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Tax deductions help businesses save money by reducing tax liability. Deductions reduce the overall business income that will be taxed. They typically include expenses incurred over the taxable period. These expenses are then deducted from the income earned to calculate taxes.
The intricacies of business taxation require in depth understanding and careful consideration. Tax payout can depend on business structure, industry of operation, number of employees, infrastructure, and resources. Startups and small businesses often operate within fixed financial constraints and must take advantage of the benefits that tax planning offers. Here are four expenses that can be written off:
#1: Rent and utilities
Startups and small businesses can write off their rent expenses and money spent on utilities that are critical to operating. These utilities include gas, electricity, water, and sanitation. It is important to keep the business and personal part of rent and utilities expenses separate, since many small businesses start at home.
#2: Office supplies and electronics
Depending on the structure applicable to your business, purchasing supplies can decrease taxable income. Tax liability also varies according to business structure. It is important to align your expenses with the applicable tax bracket.
The IRS, under Section 179, allows businesses to deduct the entire purchase of office equipment and software in the year of acquisition. For the year 2021, this deduction limit has been set to $1,050,000. The spending cap on equipment purchases is $2,620,000. Section 179 also applies to business-use vehicles, but with restrictions in place.
#3: Business phone billing
Business phone usage is a deductible expense and it therefore makes sense to invest in business-only phones. If calls related to the business are being made using a device that also involves personal use, businesses must request itemized phone bills that serve as a record of business usage.
#4: Health insurance coverage
Health insurance coverage may qualify for a tax credit of up to 50% of premium paid for employees. In addition, health insurance can be listed as a deduction on the personal tax returns of the business owner. There are additional rules governing health insurance premium expense deduction, including self-employed individuals and S corporation shareholders who own more than 2% of the company stock.
Optimizing tax time with professional assistance
Business expenses are unavoidable, but being vigilant and applying the right deductions can help businesses save money without compromising tax obligations. Given the complexities, time, and attention needed to file taxes, startups and small businesses can benefit from entrusting this process to a professional business accounting services firm that can provide:
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