Effective Strategies to Reduce Tax Liability with Deductions

Group of team members trying to identify how to reduce tax liability

One of the most common headaches small business owners face involves their taxes; mercifully, US businesses can apply deductions to reduce 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 the Cost of Sales to Reduce Tax Liability

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 in order to reduce tax liability. 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.

Can Cleer Tax Help Me Reduce Tax Liability?

Absolutely! At Cleer Tax, our dedicated team is committed to addressing the distinct requirements of your business.

We provide comprehensive tax advisory services tailored to your specific needs, covering every aspect of compliance and optimization – including helping you reduce tax liability wherever possible. Our goal is to ensure that you capitalize on every available opportunity, leaving no stone unturned when maximizing your tax benefits and minimizing any potential liabilities.

CLEER provides Corporate Income Tax Packages encompassing federal and state income tax filings for a hassle-free experience. Our comprehensive new company package offers tax consultation, bookkeeping, and a chart of accounts set up to help you do it right from the start. We also offer all-in-one monthly accounting packages, which include your monthly statements plus your federal and state tax returns

If you need any help reducing your tax liability, schedule a consultation to discuss it further. You may also email Customer Success at hello@cleer.tax.

Author Bio
David McKeegan
David McKeegan, the founder of Cleer.Tax is both an MBA and Enrolled Agent. As an entrepreneur and small business owner himself, he really understands the pain points that company owners and founders have in regards to tax compliance and having clean financial statements. What really differentiates David is his ability to distill complicated tax matters into layman’s terms, making the advice actionable and accessible to all.
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