Tax is a compulsory payment or contribution that is made to the revenue of a state. It is usually levied by government on workers’ income, business profits and sometimes added to the cost of goods and services. Most countries around the world are making a vast majority of their revenue from taxing businesses, individuals, traders and workers.
Over the years, most people around the world have been paying tax on expenses that could have been avoided or written off. This is because of the fact that they don’t have sufficient information that will guide them on certain areas where tax will be written off for them officially. Most small businesses owners are ignorant of the fact that they can pay lower tax than what they currently pay. Simple understanding into the tax system will give them the right information regarding the area in business revenue that needs to be written off.
What is the meaning of Tax Write Off
Tax write off can be seen as any expenses that can be legitimately deducted from taxable income. Knowing the particular expenses to write off legitimately can be very challenging as there is a fine line between deductable expenses and non-deductable expenses. Ordinarily, small business owners should be able to write-off expenses incurred in running their businesses and deduct them from their revenue so as to ascertain their taxable income.
Financial experts and analysts are of the opinion that tax write-off is a Godsend phenomenon for small business owners that are operating on a small budget. This is because of the fact that once a series of write-offs have been identified on business revenue, the tax liability of such business will reduce significantly. Over the years, the term write-off has been given different names by several people and one of the most common of all is deduction.
It is important to note that not all business expenses can be written-off from business revenue. According to the Internal Revenue Service (IRS) in the US, for expenses to be written –off or deductable from business revenue, such expenses must be ordinary and necessary.
An ordinary expense is an expense that is common and accepted in a business or trade while a necessary expense is the one that is appropriate and contribute directly to the growth of the business.
Also there are two major expenses that can’t be deducted or written-off from business revenue and these expenses are Cost of Goods sold and Capital (depreciable) expenses.
Cost of Goods Sold: This refers to the cost attributable or linked to the production of the goods sold in the business. According to Internal Revenue Service, cost of goods sold can’t be written off from the business expenses.
Capital (depreciable) expenses: This is also another expense that can’t be written off and it could be tantamount to violating Internal Revenue Service (IRS) tax law.
This blog post is tailored towards unveiling to our audience the areas in the business revenue where tax can be written-off or deducted.
Some of the areas where small business owners can write-off tax are;
- Salaries and Wages: Salaries and wages is an area where small business owners can easily write-off tax. However, it is important to note that payments made to sole proprietors and partners in a partnership business are not deductible. Payments to employees and other individuals working for the company are written-off and deductible from the business revenue. This will help to reduce the amount of money that will be paid as tax.
- Car and truck expenses: For small businesses to operate efficiently, they use vehicles like cars, trucks and vans.
- Contract labor: As a way of reducing cost, some small business owners use independent contractors to meet their labor needs. This is actually the trend for small businesses in the present day society. The cost of these labor contracts can be written off from your tax payment, this will help to reduce the amount you will be paying as tax.
- Rent: Every business needs a location to operate. The costs of renting such location including storefront, office, factory or other facilities are fully deductible from business taxable income.
- Supplies: The cost of supplying items that are used directly for business operation is also deductible from business revenue.
- Depreciation: Generally, all business owners are given allowance for the cost of buying property or equipment for their business. This allowance also includes 50 percent depreciation for the property acquired for the business. This cost is fully deductible from business taxable income.
- Utilities: There are certain things that are inevitable for running a business. One of such things is utilities like electricity, office phone charges etc. These charges are not deductible as they are seen as important to business operation. For people who operate a home office, the cost of servicing and recharging home telephone is not deductible. However, if there is a second telephone in your home, it will be regarded as deductible expenses.
- Repairs: The cost of repairing equipment or other property that are used to run a small business is deductible. However, there are instances when some of these repairs cost are deductible as IRS will claim that there is already depreciation bonuses on such equipment or business property. This is why it is always advisable to do a thorough research on the equipment type and the category it belongs to according to IRS grouping.
- Insurance: It is a known fact that every business needs to be insured against future loss. In view of this, the cost of business owner’s policy, business continuation insurance and malpractice coverage is deductible. However, certain tax rules apply to health insurance coverage. For instance a small business may be entitled to claim about 50 percent tax credits for the premium paid for health coverage. This is more favorable to business than deduction. This is why it is advisable to always carry out a thorough research so as to know the area that will be favorable to you during tax write-off.
