When it comes to allowable tax deductions, it’s important to be certain that you fully understand what you’re entitled to, what you aren’t, and how to properly make and support your claims. While it’s in your greatest interest to claim deductions that you know you’re allowed to write off, the tax season often comes with write offs that may have never crossed your mind. Here is a list of allowable tax deductions that you may not have considered.
Petty Cash Expenses
In the long list of tax deductions, you may not have thought about petty cash as a potential write off. Petty cash refers to small things for your business that you pay for in cash. They can include paying for parking or providing coffees and snacks at your office meetings. Keep track of the cash that you spend at or involving the office because these little purchases can add up to a significant tax savings.
It’s necessary to keep a long book to record these petty cash expenses, because recording your transactions in your mind is not a reliable way to keep track of what you’ve spent. Note the times, dates, amounts, and items that were purchased and, if at all possible, include receipts. Come up with a total at the end of each month so that you are not struggling to itemize small purchases before tax season.
If you were not able to claim certain deductions during the previous year, it might be a good idea to check in again. You might be entitled to previously unattainable deductions this year. Some carryover deductions might include monetary or item donations to a charity, home office deductions, and capital losses. Ask your tax professional about some of the carryovers to consider writing off for the taxes related to your business.
If you have chosen not to list the costs of research and business experiments as long-term expenses, you might have the ability to deduct them when preparing your taxes. Though there are several restrictions and qualifying factors associated with this kind of a deduction, the IRS has information about how to properly go about deducting research costs. Since this is a complicated deduction to initiate, please be sure to ask your tax preparer about the proper methods so that you can be confident that you will not find yourself in any sort of trouble with the Internal Revenue Service.
If you’ve paid someone to perform accounting work for your business by way of bookkeeping, tax advice, and tax preparation, you can deduct the expense on your taxes. Certain restrictions do apply depending on the type of fee that you’ve paid and the work that you had done. It’s wise to ask your tax professional for advice on how to properly document these claims. Keeping all of your receipts handy can’t hurt, either.
Of the Allowable Tax Deductions, Try Startup Costs
If you had any costs that you incurred before you formally opened your business, you may be entitled to a deduction during your first year of business. You’ve got to be operating a business in order to qualify for this allowable tax deduction, but if that condition is met, try deducting the expenses that you incurred before your business opening was official.
Up to $5,000 of the startup costs that you encountered before you started the first year of business can be deducted. However, if the startup costs totaled more than $5,000, you can still deduct them, but it has to be amortized over a period of fifteen years. If for some reason the startup costs of your business exceeded $50,000, there are limitations that apply when attempting to deduct these costs.
If you have a bank account that is only for business, these sort of tax deductions are much easier to record. Bank charges for your checking account, cash withdrawals, and other bank-related charges are deductible. Sales taxes on transactions and property interests count, too. Overdraft fees and bank fees for insufficient funds related to business expenses, though unfortunate, are also legitimately tax-deductible expenses.
When considering allowable tax deductions, inventory is not always a sure thing. Most of the time, inventory is not deductible right away. Rather, a business with some amount of inventory uses the accrual method to include inventory in the cost of goods that have been sold. This reduces the income that is recognized on sales.
In some cases, there is a special rule that allows certain small businesses to use the cash method and treat inventory like material and supplies, which are tax-deductible.
According to the IRS, the small businesses included in this rule are those with an annual average gross receipt under $10 million for the previous three years. These businesses must also be in certain industries, for example, one that provides services but also sells products. A nail salon that performs manicures and pedicures but also sells beauty products would be a good example.
Legal and Educational Expenses
Most of the time, business-related fees that you’ve paid to consultants, attorneys, accountants, and the like, are necessary and customary expenses that are directly related to running your business. That means that they’re deductible in the year that they were paid. Keep in mind, legal fees that are paid to gain business assets are not tax-deductible.
Tax-preparation fees for the previous year, licenses, and fees paid to state or local government, as well as expenses for education or training are usually deductible of that education and training is related to your work.
Tax-deductions are an excellent way to gain back some of the hard work and fees that you’ve put into running your business. There is a plethora of available tax deductions, especially those for small business owners, so if you’re in any doubt about what you’re entitled to, double-check with your tax professional. It can’t hurt to ask, and doing so can grant you deductions that you’d never have thought about otherwise.
If you’re in the market for a reputable CPA firm, consider West Austin Tax for your income tax questions and services. You can visit their website for information, video resources, or to schedule an appointment with one of their professional CPAs. You can also call (512) 330-9400 for more support.
*West Austin Tax is not a CPA firm.