As a small business owner or independent contractor, you’ve got this tax thing down. You obviously know exactly what a tax write off is – and isn’t… right? You’ve done your research and you’ve perused tax blog after tax blog. You’ve even tried deciphering the IRS website!
But as 2022 came to an end, you realized you cannot spare the time to do your taxes yourself. You gather your receipts, organize what you know to be a tax deduction, and hand everything off to a professional.
And just like that, you’ve saved hundreds of dollars by outsourcing the work to a tax professional. But… how could this be? You’ve done the work! The answer is simple: there’s A LOT to know.
But there are some ways you can get around having to go back to college and get a master’s in accounting, so let’s go over some basics when determining what a tax write off is – and isn’t.
What even IS a Tax Deduction?
Simply put, a tax deduction is an expense that you are able to deduct from your total taxable income. What a tax write off is and isn’t is determined by the IRS’ guidelines, and as a small business owner it is important to know these guidelines inside and out.
Do you work from home? You can write things off like portions of your rent and utilities, your telephone and internet, and even property taxes. If you’re renting an office space, you can deduct that expense as well.
Are you an independent contractor working for a delivery service? You can write off many expenses having to do with your car – including gas, mileage, and any work your mechanic might have to do to keep those wheels rolling.
A tax deduction for your business will be determined by two things: your cost of goods sold (COGS), and your operating expenses. When determining what a tax write off is and isn’t, it is important to understand these two things.
Your COGS is determined by total costs spent to create your services and/or goods. For example, your crocheting business is doing so well you’ve outsourced the labor to crocheters to keep up with demand. Sourcing fabrics and workers’ wages fall under your COGS.
Outside of your costs of goods sold is your business’s operating expenses. These expenses can also look like office supplies, interest and bank fees, property taxes, rent, etc. It is best to meet with your tax professional about how your business will be affected.
To all my Sole proprietors, LLC’s, S Corps, and Partnerships – your businesses are considered “pass-through” entities. This means you are able to pass through your income and its deductions to your personal income taxes, so you don’t pay taxes at the business level.
To make sure you have all your deduction ducks in a row for tax time, it is best to contact your tax professional to help clarify how to deduct for your specific business.
Ways to Minimize your Taxable Income
The more money you make, the more you are taxed. What a conundrum! Fortunately for you, there are ways to allocate your funds that will benefit you come tax time. Any small business owner or independent contractor can get behind that!
Purchasing assets (aka business equipment) can give you a leg up when claiming expenses. Also, starting an IRA or retirement fund can save you some serious dough, and will also set you up for some security when you choose to finally retire.
Keeping Up with the Kardash… I mean Deductions
I know you’re busy, but please, if you take anything away from this article, let it be this – Keep. Up. With. Your. Books. I promise you if you take just 30 minutes at the end of each week to bookkeep, tax time will be a breeze!
By adopting a bookkeeping routine, you are making sure that you will get the most return on your investment (and also make it A LOT easier on your tax professional). When your small business’s income starts to soar, you’ll appreciate that extra money come tax time each year. Click here to see the four signs books need to be cleaned up.
So, whether your bookkeeping routine looks like sitting down every Friday and manually entering your expenses into QuickBooks Online, or outsourcing your bookkeeping to a professional, this is an important step in ensuring you get the max from your tax deductions.
When it comes to determining what a tax write off is and isn’t, it can be a little confusing for any small business owner or independent contractor. When it comes to claiming a tax deduction, there is SO much to know, and doing things incorrectly can really cost you.
I hope this article provided you with a little more clarity, but if you have any questions, please do not hesitate to reach out to me!