- Commissions: Commissions that business owners pay to their sales team or any other group working for them are also deductible. Most businesses spend huge amounts of money on commissions and when they are written off, it will helps business owners to save more.
- Advertising: Small businesses around the world spend heavily on advertisement. The essence of this is to create awareness about their products or services to the larger society. Any amount of money spent on advertising is fully deductible.
- Travel: As part of business operations, small business owners sometimes send their staff on business trips with a view of expanding the business reach. The costs of sponsoring such trips are fully deductible as it can be linked directly to the business operation.
- Home office: There are people who use their home regularly as their business location where they meet with their clients. In situations like this, a portion of the home’s personal expenses are deductible as business expenses. This deduction could be painting a home office, real estate tax etc.
- Legal and Professional fees: The cost of hiring a legal practitioner or professional like accountant is fully deductible as business expenses.
- Rent on Equipment or machinery: In order to reduce cost, most businesses always prefer renting equipments or machinery that they use in their operation. The cost of renting this equipment is fully deductible.
- Interest on Business loans: There are instances when business owners obtain loans to be able to execute certain projects for the business. Example of such project is construction of a new office location or factory. The interest charged on such loans are not taxable, rather they are deductible as business expenses. However, when the loan is taken by the business owners and not earmarked towards the business but for other investment purposes, such loan is not deductible.
- Employee Benefits Program: Money spent on any program carried out by small businesses or corporation with the main aim of benefitting employees is deductible. Examples of such programs are; education assistance, dependent care assistance, contribution to employee’s retirement plan accounts. This is also applicable to self employed individuals who contribute to their own qualified retirement plan. Such contributions made to the retirement plans are deductible from business revenue. This will help to lower the amount the business or individual will pay as tax.
- Mortgage Interest: Businesses that operate in their own real estate property can fully deduct mortgage interest for their revenue before tax is paid. This will drastically reduce the amount that would be paid on tax and such money can be reinvested into other aspects of the business.
- Charitable Contribution: Some businesses contribute a huge amount of their revenue to charity. Such amount contributed to charity is written off the tax and considered as part of business expenses.
- Theft and Loss: Unavoidable loss or theft of items used by business organizations to run their business is deductible. However, when such theft or loss of items wouldn’t have occurred if proper caution was taken, such loss or theft doesn’t count as it will not be deductible.
- License fees: There are certain businesses that operate based on licenses. The amount spent on such licenses and regulatory fees are deductible and regarded as business expenses.
- Child labor: Some business owners sometimes hire their children below the age of 18 to work for their businesses. These business owners can calculate the salaries of their children working for them and deduct them as business expenses.
- Auto expenses: Auto expenses refer to the amount spent in maintaining a business or company’s vehicle. Example of auto expenses are; depreciation, lease payments, gas, insurance, repairs, registration fees etc. These expenses are deductible and regarded as business expenses.
- Bad debts: Most businesses around the world today, face the problem of bad debts. It is always a challenge when a client refuses to pay after enjoying a service or a vendor refuse to deliver after collecting payments. Bad debts are always deductible from business revenue and regarded as expenses incurred in the course of running the business during the year under review.
- Education: One hundred percent deduction is made on business expenses relating to education. These expenses include; seminars, trade shows, magazine, CDs and DVDs that are related to the industry in which the business operates.
- Entertainment: This is another important area that people often neglect where tax can be written off. Entertainment expenses in this content refer to any amount spent in entertaining customers or clients who have come to do business transactions with you. However, the entertaining and spending has to be within the business setting, if such is the case, then 50 percent deduction will be made on the expenses.
- Start up expenses: Starting a business can be very challenging and it requires constant effort in carrying out marketing research as well as product research. Business owners usually spend a lot in carrying out this research in order to create their businesses. The amount spent at this initial stage of the business is known as start up expenses are they are fully deductible from the business revenue and regarded as business expenses.
- Bank fees: Business owners constantly carryout different transactions in the bank on behalf of their businesses. Most times banks charge a token for such transactions. Examples of such charges are; ATM withdrawal charges, wire transfer fees, and other bank services. These charges are fully deductible from business revenue as business expenses.
Having a perfect understanding of the business expenses that are fully deductible from your taxable income will help to reduce the amount you are paying as tax. Many business owners don’t have this information; this has made them pay more tax than they could have paid ordinarily.
Information is power, make good use of this information so that you will know the expenses you will remove from your taxable income so as to reduce the amount you are paying as tax.