As a business, it's your responsibility to get your taxes right, but not every penny you make is subject to them. That's because the IRS recognizes the difference between turnover and profit. This difference can be as much as 90 to 95 percent for some big businesses, particularly those that employ lots of staff and create or sell goods. Here's a quick rundown of tax-deductible expenses.
In most cases, labor is a huge expense, and even for a small shop or production facility, it can form a sizable amount of your outgoings. In addition, taxes related to labor, such as employer contributions, are also deductible, as the IRS sees these as expenses. Retirement plans, insurance and other contributions are also tax-deductible expenses.
Cost of Goods
Any purchase of raw materials to create your goods or the cost of simply buying goods to sell is naturally a tax-deductible expense. Don't forget to include seemingly minor expenses. A restaurant, for example, might include buying spices at a local supermarket or driving down to a dollar store to grab sponges for cleaning. All these costs add up, so you should include them to reduce your tax bill.
Your business likely needed items in order to open. Possible startup expenses might include a bar code scanner, desks, chairs and computers. Because the values of these items depreciate, you handle them differently: Take the value, deduct the eventual salvage price, and divide by the number of years that you expect to use the item. That value is what you claim each year until the item reaches the calculated salvage value. Once you hit the salvage value, you can no longer claim for that item.
If you own a business that has its own building, rent is usually easy to calculate; you just claim the rent for that year. If you work from home, it becomes a little more complicated. IRS Publication 587 covers business use of your home, but it essentially says that the area of home that you use must be exclusively and regularly used for your business. If, for example, your home office doubles up as a play area when you're not in it, the use of that office is not considered exclusive, so it's not a tax-deductible expense. There are exceptions, however, such as for warehousing or for day cares.
That pen may not cost much, but every little tax-deductible expense helps reduce your tax bill. Don't forget to claim essentials such as staples, pencils, erasers and paper.
Of course, this list is not comprehensive, but it does outline the basics of what you can deduct from your tax bill as of 2016. Naturally, if you have any queries about whether an item is a valid tax-deductible expense, you should talk to a licensed professional about your specific circumstances.
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