You have so much going on running your business that it’s easy to not think about taxes. But, your tax deductions can lead to significant savings and more money in your pocket. Tax deductions are so important.
Here are some overlooked tax deductions for small business owners, independent contractors
Why tax deductions are important: Limiting your taxable income
The more deductions you take, the lower your taxable income will be. That means you can pay less in taxes than you would and have more money to grow your business. Or, you can spend that money on whatever you want. We don’t judge.
Remember, tax fraud and tax evasion are illegal and you should always avoid this. You can face stiff penalties for this, including jail time. Minimizing your tax liability by following existing rules is perfectly legal, though. Taking the deductions you’re entitled to is a great way to help your small business succeed in the long run.
5 overlooked tax deductions for small business owners
It’s easy to complain about taxes. There are definitely elements of it that are burdensome. With that said, there are many who argue that the tax system is geared for entrepreneurs and small business owners.
Here are some of the most interesting tax deductions that small businesses can’t afford to ignore.
What are the expenses in a business?
Business expense deduction
Virtually every single business expense is deductible. That’s right, everything you spend for your business can lead to tax savings. As long as these expenses are:
- Ordinary and necessary
- Directly related to your business
- For a reasonable amount
This includes nearly everything: advertising costs, depreciation of business assets, software costs, banking fees and more.
The IRS isn’t just going to take your word for it, though. So, be sure to track your business expenses diligently and provide accurate record keeping.
Also, don’t forget you can write off all the startup costs it took to create your business. There are generally considered capital expenses. So, you can’t deduct them as you would normal operational business expenses.
Net operating loss
This can be a big one. Many businesses don’t generate a profit in its first couple years. While it’s not fun to lose money, a net operating loss can provide tax benefits. You can use this to reduce your tax liability for the current and future tax years.
You can find detailed instructions on how to determine the amount of your net operating loss here.
Health insurance costs
You already know how costly health insurance can be. Thankfully, you can still deduct some of those costs for yourself, your spouse and your dependents. Remember, you can only use the self-employed health insurance deduction if your business earns a profit. If the company doesn’t earn money or has a loss, you can’t get this deduction.
You can also deduct health insurance costs as a business expense if your business pays them for employees. This doesn’t apply if you’re an employee of your business and providing yourself health insurance but there is a workaround this limitation.
If you worked for a company, that business would foot 50 percent of your Social Security and Medicare taxes. But as a self-employed small business owner, you have to pay your own Social Security and Medicare taxes—commonly known as the self-employment tax. The good news is that you can deduct 50 percent of your self-employment taxes on your annual return.
Driving or business miles is a tax deduction for small business owners that you shouldn’t overlook. You probably drive a lot. Make sure you’re getting the most out of those miles with a mileage deduction.
Just be sure you have a proper mileage log to back up your mileage claims. The last thing your small business wants is for the IRS to audit your claim, then not allow your deduction and charge penalties.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.