Back
Reduce Tax Liability with Deductions
Business Tax Information

Reduce Tax Liability with Deductions

Make sure you get the full benefit of all of the business deductions, that are necessary in the ordinary course of the business.

Crystal Stranger
October 20, 2022

One of the most common headaches small business owners face involves their taxes; mercifully, US businesses can apply deductions to reduce their tax liability. According to the IRS, in order for an expense to qualify as a business deduction, it must be incurred in the ordinary course of the business and must be necessary.

Make Sure to Identify Cost of Sales

It is important for business owners to identify expenses directly associated with the goods and services they provide. These expenses are called cost of sales or services. This includes cost of raw materials, labor costs of workers directly involved in the production process and factory overhead such as proportionate share of the production area for rent, utilities and other miscellaneous expenses.  Once these expenses are in the cost of sales, the taxpayer cannot use them again as operating expenses.

Administrative and Selling Expenses

The most common deductions that small businesses can use are administrative and selling expenses. Administrative expenses include the expenses the company pays regardless if they produce or sell. This type of expense includes rent, admin salaries & wages, office supplies, insurance, legal & professional fees and utilities. Selling expenses, on the other hand, include sales commission, advertising, marketing and promotional materials.

Taxes and Financial Expenses

You can also deduct taxes and other financial expenses. Taxes include state and local income tax, sales tax, property tax and excise tax. Interest paid for business loans is also tax deductible but not the business loan itself. Losses from sale or disposition of business property also forms part of your business deduction.

Depreciation

Depreciation is another income tax deduction which allows taxpayers to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration or obsolescence of the property. In the US, taxpayers can elect qualifying properties under Section 179. This section allows them to deduct the full depreciation for the year the equipment begins its service. The limit for 2018 has a cap of $1,000,000. In addition to Section 179, taxpayers have a separate option to claim special depreciation allowance. By using this special allowance, taxpayers can deduct 50% of the costs of qualifying properties as a depreciation expense in the year they are placed in service.

Organization Costs

Organization costs—initial costs incurred to create a company—are also tax deductible up to $5,000. Any amount over $5,000 capitalizes and amortizes over a period of 180 months. Capital expenditures are not deductible as business expenses; instead, they capitalize and depreciate over time.

Prohibited Deductions

Though most business expenses are tax deductible, there are few the law prohibits. These include penalties and fines, federal income tax payments, clothes which are non-uniforms and political contributions.

If you need help, email hello@cleer.tax
ABOUT THE AUTHOR
Crystal Stranger

Crystal Stranger, EA, NTPI Fellow, International Tax Director • Multi-Industry Entrepreneurial Innovation • Speaker • Writer • Blockchain Technology • Business Development. Crystal Stranger started out as a software developer in the tech world of San Francisco, then ended up homeless in the dot com crash, turned her life around as an investor, gaining millions in real estate, then worked in finance and became an enrolled agent, federally licensed for tax planning and representation. She has done much project management and product development across different industries, but continually comes back around to software. She has been writing about cryptocurrency tax and regulatory issues since 2014 and has built several companies from the ground up.

Enjoyed this read?

Stay up to date with the latest video business news, strategies, and insights sent straight to your inbox!

Thank you! Your submission has been received!
Oops! Something went wrong