6 Tax Deductions You May Have Overlooked
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President at BSM Accounting Services.
As a business owner, lowering your overall tax liability should be a top priority. One way to do this is to ensure that you are taking advantage of all the deductions that are available to you. Over the years, accountants have seen business owners leave a lot of money on the table. Here are six deductions that are often overlooked.
1. Home Office Deduction
Given the circumstances over the last two years, this one is more relevant than ever as more businesses permanently shift to working from home. If you use part of your home for business purposes, you may be able to deduct a portion of your mortgage or rent, utilities, insurance and other expenses. There are two options available:
• Simplified. The simplified option sets a rate of $5 per square foot, with a maximum of 300 square feet, capping the potential deduction at $1,500. This option is best for business owners who do not keep track of every single expense but still operate from home and would like to take advantage of the deduction.
• Regular. The regular, or standard, option allows you to itemize each and every one of your expenses. The maximum limit for deductions here would be your company’s gross income. There is a caveat, however: This option requires you to have detailed receipts and records of your business-related expenses. So, if you have over $1,500 in home office expenses and you’re the type of person who keeps things organized, this might be the best deduction for you.
2. Vehicle And Mileage Expenses
If you use your personal vehicle for business purposes, you may be able to deduct mileage and a portion of your gas, oil, repairs and other maintenance costs. The IRS releases standard mileage rates on a yearly basis. In 2022, you can deduct 58.5 cents per mile driven for business purposes and 14 cents per mile for every mile driven for charitable purposes.
However, if you choose to deduct your vehicle expenses using the actual expense method, you can deduct a portion of your vehicle’s depreciation, as well.
3. Meals And Entertainment
You can deduct 50% of the cost of business-related meals and entertainment, including client dinners, business lunches and tickets to sporting events or shows.
However, there are a few caveats. First, the meal or entertainment must be “directly related to or associated with” the active conduct of your business. Second, you can only deduct the cost of meals and entertainment if you have receipts or other documentation to support your expenses.
4. Petty Cash Expenses
Petty cash is the currency used for little purchases, such as bagels for an office meeting or parking and tolls. These tiny deductions can add up to significant tax benefits. To deduct petty cash, you’ll need to keep a log of all your cash-related transactions for all of your expenses. Many businesses opt to use petty cash vouchers to keep track of their cash transactions.
When you log your expense, ensure that you describe the transaction—attach any relevant receipt, date and place of occurrence.
5. Business Startup Expenses
The IRS allows you to deduct up to $5,000 in “business startup expenses” and $5,000 in organizational costs over your first year of operation.
Any costs that are related to the formation and setup of your business qualify. This could include your fees for forming an LLC, corporation or partnership. Additionally, fees for attorneys, CPAs and business brokers who help you start or buy a business can also be deducted. Your business startup expenses are categorized as capital costs and therefore must be amortized over a 15-year period.
6. Retirement Plan Contributions
You can deduct contributions that you make to a retirement plan for yourself and your employees. The deduction is taken off your taxable income, which lowers your overall tax liability. According to Merrill, “The maximum deductible contribution a business owner can make to an individual or small business 401(k) is $61,000 for 2022 (not counting catch-up contributions) — which includes your contributions as both an employee and employer.”
There are a few different types of retirement plans that you can set up for your business, including SEP IRAs, SIMPLE IRAs and 401(k)s. Each type of plan has different contribution limits, so be sure to choose the right one for your business.
By taking advantage of all the deductions that are available to you, you can lower your overall tax liability and keep more of your hard-earned money. Talk to your accountant and make sure that you are taking advantage of all the deductions that are available to you.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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