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The Ins & Outs of Small Business Tax Deductions

Tax deductions are an important part of preparing your state and federal tax return. This financial tool allows you to reduce your tax liability, meaning that you will have to pay less to the IRS. Tax deductions may help you receive an IRS refund, as well. Small business owners have tax deductions available to them beyond those available to individuals.

Tax Deductions versus Tax Credits

When you are working on your tax return, you must add up all of the income you have received from all sources. From that figure, you can take deductions. The amount after deductions determines your tax rate and final tax bill. It is common to confuse tax deductions with tax credits. A tax credit is applied to your tax bill – it reduces your owed taxes. A tax deduction reduces your taxable income. If you have a tax credit and a deduction for the same amount, the tax credit will reduce your bill much more than the deduction.

Should You Itemize Your Deductions?

When you file your taxes, you must choose between taking the standard deduction and itemizing your deductions. A standard deduction requires much less paperwork – it is set by the IRS each year, and you are entitled to it. If you itemize your deductions, you must list each item you want to deduct. This means you will need to have clear records, and it takes time. However, most small business owners have a smaller tax bill when they itemize their deductions than when they take the standard deduction. If you are not sure which option is best for you, consider using tax software to help you compare easily and automatically.

Common Tax Deductions for the Small Business Owner

Small business owners can take deductions for office expenses, insurance costs, and motor vehicle usage, to name a few. Office expenses can be deducted whether you work from home or lease office space, but it can be more complicated to deduct a home office. Nonetheless, this important deduction can represent a significant tax savings and is worth considering. If you lease an office, you can easily calculate how much you have spent on rent, utilities, and incidental expenses over the course of the year. If you are going to claim the home office deduction, be sure that the space you are claiming is used only for your business and nothing else. If you use only part of a room for your home office, you can measure the space and use that square footage for your calculations. Equipment you are claiming as part of your home office deduction must also be used only for your business. If you pay for health insurance, your premiums are completely deductible up to your business' net profit. You can only deduct premium costs if you were not eligible for other insurance coverage. If you drive a car as part of your business, you can deduct a set amount for each mile you drove during the year. Additional costs like tolls and parking can also be deducted.

Though the sheer number of tax deductions available to you as a small business owner can make tax season seem overwhelming, there are resources that can help. Easy-to-use tax forms can help you stay organized when you file.

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