Deconstructing Deductions | Business Tax Basics for Business Owners
Published on by Andre Williams in Tax Services
Let’s face it – no one wants to pay more in taxes than they have to. And whether your business is large or small, newly formed or has been around for years, as a business owner there’s always a key question in your mind: Are we doing things correctly, and are we taking advantage of all the tax deductions out there?
The best way to ensure you can answer “yes” to that question is to work with a knowledgeable, proactive, and highly trained tax professional, but knowing the basics can help deliver extra peace of mind. In this post, we’ll cover some of the most important deductions and how they might apply to your business.
Breaking down the Big Five
While the range of business tax deductions is wide and a licensed tax professional is the best way to ensure you’re taking advantage of all the deductions you’re eligible for, here’s an overview of the five most common.
1. Home office deduction
If you run your business out of your home, you can claim a deduction whether you’re a homeowner or a renter – if you meet two important criteria. First, your home office must be used regularly and exclusively for your business, and second, it must be your principal place of business.
Once you satisfy these two requirements, you then have two options on how to claim your home office deduction. The simplified option allows for a deduction up to $1,500 that is based on the square footage of the office space and allows for $5 per square foot.
The other option is called the regular method. With this method, you can utilize a percentage of all the home expenses and allocate it based it on the square footage of the home office. This method is more administratively burdensome but could lead to a greater deduction.
2. Vehicle expenses
If you utilize your vehicle for business purposes, you may be able to deduct the expenses associated with that vehicle. In addition to tracking those expenses, you may also have to track your mileage if the vehicle is used for both personal and business purposes to help determine what can truly be deducted for business purposes.
As with the home office deduction, there are two methods to determine the deduction. The standard mileage method is a simple way of determining the deduction amount based on the IRS annually released mileage rates (The standard mileage rate for 2024 is 67 cents per mile).
The other option is the actual expenses method. This method requires more extensive bookkeeping but can yield a greater deduction. With this method, you must track all expenses associated with the vehicle and allocate based on personal versus business use.
3. Qualified business income
If your business is structured as a partnership or an S corporation, you could be eligible for a 20% deduction on your taxes. For example, S Corporations are considered ‘pass-through’ entities, meaning these types of entities pay no federal income tax at the corporate level, and all income and losses ‘pass-through’ or ‘flow-through’ to the individual and are taxed at the owner’s individual 1040 level.
Depending on the industry in which the business operates and/or the income levels of the individual filers, the qualified business income deduction could be limited and the forms on which reporting is required could differ. It’s important to remain vigilant and ensure proper planning to avoid missing the deduction or being assessed penalties for improper reporting.
4. Employee benefits
Benefits provided to employees by the business are deductible for the business. Such benefits include health insurance premiums, life insurance policies, dependent care assistance, and small business retirement plans.
While this is important for all business types, it’s especially important for S corporations because it’s common practice to have the owners of an S corporation act in an employee capacity. This can have major implications depending on the shareholder’s ownership percentage – so extra vigilance is required in filing the return.
5. Professional services
Business owners get pulled in many directions, and learning where to spend your time so that it’s most advantageous for the business is key. Delegating tasks to professionals such as drafting legal documents, bookkeeping, and tax return preparation can not only save you time but can also reduce your tax bill at the end of the year because some professional services fees are tax-deductible to the business.
Let’s talk.
There are countless deductions and credits available to taxpayers, and successfully navigating the intricacies and complexities of the tax code calls for in-depth professional insight. If you have questions or think it’s time to take a closer look at your tax situation, the Barnes Dennig team of top tax pros is here to help. Contact us today for a free consultation.