Everything You’ve Ever Wanted to Know About Tax Deductions & CreditsJon Steiert
Ben Franklin was a wise man. Perhaps he didn’t realize at the time just how true his words were or how far they’d travel, but either way, it’s clear he recognized taxes were a necessary evil.
Of course, most taxes come without ill will; even though they might feel like they’re in place just to torture us. Taxes help support our cities, neighborhoods and other institutions we rely upon to keep functioning. Still, you’ve worked hard for your money and we want to help you keep more of what you’ve earned.
Small businesses have a lot of spinning plates to handle even before tax season enters into our minds. Understanding the tax codes, credits, and other write-offs can serve you well when it comes to keeping more money in your own pocket.
Understanding Tax Deductions
For a company attempting to establish itself, aggressive spending is common. Fortunately, there are ways to write-off some of these expenses.
One of the best and easiest ways a business can reduce their tax liability is through tax-deductible business expenses. Choosing a tax strategy to help guide your business makes life a lot easier as your business evolves.
For example, cash basis taxpayers have the freedom to regulate the timing of their income and obligations for each calendar year. Accrual-based businesses, on the other hand, have the ability to speed up their expenses while postponing their income.
Examples like these are only the start of the different deductions available to small businesses. In the rest of this blog, we’ll break down some of the most common tax deduction questions entrepreneurs and small business have.
Expenses, Deductions (& Bears, Oh My!)
According to the IRS, business expenses are required by law to be ordinary (meaning they are common and widely accepted in your industry) and necessary (again, meaning they are helpful and appropriate for your business).
These tax laws strictly indicate that business owners keep deducted business expenses separate from personal expenses. Capital expenses and any other expenses that go directly to the goods you sell also need to be kept separate.
Now that we have a greater understanding of what tax deductions are and their rules and regulations, it’s time to get a grasp on how businesses can capitalize on them.
3 Steps to a Successful Deduction System
1. Keep your books up-to-date
Let’s be real: you should be doing this for business, anyway. Keeping track of your income and expenses makes tax preparation and filing simple – and saves you from the dangerous world of guesswork and ‘creative accounting’. If you need help maintaining your books, there are even accounting software programs available such as Quicken and QuickBooks that can help take care of the dirty work for you.
Bookkeeping makes adhering to the requirements of the IRS a whole lot less painful when tax season comes around. When you do go to file your taxes, whether it’s you, your tax accountant or CPA, an up-to-date balance sheet, and an income statement will be needed. Your capital-asset activity for the year, which includes any buying, selling, or disposing of capital assets from the previous fiscal year, will be required at the time of your tax filing.
Keeping your books clean makes it much easier whenever you begin the process of securing an alternative to an online business loan; having accountability will not only keep you in the good graces of the IRS but also your future self.
2. Save your receipts and records
Ever gone to lunch with an entrepreneurial friend who asks for an extra copy of the check? As long as you’ve had a business discussion, your friend is going to take that receipt, make a note and write it off the meal as a business expense.
Establishing a system where you provide a detailed context for the deductions you’ve claimed is essential. Without physical or digital proof of these expenses, your accountant or even the IRS could call your entire deduction structure into question. While an audit isn’t the end of the world, it’s time-consuming and certainly not something you want to deal with.
Play it safe, take pictures of your receipts, invoices and other records and don’t forget to take notes!
3. Defend your deductions
The more information you have, the better.
Just like we discussed with taking notes, the more information and context you can provide, the safer you’ll be. The best course of action is to create an infrastructure where you and your team understand exactly what needs to be tracked, documented and saved.
For example, if you or a member of your organization drive their own personal car for business purposes, the mileage can be categorized as an expense. However, the stipulation from the IRS is you must provide the context for how the vehicle was used for work and when. More information on this topic can be found on the IRS website.
Hopefully, you’re never faced with an audit from the IRS, but you ever are, the more organized you are, the easier it will be to defend yourself. The three tips above will certainly help keep you on the right path.
But wait – there’s more!
While deductions sure are swell, there are other tax breaks that you should be aware of – tax credits.
The Difference Between Tax Deductions & Tax Credits
Beyond all of the items we reviewed with deductions, tax credits are incentivized business activities that Congress has deemed worthy of reduction. Minimizing the tax liability motivates business owners to perform a certain task that may otherwise go underserved throughout the country.
While tax credits do provide a greater relief benefit compared to tax deductions, products and processes are either one or the other – they can’t be both. While the idea of double-dipping in a pool of tax relief sure is enticing, it’s often not feasible.
Still, there are a ton of business tax credits available to businesses of all shapes and sizes. To see which ones might be a fit for you, take a look at this list from the IRS.
At the end of the day, the tax code, even with the new Tax Cuts & Jobs Act of 2018, is confusing.
Having a simple, repeatable system in place for yourself and your team is vital to keep all of your business expenses and actions above board. If you run through your 2017 taxes and find that even with all of these favorable deductions and credits your business is still hurting for working capital, Fast Capital 360 is here to help.
Our funding solutions can help businesses who are looking to get ahead – whether it’s a funding alternative to a small business line of credit or an SBA loan, we’ve supported more than 14,000 businesses across the country in their quest to grow.
Hopefully, this guide will help you find more tax relief this year than any other year, before! Happy Tax Season.