When it comes to saving money on your business taxes, it’s easy to feel overwhelmed by the sheer volume of information about what you can deduct and what you can’t. However, for small business owners, especially, it’s important to write off as much as you can in order to retain the most profit for your business possible.
8 Ways to Save Money on Business Taxes
As we move forward after the pandemic that hurt so many business operations during 2020, it’s more important now than ever to know how you can save money on your taxes. Don’t wait until taxes come due to start tracking your deductions. Know these eight ways to save money on your business taxes, and keep them in mind throughout the year.
1. Deduct Rental Space
Home offices aren’t the only setup that allows you to deduct rental expenses from your business taxes. As a small business, you may not own your own office, warehouse, or other space yet. But if you rent any type of business property, you can write it off on your tax return.
The business property write-off works similarly to writing off a portion of your rent for a home office. You must use your space for business purposes either exclusively or for most of the time. One unique consideration to keep in mind is that if you will eventually own the property, the IRS doesn’t consider your rent expenses deductible.
Business rent deductions apply to more than just office spaces and warehouses, too. Parking lots and any equipment you lease also apply. If you rent it and it meets the above eligibility standards, it’s 100% deductible.
2. Write-Off Office Supplies
Similar to home office expenses, the supplies you purchase to maintain a functional office are deductible. This includes cleaning materials, printer ink cartridges, computer software, kitchenware, and stationery. These may not amount to substantial expenses, but you almost certainly pay for them, so they’re worth deducting.
This deduction comes with three main qualifiers. First, you must not keep a record of when you use these supplies. Second, you can’t take inventory of how much you have on hand at the beginning and end of the tax year. Third, these deductions can’t skew your business income.
3. Remember Personal Tax Deductions
As a business owner, you can claim more tax breaks on your individual return to further reduce costs. Some deductions, like charitable contributions, apply to both business and personal returns, but you typically can’t claim both simultaneously. Generally speaking, you’ll have to decide whether to file them on your business or individual taxes, depending on your specific situation.
If you pay someone to care for your children while you work, you can write off related expenses. To qualify for the Child and Dependent Care Credit, the dependent in question must be under 13 or incapable of self-care. You can deduct 20-35% of these expenses, up to $3,000 for one dependent and $6,000 for two or more.
You can also deduct health insurance premiums for you, your spouse, and your dependents, though some states may require specific kinds of proof of insurance. If you only contribute to your own retirement plan, you can deduct these payments, too.
4. Account for Depreciation
All of the property and equipment you purchase as a business will exhaust its value over time. Depreciation measures those value changes and lets you write off the total cost in one year. Depending on the asset in question and your method of calculating depreciation, you can deduct up to 100% of an asset’s price.
Not all property will qualify for the depreciation write-off. You must own the asset, use it for income-generating purposes, and have an estimated useful life expectancy over one year. Some specific assets, like vehicles, have limits for how much you can deduct.
Depreciation is often more complicated than most other types of write-offs. Refer to the IRS’s guide on how to depreciate property to ensure you’re compliant. These write-off rules change too — so keep your eye on these. You may also want to turn to a tax professional for help.
5. Deduct Legal and Professional Fees
The past two years have seen many legal changes and disruptions from the pandemic and election. Consequently, your business might’ve incurred more legal or professional fees than usual this tax year. If that’s the case, you may want to consider deducting these expenses.
Fees from lawyers, accountants, tax preparers, and bookkeepers all qualify for deduction under the right circumstances. The most important consideration is that these services were necessary and directly related to running your business. You can also only deduct these expenses if they were “ordinary,” so something unreasonably expensive or unique likely doesn’t qualify.
Anything related to personal issues, such as personal injury claims, is exempt from the deduction. You may have some work-related fees of a personal nature, like writing a will, and these are partially deductible. As with similar write-offs, with these, you can deduct the parts related to your business.
6. Write-Off Maintenance and Repairs
With many employees working from home the past year, you may have taken the time to make repairs around the office. Maintenance is a crucial part of running a business, with some companies spending millions of dollars annually on it. Since spending in this area is typically high, you can save a lot by deducting these expenses.
Most regular maintenance activities are entirely deductible for small businesses. Keep in mind that the IRS considers betterments, restorations, and adaptations as a separate category. Generally speaking, though, any routine maintenance or repairs that keep your property or equipment in standard working order are deductible.
Repairs or modifications that result in capital improvements don’t fall under this write-off. For example, if you expanded your property or built a new roof, those expenses wouldn’t be deductible.
7. Remember Moving Expenses
Given the financial pressure of the past year, you might have had to move to a new location. Moving can be an expensive process, but thankfully, you may be able to write it off. While the 2017 Tax Cuts and Jobs Act suspended moving expenses deductions for individuals, businesses can still deduct these costs.
Expenses like hiring a moving company, renting vans, and buying gas typically qualify as deductible. These must be entirely business-related, though. No personal costs count. If you’re planning on moving later in the year, keep thorough records of your expenses to help deduct them later.
8. Track Business Meals
One of the most often overlooked tax write-offs for small businesses is business meals. Whether you meet clients over meals or buy food for your employees, your company likely spends money on eating. You can deduct many of these expenses as long as they meet a few requirements.
Meal costs must be reasonable to qualify for a deduction. Similarly, these expenses must be an ordinary and necessary part of your business. You or an employee must also be present at these meals, and if they’re part of an entertainment activity, must be a separate purchase from that activity.
How much you can write off depends on the type of meal. Company-wide events and entertainment expenses are generally 100% deductible. Business meals with clients and office snacks are 50% deductible.
Save Money on Business Taxes in 2022
As we reach the halfway point of 2021, it’s a good idea to evaluate what tax expenses you can write off for the year and monitor your potential savings before 2021’s tax deadlines come around next April. Keep these eight tips in mind, and you’ll be on your way to putting more money back into your business.