If you own a small business, you can write off many of your everyday business expenses as tax deductions. These tax breaks can reduce your total business income for the year. This usually menas you’ll pay less in taxes.
Since small businesses tend to have a very different cash flow than companies that offer stock options and 401Ks, there are some tricks to help you save taxes on the backend. These end-of-year tax deductions are especially useful for individuals who own their own businesses, partnerships and S corporations. Each one of these powerful tax deductions can help you save on your taxes this year and in the future.
Tax Deductions for Small Businesses
Tax deductions are meant to reduce the amount of income that you are taxed on. There are deductions for regular expenses that you incur in your day-to-day business operations and deductions for one-time expenses, such as start-up costs and business investments. Tax deductions can be narrowly defined or very general, but the general rule is that if it is an expense to run your business, it can be counted as a business tax deduction.
If you purchased a piece of equipment or furniture for your business, you might be able to deduct a portion of the cost over several years. The portion that you’re allowed to deduct each year is known as depreciation, and this is a great tax deduction to capture if possible.
You can only claim depreciation on assets that are used over the course of business operations. Equipment and furniture that are used in the production process are good candidates for depreciation. You cannot claim depreciation on assets that are used in a personal capacity, such as your laptop that you also use for work or a desk that you sit at both at home and in the office. You must also keep in mind that there are two types of depreciation—regular depreciation and Section 179 depreciation. Regular depreciation is the most common type and is claimed on most assets. Section 179 depreciation is an accelerated method for claiming deductions on expensive business assets.
2) Self-Employment Tax Deductions
As a solopreneur, you don’t have to pay taxes for any employees (because you don’t have any). However, you’re required to pay taxes to fund government programs such as Social Security and Medicare. While you can’t write off all of those expenses, you can write off some.
In fact, half of your self-employment taxes can be written off as a Schedule C tax deduction.
3) Travel and Entertainment Deductions
If you travel for business, you can deduct some of the costs associated with it. Those costs include transportation, meals and lodging. You’re also allowed to deduct expenses that are associated with entertainment if the event has a business purpose. For example, you might host a dinner for your clients or invite a potential partner to lunch. Those expenses are fully deductible as travel or entertainment expenses.
4) Computer and Office Equipment Deductions
You can deduct the cost of purchasing and maintaining computer and office equipment. This includes everything from your computer and printer to your desk and chairs. You can also deduct the cost of hiring a contractor to help you build a website or develop an online presence.
Keep in mind that the computer and equipment must be used for work. You cannot write off the cost of a computer that is used exclusively for personal purposes. You also cannot write off the cost of a computer that is shared between work and personal use. You must be able to show that the computer is primarily used for work.
5) Marketing and Advertising Deductions
Advertising your business and marketing efforts are necessary. You can deduct the cost of advertising and marketing efforts. Keep in mind that the advertising must be intended to bring customers to your business. If you spend advertising or marketing dollars to thank your customers, you cannot write off those costs.
6) Contribute to an HSA
The HSA, or health savings account, is used to set aside funds for future medical costs. You need to have a high-deductible health plan (HDHP) to be eligible for an HSA. Therefore, you will be responsible for paying additional out-of-pocket medical expenses.
The HSA is the only retirement account that allows both pre-tax contributions and tax-free withdrawals. However, the HSA only covers qualified medical expenses such as:
- Fertility enhancement
- Artificial limbs
- Drug prescriptions
- Physical Therapy
- Laboratory fees
- Laser eye surgery
- Flu shots
- Guide dogs
- …and more (actually, the list is quite exhaustive)
You can contribute up to $3,650 in 2022 as long as your HDHP minimum deductible is $1,400. Get your tax deduction and prepare for any medical expenses!
7) Contribute to a Solo 401k
Solo 401k plans are the most powerful retirement plan in existence. You can contribute up to $61,000 for 2022. Add $6,500 if you are age 50 or older. Double that contribution amount if you and your spouse both work in your business. That’s a tax deduction of up to $135,000.
If you open a Checkbook Control Solo 401k plan, you can invest those funds in any number of alternative assets, like real estate, private equity & private debt, cryptocurrencies, promissory notes, venture capital investing, commodities, hedge funds, tax liens, or even traditional stocks, bonds, & funds.
The Solo 401k is a Qualified Retirement Plan (QRP). There are two main types of QRP Solo 401k contributions:
- Employee (salary deferral) Contributions
- Employer (profit sharing) Contributions
You are both the business owner and the employee of your business. This means you can take advantage of all three types of Solo 401k contributions which are then tax deductions for you and your business.
Contribution limits are based on your earnings from the business connected to your Solo 401k plan.
Employee (salary deferral) contributions: The Department of Labor allows a maximum employee salary deferral contribution of $19,500. The employee contribution may be up to 100% of your net compensation. Employee contributions may be pre-tax or designated Roth contributions.
Your total employee contribution limit is across all plans where you are an employee. Therefore, if you contribute $10,000 per year to a “regular” job 401k, you could contribute the remaining $9,500 to your Solo 401k as an employee contribution. That’s still a hefty tax deduction to claim!
If you own a small business, you’re probably overpaying your taxes. Therefore, it’s important to know that you can deduct many of your business expenses. However, it’s also important to know which expenses qualify as business expenses. Keep in mind that not all of your expenses can be deducted. Only those expenses that are related to your business can be written off.
When you take stock of your business and how your business is spending money, there are surely tax deductions to claim to help you (legally) pay less in taxes. Make a list of what might be the most beneficial to your bottom line and ensure it’s compliant with the IRS!