Tax return
SIX EXPENSES THAT YOUR COMPANY
CAN DEDUCT FROM TAXES
REQUIREMENTS FOR AN EXPENSE
An expense, from a financial accounting point of view, is an outflow of money that a company pays to purchase a product or service. To be tax deductible, according to the Tax Code, the expense must meet the requirements of being NECESSARY and ORDINARY. The concept of ordinary and necessary means that it can be any expense that generates business income. In other words, if you own a daycare, you can probably deduct as an expense the purchase of a 65” television for which you paid $800, as long as it is correctly justified as necessary to generate business income. In addition, the expense must be PAID or INCURRED DURING THE YEAR and REASONABLE. This means that the payment must be reasonable for the activity you are engaged in. If we go back to the daycare example, is it reasonable for me to buy a $15,000 television?
WHAT ARE THE 6 EXPENSES I SHOULD KNOW ABOUT?
1. Commercial use of vehicles
As a small business owner, you can deduct automobile expenses for visiting clients or traveling to business meetings away from your regular place of business. Generally, you can deduct either actual expenses (gas, oil changes, tires, preventive maintenance, etc.) or standard mileage rates. If you choose to deduct actual costs, you must keep a detailed account of your trips: note the date, miles driven, and the purpose of each trip. Other expenses you can deduct for using your vehicle include business-related tolls and parking when traveling away from home for business purposes.
2. Commercial home use
You can deduct expenses related to the business use of your home if it meets specific exclusive use or regular use requirements. Costs included are mortgage interest, real estate taxes, utilities, maintenance, rent, depreciation, or property insurance. Using these expenses has been a complex issue that has been the subject of many disputes and court cases, so we recommend you seek advice from our experts at WealthSpring Financial Services.
3. Meals and business travel
You can deduct the cost of meals if they are business-related events. This deduction can also be applied to meals you provide to your employees on your premises. Remember that only for the years 2021 and 2022, the deduction for business meals increased from 50% to 100% if the food and beverages come from a restaurant. Regarding business travel, in general, you can deduct ordinary and necessary out-of-home business travel expenses.
4. Bad debts
Your business can claim a bad debt deduction if you do not get paid for work performed or products sold, as long as your business uses the accrual method of accounting. In addition, if you loaned money to your customers, suppliers, or employees and they never paid you back, you can also claim a bad debt deduction to offset part of the loss.
5. Taxes
There are many taxes that you can deduct when you have a business. For example:
● Personal property taxes.
● Real estate taxes are deductible to the extent you use the land for business purposes.
● Part of the employment taxes you pay to your workers.
● State taxes on the gross income of your business.
● Sales and excise taxes are deductible when paying for business-related purchases or services.
6. Pension plans.
Suppose you have a retirement plan, such as a Simplified Employee Pension Plan (SEP) or a Savings Incentive Plan for Employees (SIMPLE). In that case, you can deduct contributions to your plan and assistance you make for your employees. (If you have no full-time employees except your spouse, an individual 401[k] plan may offer you an even more significant benefit than a SEP or SIMPLE plan.)
As you can see, there are many types of expenses that you can deduct from your taxes; the important thing is to know them and get expert advice. If you want to know more about your business expenses and report your tax return, please get in touch with us at 917-862-3085 or claudia@wealthspringfinserv.com. At WealthSpring Financial Services, we have accounting and tax experts who will advise you on everything your company needs.