Entrepreneurship offers flexibility, control, the prospect of substantial earnings and taxes. The latter represents a cost that you must consider when running a business. To reduce the tax costs of running a business, the Internal Revenue Code allows you to deduct many of your costs of doing business from the revenues of your business. Deductions take the form of the direct costs of producing the goods that generate your sales. You also have the deductions below.
Starting the Business
Before the grand opening, you have tasks such as developing a business plan, scouting potential competitors, locating your business and organizing a structure for doing business. You may also be searching for suppliers, vendors and even potential customers. For these startup and organizational expenses, you get some tax relief.
Specifically, you have a deduction up to $5,000 for start-up costs. Within this category, you may count mileage and gas to find business sites and expenses for business consultants, promotional coupons, flyers, advertisements and training of employees — all in preparation for the start of operations. Organizational expenses have a $5,000 limit and include fees to lawyers and government agencies for preparing and filing incorporation or organization papers, bylaws, operating agreements, organizational meeting minutes and resolutions and pay to initial directors and officers.
For each category, you get up to the $5,000 only if the respective startup or organizational costs do not exceed $50,000. Should you spend more than $50,000, then your deduction is the difference between $55,000 and your actual expenses. By illustration, actual organizational expenses of $54,000 would mean a deduction of $1,000 for that category. If actual expenses rise north of $55,000, you do not get any deduction.
A 20-Percent Deduction for Passing-Through
The way you organize and conduct business can create for you a deduction of 20 percent of your business’s net income. To qualify, you must choose an entity-type that allows your income to pass through the business to you. The eligible choices include sole proprietorship (sole owner), partnerships, limited liability companies and S-corporations (small business corporations). If you select one of these, the income or your share of it goes to you rather than the entity. With a C-corporation, your income is taxed at the corporate level and then at the individual level if you get a dividend.
Traditionally, businesses deduct a portion of the cost of equipment over a period of years through depreciation. The period depends upon the type of property.
Under the federal Tax Cuts and Jobs Act, you may deduct the entire cost of business property — equipment and buildings — you acquire in the year you purchased it. This applies to property bought and placed into service before January 1, 2023. For property acquired in 2023, the immediate deduction is 80 percent of the purchase price, with a 20 percent decline in the deduction each year through the end of 2026.
Deductible business expenses include rent, utilities and maintenance for your store, office or facility.
The deductions for office space expenses also apply to that part of a home that you devote for business use. This means you can’t claim a kitchen as your home office because you occasionally prepare invoices or work on a project in it. However, when you use the kitchen exclusively for preparing baked goods for customer, it becomes a devoted space for which you can claim the office space deduction. To calculate the deduction, you multiply the percentage of your home devoted to the business use by the total mortgage or rent, utility and maintenance for the residence.
In your business, your vehicle may take you to meet clients, deliver merchandise or items and attend meetings with officials, investors or others connected with your business.
For these expenses, you may deduct either the actual vehicle expenses or an amount based on a standard mileage rate by the IRS. If you opt for the latter, you multiply the mileage for business use by the IRS rate. In 2019, it stands at 58 cents per mile. For the actual expenses, you need gas receipts to validate what you spent for business trips and invoices for repairs and maintenance to the vehicle from business use. If you mix personal and business use of a vehicle, you may find it difficult to apportion the expenses for vehicle operation between business and nonbusiness. Accordingly, you likely will find the mileage approach more feasible especially if you don’t have a separate business vehicle.
Advertising deductions involve the costs of radio, television, newspaper and internet commercials or spots. For these, the invoices from the media platform owner should suffice. The deduction also embraces the costs of business cards, billboards, flyers, coupons, yellow pages or phone directories and brochures. Deductible goodwill advertising expenses include what you spend to sponsor a local team, sporting event or performance; deliver product samples and conduct prize promotions.
Business and Professional Improvement
Certain businesses, especially in technical or mechanical fields, feature new products, services and processes that require retraining or continuing education. The costs of continuing education classes for you or your employees are deductible business expenses. You may also write off your purchases of new product or maintenance manuals that you need for the business. These items often apply if you operate a business involving the repair of vehicles, specialized equipment and computers.
Guest post courtesy of Dana Ronald here from The Tax Crisis Institute