Small business owners, the ones that are working for themselves trying to scrape by, often don’t have the money to hire a bookkeeper and accountant. And these small business owners are making the vital mistake of not taking the deductions that they could on their tax returns.
Don’t get me wrong, you also need to be cautious when claiming deductions; deductions always need to be legitimate if you plan to avoid an audit.
1. Home Office Deduction
You can deduct your home office from your taxes, but this needs to be strategic. “The home office deduction is one that does depend on technicalities more than a story,” states Jak+Co. What does this mean?
Your office needs to be used exclusively for business 365 days a year.
If your office is also the place where you invite guests, sleep and watch television, this can land you in trouble. You’ll need to exclude any square footage of the room that is used for anything besides business.
Even if the portion of the room is used ten times a year as a guest room, it will need to be excluded.
If you can dedicate a space to just business activity, then you can deduct it from your annual taxes.
2. Retirement Contributions
If you’re planning on retiring, you should be making regular contributions to your retirement account. Self-employed individuals often save for retirement through two main vehicles, according to Bankrate:
- SEP IRA
The great news is that you can deduct your contributions from your personal income tax return. It’s a great way to keep money in your pocket while also saving for the day that you retire.
Just remember that you won’t be able to access your retirement money without incurring a penalty before you retire.
Do you pay anyone commissions for bringing in business? If so, these payments can be fully deducted. Commissions are the ideal way to bring in leads, generate business and position your business for long-term success.
4. Meals and Entertainment
Do you go on business lunches or bring clients out to lunch? If so, you can deduct some of these costs. In fact, you can deduct 50% of these costs, but you need to remember that your outing must be business related.
Accountants often recommend making a ledger that keeps track of who was at the outing and what the purpose of the outing was.
You can deduct some or all of most expenses if they’re business-related. You can even deduct interest on your debt, legal fees and employee benefit programs.