Note: This post is discussing business tax deductions. Although the concept is the same for personal tax deductions, personal expenses are handled differently.
Before go into what a business tax deduction is, let's start with what the tax deduction is deducting from.
The revenue you generate in your business is your starting point. So, if you bring in $100k in sales, then this is what you would be taxed on. This is called your taxable income.
However, your business expenses can deduct against your revenue to reduce your taxable income.
That is what a tax deduction is. An expense that you can subtract from you taxable income and reduce how much you pay in taxes.
Most business expenses are 100% tax deductible, however, there are exceptions to the rule. The regulations around taxes changes every year, so it's important to ensure you are applying any regulations to the correct year. As always, consult with a tax preparer that will provides guidance based on your specific situation.
Three Tax Deducations that Every Business Owner Should Take Advantage Of:
Home Office Deduction: If you operate your business from a portion of your home, you may be eligible for the home office deduction. This deduction allows you to deduct a portion of your home-related expenses, such as mortgage interest, property taxes, utilities, and rent, based on the square footage of your home office relative to your total home space. However, there are strict IRS guidelines for claiming this deduction, so it's crucial to ensure compliance. For example, you couldn't include your mortgage payments as part of the calculation, just the interest.
Vehicle Expenses: If you use a vehicle for business purposes, you can often deduct associated costs, such as mileage, gas, insurance, and maintenance. You can choose between two methods: the standard mileage rate (set by the IRS) or actual expenses. Keeping a detailed mileage log is essential for claiming this deduction accurately. (Check out our blog post for more information on tracking mileage in your business).
Continuing Education: If you invest in training, workshops, courses, or other educational programs to enhance your employees' skills and knowledge related to their job, you can often deduct these expenses as a legitimate business cost. However, it's important to ensure that these educational expenses are directly related to the employee's current job. For example, an accountant couldn't justify deducting a course relating to skin facials.
Three Tax Deducations that are Not Tax Deductions:
Clothing: The deduction of clothing is usually questioned, but there are certain types of clothing that qualify as a deductions. - Uniforms such as nurse's scrubs, esthetician's tunics, or protective gear that firefighter's wear as this type of clothing is for functionality and not suitable for everyday wear. - Branded apparel if it bears your company logo and worn by your employees then it can be deducted as a business expense because it is deemed as promotional for your business.
Make Up: Make-up is not generally considered a tax deduction, even if it's work-related. There are very strict rules to what the IRS will allow as a make-up deduction. : - Performers who use make up as part of their costume or stage presence such as ballerinas can justify deducting make-up if not provided by their school/company. - If you work with a make-up artist for a business activity such as a photoshoot, you can deduct as a business expense as you're paying for the service. - Make-up products are not tax deductible unless you are a make-up artist and use products to complete your service. Even if you are using the products for photoshoots or business related events, you couldn't deduct any make up products that can be worn for everyday wear.
Corporate Gifts: It's not commonly known that only up to $25* per individual per year is $100 deductible in the business. Anything above that would not be deductible. So, if you get a client gift of $50, you would only deduct $25 of that amount. Note, expenses such as the gift box/wrapping is not included in that $25 limit. Just the value(s) of the products itself. *latest update for 2024.
One of the main points to remember is that a tax deduction isn't a dollar for dollar deduction. A lot of business owners justify spending $100 on a tax deductible cost forgetting that it doesn't reduce taxes by $100. It reduces your taxable income by $100 so you are reducing the amount taxes are calculated off.
Don’t forget, it’s important to consult with a tax professional to ensure you are properly identifying and claiming the deductions you qualify for. With a clear understanding of tax deductions, you can navigate the tax filing process with confidence and operate with a tax reducing strategy.
The Finance Agency are accounting professionals however, any information contained or given is for educational purposes only and does not a substitute for financial advice from a professional who is aware of the facts and circumstances of your situation. Please consult with a CPA, tax preparer, or accountant that is working with your specific business situation and State regulations.