax deduction depreciation.
Optional method (standard mileage rate): Business owners who own or lease their cars and who do not operate a fleet of vehicles for their businesses are eligible for this method.
The IRS has announced the standard mileage rate for 2019.
These are the rates you should use when preparing your 2019 business taxes.
58 cents per mile for business Miles cents per mile for medical or moving expenses 14 cents per mile conducted in the service of charities. The maximum allocation for 2019 of a fixed and variable rate plan (FAVR) is $50,400 for cars, trucks and vans. Business owners should take this into account when calculating their income and expenses or when paying employee expenses.
DEPRECIATION OF REAL EXPENSES
Definition: The monetary value of an asset decreases over time due to use, wear or obsolescence. This decrease is measured as depreciation.
Description: depreciation, that is, a decrease in the value of an asset can be caused by several other factors, as well as by unfavorable market conditions, etc. Machinery, equipment and currency are some examples of assets that are likely to depreciate over a specific period.
Opposite to depreciation is the appreciation, which is the increase in the value of an asset over a period.
In general, assets placed in service after 1986 are depreciated using the modified Accelerated Cost Recovery System, (MACRS). The term "MACRS" essentially refers to two different depreciations, the General Depreciation System and the Alternative Depreciation System. The general depreciation system is the most common and applies the depreciation rate against the asset.
The Alternative Depreciation System is different in that depreciation is deducted for longer periods of time. This system is generally used for listed property where commercial use falls below 50% and for situations where the General Depreciation System cannot be applied. But it does not apply if the standard tax deduction is claimed.
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