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A Quick Guide to Small Business Tax Exemptions
The management of finances is crucial in business. Tax is one aspect of financial management that you shouldn’t overlook. Knowing the tax exemptions you qualify for as a small business is essential for you since they may benefit your revenue.
There are several legal ways for a business to lower its tax liability. Depending on the state, these techniques could be different. So, the best way to take advantage of these tax exemptions may require you to conduct your research. However, it would be best if you worked with a competent tax expert or financial counselor who could assist you with filing your taxes from the beginning.
To help you further, below is a brief overview of small business tax exemptions.
What Small Businesses Need
Before you enjoy the benefit of tax exemption for your small business, you must first ensure that you have the following:
- A Sound Bookkeeping System
Every business needs an accounting system that tracks and records all income and expenditure. When filing taxes, your accountant will require detailed accounting records. You risk breaking compliance laws if your records are inaccurate. Additionally, you must ensure that your accounts abide by all other Internal Revenue Service (IRS) regulations. A bookkeeping system will assist you with this.
- Receipts Documenting Expenses
With tax exemptions, you must keep all your expense receipts. Your accountant will thank you later for keeping these receipts because they’re vital. Additionally, note that certain expenses need more than just receipts. For example, you may need to keep track of mileage to support your deduction for auto expenses.
- 501c3 (For non-profit organizations)
If you run a non-profit organization, you must submit a 501c3 application to the IRS to be granted tax-exempt status. As a result, the non-profit organization will qualify for a federal exemption from paying corporate taxes. Contributions made to that entity, however, are still tax-deductible. Therefore, you need to keep detailed records of your transactions.
Creating a non-profit entity is typically time-consuming due to the documentation required. Nevertheless, if you are a non-profit organization, submit a 501C3 application as soon as possible. But sending it directly to the IRS might be time-consuming. Therefore, outsourcing a company to do it for you may be a good option.
Common Small Business Tax Deductions or Tax Exemptions
Below are the expenses in your small business that can be included in tax exemptions. Read on to find out.
All utilities used for your small business are entirely deductible. That holds true for your water, power, phone, garbage, and other utility bills. The cost of the initial landline, however, is not deductible if you have a home office. However, the subsequent ones will be deductible.
- Insurance Expense
You must have insurance if you are in business. Depending on the industry you’re in, your company can get a variety of insurance policies. As a result, most organizations will invariably obtain business insurance.
It is worth noting that the cost of the founder’s or owner’s health insurance is all entirely deductible. In addition, things like property insurance, malpractice insurance, business interruption insurance, and auto insurance are also deductible. Also, note that small enterprises may be eligible for a tax credit of up to 50% for health insurance under the qualifying small employer health reimbursement arrangement (QSEHRA). If you own a small business, see if you can also qualify for this.
- Vehicle Expenses
If you use a car for business, remember that car expenses are deductible. You must track mileage and provide business records to support your claim that the vehicle was used for business purposes. Additionally, you must split the costs according to mileage if you use the car for both personal and business purposes.
- Equipment Rent and Depreciation Costs
Any costs associated with renting or leasing machinery, or equipment are entirely deductible. It holds true for items like vehicles, copiers, and printers. Additionally, you can deduct the cost of depreciating your company’s machinery and equipment. However, you must spread out depreciation charges over a long period. To learn how to do this properly, you might need to consult the Internal Revenue Code section 179.
- Business Property Rent
You may deduct the rent or lease payments if you are renting a property for a business. However, sometimes you may qualify for an exemption if you manage your business from home. Therefore, you must take eligibility tests to determine your eligibility. Mortgage interest, insurance, utilities, and depreciation are deductible house expenses. For more details, consult IRS Publication 587.
- Software Subscription Costs
It’s often the case that, nowadays, most businesses are using some software to run their business processes. If you have any software, you can deduct the cost of buying that software.
- Entertainment and Event Costs
If you’re considering or planning to hold corporate events or entertain clients, remember that most of these expenses are tax-deductible. Generally, meals are only 50% deductible. However, any meals served at a work party or event are fully tax-deductible. Just keep your receipts secure and consider saving them in your bookkeeping system.
- Travel Expenses
You may consider writing off your travel expenses if you travel frequently. The IRS states that you must travel for a period greater than a complete workday for your business costs to qualify for travel expenses. This category of deductibles includes airfare, cab fare, and hotel costs.
- Contracting Costs
The expenses you spend on hiring contractual labor are entirely deductible, so keep that in mind. However, if you pay a contractor USD$600 or more in a tax year, you must send them a MISC-1099 form. The payment processor should also issue a 1099-K if you use alternative payment methods like credit cards.
- Legal and Professional Fees
Businesses frequently work with lawyers and other specialists to help them with various business tasks. You should know that the fees for hiring a lawyer, accountant, or tax advisor are fully deductible.
- Employee Salaries
Employee salaries are often fully deductible for most small enterprises. It includes commissions and bonuses as well. However, this exemption will not apply to LLC members, partners, or sole proprietors. The reason for this is that they aren’t regarded as corporate employees.
- Employee Gifts
Giving corporate gifts to staff is an excellent way to motivate and thank them. Consequently, some businesses have made giving gifts a part of their company culture. It’s particularly essential today because some businesses have made remote working the standard. Nevertheless, keep in mind that team member gifts can be deducted up to USD$25 per team member annually.
Conclusion on Tax Exemptions
Tax exemptions allow small business owners to optimize their cash flow. So, it would be best to have an excellent financial advisor who can help you take advantage of all the possible exemptions you can get depending on your business location. Also, ensure a sound bookkeeping system because you’ll need receipts when filing for these exemptions.