It is tax season, which means a total focus on your business finances and the search for tax deductions for your small business. Some business owners are on top of their finances all year round, and this time of year does not add any additional stress. Others dread tax season because it is a scramble to get everything needed to complete annual taxes.
The difference between these two tax experiences is the pre-work done throughout the year. It will come as no surprise to you that starting the year with a budget and maintaining an accurate cash forecast allows you to plan realistically for your tax burden.
Some business owners try and get ahead of their tax bill by pre-paying their expenses just to save on taxes at the end of the year. While this might result in less due in April, it can also cause you to be cash poor at the beginning of the next year. It is a cycle that is stressful and can affect your ability to invest in your business throughout the year. Being cash poor can also result in a scramble to pay your tax bill the following year. We think of it as a feast or famine cash flow cycle, which is stressful and not conducive to growth.
We rely heavily on cash forecasts to guide our clients throughout the year and prepare for the tax bill. With proper planning and forecasting, we are able to predict with some certainty what you will owe and be prepared to pay. You will not be scrambling to find the cash to pay because we will have been preparing the entire year!
There is a common feeling of dread when it comes to paying business taxes, but we want to give you a different perspective. If you are paying taxes, that means you are making money! Congratulations! It also means you are paying into social security and Medicare for your future.
Finally, if you are not cash-poor and would like to bring down your tax bill further, make sure you contribute to your SEP, IRA, or similar accounts. These contributions will bring down your taxable income and also count as a contribution to your future. Win-win!
In addition to the advice mentioned above, we compiled a list of 10 of our favorite tax deductions you may or may not know you can take on your business taxes. You can find lists and lists of other possible tax deductions online, but these are common and easy to keep track of throughout the year. Work with your accountant to utilize these tax deductions when filing.
You can deduct 100% of all food and drink purchases for 2022 but that changes to 50% this year. The meals need to be business related, and you need to have the following information:
- Date and location of the meal
- The business relationship of the people at the meal
- Total meal cost
Make sure to keep notes of your meals as soon as they happen. It can be easy to lose track. Our best advice, get the receipt and immediately jot down the info on the back.
Client and Employee Entertainment
This one gets a little tricky and confusing. Entertainment expenses are not deductible for 2022 and 2023 at the time we’re writing this. However, the food before or after an entertainment event with a client is deductible as meals. You are also allowed to deduct 100% of the cost of team building held for your employees, including food and entertainment. We definitely recommend talking through this one with your CPA or tax preparer to make sure you understand when to grab that business credit card and what account to put the costs in so they know the rules to apply.
Business Travel Expenses
All of your business-related travel expenses can be deducted. This includes airfare, hotels, car rental, tips, and much more. The entire list of business travel deductions is on the IRS website. A qualifying work-related travel expense meets the following criteria:
- The trip is essential to your business.
- The business trip takes you from the city where your business exists.
- You must be traveling away from your business for longer than a typical work day, requiring you to sleep away from home.
Business-Related Car Use
If your car is exclusively for business-related purposes, you can deduct all costs associated with operation and maintenance. If your car is a mix of personal and business, you can deduct expenses related to business usage. You can also claim the mileage used for business driving by deducting actual miles or using the standard mile deduction set by the IRS.
Home Office Expenses & Supplies
The simplified IRS guidelines for home office expenses allow home-based sole proprietor businesses to deduct $5 per square foot of your home that’s used for your business operations, up to 300 square feet. To qualify as a deduction, your work area has to be used exclusively for business.
If you own an S-Corp, you cannot take the home office deduction. That doesn’t mean you can’t deduct your home office expenses. Talk to your CPA or tax preparer about setting up an accountable plan. This process allows you to calculate your home office as a % of the home and allocate a portion of the business-related home expenses back to the business. These expenses can include utilities, home/rental insurance, home improvements, mortgage interest, and so much more.
Office supplies such as pens, paper, printers, computers, and software are always deductible in the year they were purchased.
Phone and Internet Expenses
If you need a phone and internet connection to run your business, and let’s face it, we pretty much ALL do, you can deduct these expenses. Be aware that if you use your phone and internet for work and personal, you can only deduct the percentage that goes to your business use. It can also get a little tricky to calculate when everyone in the family is on the same cell phone plan. Make sure you’re only deducting the business-related portion.
Professional Services, Salaries, and Benefits
Any professional services you hire that are necessary to the functioning of your business are acceptable tax deductions. Accounting, bookkeeping, and legal services can be a write-off. You can also deduct software used for filing taxes or bookkeeping. These guidelines for legal and professional fees from the IRS can help you determine if your expense is deductible.
Any salaries, benefits, and vacation pay is tax deductible. The requirements for deducting wage and benefit expenses are:
- The employee is not a sole proprietor, partner, or LLC member of the business
- The salary is reasonable and necessary
- The tasks delegated to the employee were completed
If you’re getting anxious about that 1099 contractor that operates as a sole proprietor or business of their own, don’t worry. They fall under the professional services category.
If you make charitable contributions to qualifying organizations on behalf of your business, you can deduct those donations. You can claim these expenses on your personal tax forms if your business is a sole proprietor or partnership. You claim charitable donations on your corporate tax return if your company is a corporation, including S-Corp.
Any educational expenses that bring value to your business are acceptable tax deductions. Education tax deductions require that the learned material must improve your skills or help maintain your professional expertise. Educational expenses that qualify for deductions include
- Courses and classes related to your field of work
- Seminars and webinars
- Trade publication subscriptions
- Industry-related books
This includes business coaches and all kinds of training opportunities.
Any contribution to an Individual Retirement Account (IRA) reduces your taxable income for the year. The total contributions can’t exceed the total income earned or the annual maximum contribution, whichever is less. The best part is, if you already have that SEP IRA setup and are calculating your taxes today, you have until April 15th to make the contribution and still get to deduct it on your 2022 tax return!
I can’t make a post like this without the traditional disclaimer: No warranty or representation, express or
implied, is made by 4 Corners CFO LLC, nor does 4 Corners CFO LLC accept any liability with respect to the information and data set forth herein. Distribution hereof does not constitute tax or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein.
If you don’t have that professional advisor we would love to help! Let’s chat about your business finances and taxes and ensure you have all the help you deserve! We can help you set yourself up for success in 2023 with a financial roadmap and the accountability to stay on track!
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