Business Expenses 101 - 8 Tips for Getting the Most Out of Tax Write Offs
January 13, 2023
As a small business owner or startup founder, it's important to keep your tax liability as low as possible. Doing so is key for maximizing your potential profits.
So, how do you keep your tax liability low? One way is to write off eligible business expenses. This article will look at what expenses you can write off, and how to get the most out of the process.
What is a tax write-off?
No one likes to pay taxes. It's a painful necessity in the "death and taxes" sense — but you'd rather reduce the amount you owe the government as much as possible. An effective use of write-offs can achieve this goal.
The purpose of a write-off is to reduce your taxable income. The term refers to amounts that the government doesn't require you to pay taxes on. In practice, these consist of deductions on your tax return, letting you lower the tax burden for your company and maximizing the resources you retain for your business.
The purpose of a write-off is to reduce your taxable income. The term refers to amounts that the government doesn't require you to pay taxes on.
These write-offs are distinct from a tax credit, which represent another way you can reduce your tax burden. Tax credits represent incentives the government provides for you to take certain actions. Some high-profile credits include subsidies to encourage green energy and health care offerings. Write-offs, on the other hand, consist of expenses that you can subtract from your taxable income.
What expenses can be written off?
The specifics of your taxes will depend on your business. However, there are some generalities to keep in mind. Looking broadly, the IRS defines a deductible expense this way:
"To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary."
Obviously, this definition covers a wide range of business expenses. In practice, it includes big-ticket items like:
- Employee salaries
- Vehicle costs
- Interest on loans
However, the list of write-offs doesn't stop with these obvious items. You can drill down to many of your other expenses, allowing you to further cut your tax bill. Keep in mind more esoteric expenses, like:
- Legal fees
- Marketing costs
- Expenses related to education and training
- Entertainment costs for customers and employees
- Non-cash items, like depreciation
These are just examples. With a broad definition of deductible items, many of your day-to-day expenses will fall under this category. That leaves the question: what can't be written off?
There are some costs that can't be deducted from your business return. As laid out by TurboTax, here are some large categories that aren't eligible:
- Federal income tax
- Lobbying payments
- Other political contributions
- Penalties and fines incurred if you break the law
Best practices for writing off expenses
Now that you understand the basics of tax write-offs, how do you get the most out of the process? Here are some steps to take to create a structure that allows you to minimize your tax burden:
Don't Wait Until Tax Time
Tax time tends to come with a rush of activity. However, don't save all your efforts until the final moments of the fiscal year. A last-minute approach will lead to a disorganized process, raising the chances you'll miss something.
Get Outside Expertise
Unless you have specialized accounting knowledge, it's best to hire someone to help with your taxes. If your business has enough scope, this can include full-time staff. However, most small businesses turn to outside help to get the expertise they need to maximize their deductions (without risking an audit).
Make Yourself Conversant with Accounting Concepts
While outside experts will give you the best chance of optimizing your tax strategy, you should familiarize yourself with the basics of accounting. This information will help you have productive conversations with your accountants. It will also make it easier for you to put recommendations into practice.
Create a Meticulous Record-Keeping Process
Taxes revolve around paperwork. The better information you have, the easier it is to calculate deductions (and prove your claims if you're ever subject to an audit). As such, maintain meticulous records of all your transactions. At the same time, keep receipts and other documentation.
The better information you have, the easier it is to calculate deductions (and prove your claims if you're ever subject to an audit). As such, maintain meticulous records of all your transactions.
Overwhelmed by recordkeeping requirements? It can become difficult to stay organized as you run a busy startup. However, tools exist to make the task easier.
There are many software offerings on the market to ease your accounting burden. Programs like Quickbooks and NetSuite make it easier to track expenses. Find the right fit for your small business and use it to simplify your tax considerations.
Involve Your Team
Don't make tracking and recording expenses a one-person job. Rather, involve your team in the endeavor. Create policies that apply to everyone within your organization. This will make proper accounting part of your overall culture.
Take a Broad View
As we've seen, the definition of deductible expenses is very wide. Often, business owners are surprised about the types of costs that can be written off as part of the tax process.
As such, don't take a blinkered view when it comes time to discuss your taxes. Approach the process with an open mind, reviewing each individual expense to see whether it is eligible.
Stay Current with Changing Rules
Accounting isn't a static discipline. The rules surrounding tax write-offs and credits change over time. As such, you need to stay up to date with the latest alterations, so you can remain compliant with regulations and get the most out of your tax return.
Minimizing your tax bill through write-offs
The more money you can save in your small business, the more profits you can make. Beyond that, preserving your capital means you have more resources to fund your venture's future.
As part of this, you don't want to limit all outgoing funds. Taxes play a big role in this strategy. That's why writing off your business expenses is a crucial piece of your overall accounting process.
Use the information provided here to identify the business expenses you can write off. Doing this requires creating an overall process of oversight and financial control, making sure you get the most out of your deductions.