Entrepreneurs take advantage of all possible opportunities to lower their taxes, including making the most of their deductions during the tax season.
Tax deductions help enterprises improve their cash flow and maintain business operations. Thus, many business owners want to maximize their business tax deductions; however, not all are aware of the various business expenses that can reduce their tax liability.
What are tax deductions, and how do they work?
Business expenses are the costs incurred in the day-to-day course of business. These are also referred to as deductions, as these are subtracted from the gross income when businesses calculate their taxable income.
Tax deductions are a form of tax incentives, along with exemptions and credits. For an expense to qualify as a write-off, it must be ordinary and necessary to the business’s operations.
Which business expenses are deductible?
Small business owners must understand what business expenses they write off on their taxes or risk receiving a penalty.
The Canada Revenue Agency (CRA), the Internal Revenue Service (IRS), and the UK’s Her Majesty’s Revenue and Customs (HMRC) have varying operating expenses that they allow business owners to deduct from their taxes.
But the ten main operating expenses small businesses can deduct from their taxes are:
Business start-up costs
Business owners can deduct expenditures that preceded the operation of the business. However, they must understand that they can only claim this deductible if their business started its operation in the fiscal period in which the expense was incurred.
Business tax, fees, licences, and dues
Business tax, annual licence fees, and dues are deductible expenses. Business owners can deduct annual membership dues or fees in a trade or commercial association, as well as subscriptions to publications from their taxes. However, business owners cannot deduct membership dues and initiation fees on clubs whose primary purpose is dining, recreation, or sporting activities.
Wages and Payroll Taxes
Enterprises can deduct gross salaries, wages, and other benefits they pay to their employees.
Interest and Bank Charges
Business owners can deduct interest incurred on money borrowed for business purposes or acquire property for business purposes.
Business owners can deduct rent incurred for property used for their business’s operation. They can deduct rent for the land and building where their business is situated. Consequently, small business owners who operate their business at home can claim the rent expense as a business use-of-home expense.
Business use-of-home expense
Small business owners can deduct expenses for the business use-of-a-workspace in their home, but under certain conditions: it is their principal place of business; or they use the space only to earn business income and use it regularly to meet clients, customers, or patients.
Furthermore, they can only deduct some expenses for heat, electricity, insurance, maintenance, mortgage interest, property taxes, and other costs. Still, they must be proportionate to the actual space they use for business in their home.
Business owners can write off the amounts of “bad debts,” such as loans made to clients, vendors, or employees who did not pay them back and deduct these amounts from their business’s income to save on taxes.
Businesses can deduct all ordinary commercial insurance premiums they incur on any buildings, machinery, and equipment they use in their business operation.
Education and Training
Enterprises include employee education as a significant part of their business growth plans. They let their staff attend workshops, conferences, tradeshows, and other events to expand their knowledge, especially on subjects directly related to the business. As these help business owners carry on with their business operations, expenses related to employees’ education and training are considered deductible expenses.
Advertising and Marketing Expenses
Businesses must market their products or services to bring in new customers and retain regular customers. Costs of advertising, marketing, and other promotional activities on radio and television stations, newspapers, and digital platforms are considered deductible expenses.
How to effectively track deductible expenses?
As tax deductions are vital in maintaining a healthy business cash flow, businesses need to keep tabs on their expenses. Accordingly, they need to categorize their expenditures, separating personal finances from their business expenses, those operating expenses related directly to starting and maintaining the business.
Separating business expenses from personal expenses allow business owners to identify which expense may qualify as a deductible. Utilizing small business accounting software will also help enterprises capture the information they need throughout the fiscal year for tax filing purposes.
Availing accounting and bookkeeping services lets them record, track, and categorize expenditures, which allows them to maximize potential tax deductions, reduce the overall tax rate, and save and invest back significant sums of dollars into the business’s operations.
Where to get easy-to-use and time-saving bookkeeping and accounting services?
KIPPIN is a cloud-based mobile bookkeeping service that aims to make people’s lives easier. We provide accounting, bookkeeping, payroll, and tax services – all on a cloud platform.
Contact us today at 1-905-581-9362 or [email protected] You may also visit our website at www.kippinitsimple.com to learn more about our products and services.