If you are a small business owner, you may have been looking for tax deductions to help you save money. If you are able to get many tax deductions, writing them off can help your business grow even better.
There are a lot of businesses that get huge profits every year but when they are hit by income tax, everything reduces significantly. Especially for small business owners, getting tax deduction write-offs and using them to invest more in your business is a great advantage.
You must have realized that if you could get business expenses tax deduction write-offs, the positive effects will be huge on your business. However, are business expenses tax deductible?
This article will help you understand what business expenses are tax-deductible and other tax deduction write-offs you can use to invest in your business or increase the profit.
There are expenses that you should not put your business profits into. According to Shopify, a seller on their platform launched a business, and his profits were large. According to the seller, after a really profitable year, the income tax hits them really hard, reducing their profit. If they could reinvest that money into the company, the business would be even better than it is now. The business owner was inspired to put his profits into marketing expenses, which he could write off.
This is a mistake many other entrepreneurs are making today. Your business will still grow without these write-offs, but it would be more difficult and slow. So, what expenses are tax deductible?
Are Business Expenses Tax Deductible?
Yes, some business expenses tax are deductible, but not all. While there are some business expenses tax that are deductible, there are still some that are not deductible. Even some deductible business expenses tax may be subject to some conditions; this means that some business expenses tax may be deductible only on certain conditions.
Are All Business Expenses Deductible?
No. All business expenses that are considered ordinary and necessary are tax deductible. Other business expenses are not qualified so you cannot deduct them on your tax return.
What Business Expenses Are Never Deductible For Tax Purposes?
Non-deductible expenses include illegal or unnecessary expenses. Costs of lobbying, fines and penalties are never deductible.
List of Tax Deductible Business Expenses (Write-Offs)
Especially for small business owners or online shop owners, there are many business expenses that are tax deductible but could help your profits and business grow even bigger. At least, your burden would be reduced significantly once it is tax period.
There are so many ways you can save money from tax deductible business expenses. The process would need some efforts, as you have to record all expenses in your accounting records to maximize the write-offs.
Every day expenses like vehicle costs, electricity bills and others could help you save money. Here is a list of tax deductible business expenses you can write off to reduce your income tax the next year:
- Workspace.
- Professional Services.
- Shipping.
- Marketing.
- Packaging.
- Banking/Retirement/Insurance plans.
- Workers.
- Website Costs (Hosting, Domain and management).
- Travel Costs.
- Education.
- Other Utilities.
- Repairs.
1. Shipping Costs
If you have not been deducting your shipping costs from your qualified business income tax, you have been missing a lot. The only business owners exempted from this are people in the dropshipping business. If you are into dropshipping business, it is your duty to deliver the goods purchased from your online store, and the costs of doing so are considered ordinary and necessary.Â
Other tax deductible expenses are postage fees, delivery charges, and shipping meter subscriptions.
2. Packaging
This is also a tax deductible expense. The cost of packaging and branding your products and getting them delivered can be deducted from your tax return. This expense can include the packaging boxes, inks, envelopes, paper, tapes and others.
For many people, packaging their goods cost a lot every month, and deducting the cost on your tax return will do more than just increase your profit.
3. Workspace
This is only for people running their store from home. If your business is online, you still need a small workspace at home. The cost of this is tax deductible on your tax return. However, there are a few conditions you must meet.
Furthermore, how much the deduction is depends on how much space of your house is used for your business. Using this and other factors, you could adjust your way of doing business, devoting a comfortable part of your house to your business only.
Here are requirements you must meet to qualify for a workspace tax deduction:
- Your workspace must be used only for your business. It also must not be a random space you use occasionally for calculations and other little stuff.
- The workspace must be your principal space for business. This is mostly for people running online stores. You must prove that the space is actually your workspace
- Most of the time you spend in your workspace must be used for your business
- There should be no other workspace apart from the main one
Here is how you can calculate your home office deduction:
Remember that you must have the information required to back up your claims, as the IRS is particularly strict with fact-checking home workspace expenses.
There are two ways to calculate your home office deduction. The first way is rather simple, and we will term it Method A.
Simply deduct $5 for every square foot of your workspace. You need to measure your workspace to reach an actual value. The maximum is 300 square feet. This means you cannot deduct more than $1,500 no matter the size of your workspace.
The other method is termed Method B and uses percentage to calculate the workspace tax deduction. Simply calculate how much percent of your house’s square foot is used for your business.
Use this percentage value to your home expenses, including electricity, property taxes and all. If for example, 25% of your house’s square foot is used for your business, you can deduct exactly 25% of your mortgage interest from tax return.
If you qualify for the workspace deduction then there is more in store for you.
4. Utilities
If your home office qualifies as a workplace for deduction, you can deduct household utilities like electricity, water, and heat on your tax return.
5. Repairs
You can add the cost of repairs as expenses on your tax return. The cost of repairs like fixing your doors, tables, chairs, windows, and any other thing can be deducted.
In fact, the cost of improving your home workspace can also be deducted on your tax return. As far as the repair restores something or helps you adapt to something or betters the situation of your workspace, it can be deducted on your tax return. If you get a better door or table, it can be reported.
However, the report must be depreciated over more than 27 years. When making repair expenses, make sure everything is classified correctly.
6. Bank Fees
The bank fees used to maintain your bank account and the interests you pay for a business loan are tax deductible.
7. Insurance
Insurance included health and business insurance. No matter what type of ecommerce store you operate, you can deduct business insurance on your tax return. You can deduct these types of business insurance as expenses:
- Data Breach Insurance
- Professional Liability Insurance.
- Workers’ Compensation Insurance.
- Commercial Property Insurance.
- General Liability Insurance.
If you registered your business for insurance under any of these categories, you can write them off and deduct them on your tax return. Furthermore, if the insurance is considered necessary, you can deduct the full amount of the insurance on your tax return.
Under health insurance, only self-employed folks can enjoy the write-offs. You can deduct a whole 100% of your health insurance costs.
You can deduct the full health insurance for yourself, your dependents (including your spouse), your children (must be under age 27).
Conclusion
As a business owner, it is better to know how to manage your finances correctly. Business is not just about selling your goods or services. Income tax is a yearly hurdle you must learn to cross comfortably. This article helps you with business expenses that are tax deductible to help you reinvest the money or increase your profits.
