1. Common Tax Deductions for Texas Businesses
This one seems like a no-brainer; however, there is a proper way to structure your meal deductions. Times when you’re trying to raise money for your startup and discuss key business decisions with your team, you can only allot 50% of meal costs to your business. Gather up all those business-related emails and categorize the meals you’ve had to clearly prove that you didn’t just take out your friends and business associates to dinner for fun. Additionally, you can deduct a portion of meals and entertainment costs for employees and clients. Many business expenses can be deducted as long as they are essential and directly related to getting work done. Think advertising, promotional materials, website fees, and payments you make for office cleaning services. Regardless of the association to business, fees and expenses for any type of rental are also deductible — just not in full.
No matter the size of your business, you can apply for business tax deductions to reduce the amount you owe to Uncle Sam (the government). Similar to individual tax deductions, business owners can deduct (or take away) specific expenses they incur while conducting business. Most entrepreneurs know they can deduct rent for an office space, business insurance, and supplies, but do you know about the many other deductions you might be missing? Don’t leave your hard-earned money with the IRS when you can use these deductions that have your business in mind.
1.1 Business Expenses
Self-employed individuals are able to deduct legitimate business expenses. However, taxpayers must keep proper documentation to support these claims in the event of an audit, along with financial records to support income and cost of goods sold. Home office deductions can be substantial for some taxpayers. Even if a claimant also has a brick and mortar office, so long as he/she uses their residence for administrative purposes, the business owner is allowed to deduct a portion of the residence expenses such as utilities, property taxes, etc. Always remember that the space claimed must be exclusively used for administrative purposes. If it also gets used for personal reasons, the claimant will need to adjust their business use percentage to properly represent the space. Additionally, business owners can deduct interest on loans used to operate or start the business, attorney’s fees, subscriptions to publications, and a variety of other expenses (dinner with clients, gas for your automobile, gifts for clients, health care, advertising, etc.). Remember to keep up with loose expenses, such as mileage, parking, tolls, and travel.
People often go into business to take advantage of tax benefits. Being a business owner and self-employed individual can minimize tax liability compared to being solely a W-2 wage earner. Here are five important tax breaks for business owners in Texas:
1.2 Home Office Deductions
Determine if you need to file a Schedule C or an E. Schedule C is filed to claim the personal expenses related to your business (commuting, marketing, and supplies), while Schedule E should be used even if it makes you decrease your allowable deduction by 2% by including employee expenses. It’s very similar to Schedule C, but you can include employee expenses. For example, instead of depreciating an asset using the salvage value method which places the burden of accurately knowing the value of the assets at the end of the fiscal year on the owner, a property manager would have to depreciate the asset using the modified accelerated cost recovery system, which is more accurate.
If you are your business’s sole owner, or you run a trade or business as a partnership in your home, the home office deduction can apply to you. However, you can only write off a portion of your business-related rent, insurance, utilities, repairs, and real estate taxes. The newly designed simplified option for claiming it can make your life much easier. For example, if your home office is smaller than 300 square feet, you can claim up to a $1,500 deduction using a “turbo-tax” like method. But of course, if your business-related costs far exceed your annual revenue, you will benefit more from the complex method. When claiming it, be honest and take the relevant expenses and multiply that by the fraction of square footage over rentable space, or make the calculation based on the rented size versus the total size of the property.
There is new legislation being developed every year, which is why tax law can be difficult for business owners to keep up with. Every business adapts to make major changes, including changes to its company operations as well as changes in finance. Here are top 5 tax deductions Texas businesses should know about:
1.3 Employee Benefits
Health Savings Account (HSA) – a special pre-tax account that you can optionally create to set money aside for qualified medical expenses you may have in the future. If you are a small business owner or a “self-employed” taxpayer (i.e. a single member LLC or LLP), you can open an HSA or contribute to an HSA regardless of whether or not you offer some other form of health insurance, and you may contribute money to an HSA even if you are an employee with a primary job that is not self-employment. These contributions are then deductible from your income, reducing the amount of tax you are required to pay to the IRS. You can then withdraw the money from the HSA tax-free to pay for qualified medical expenses. In the same manner as an HSA, a self-employed taxpayer may open and contribute to a Health Reimbursement Account (HRA) or a Health Flexible Spending Account (FSA), which also allow you to pay out-of-pocket medical expenses with pre-tax dollars.
There are a variety of expenses that are related to hiring and maintaining a full-time staff. Fortunately for Texas taxpayers, the IRS set forth provisions in the IRS Code that allow for many of these expenses to be deducted from your business income. These savings for you and your employees (or future employees) are substantial. These deductions are available for salaries, health benefits for employees, vacation and sick time, 401k matching, and plenty more. As long as the compensation to employees is reasonable, employers can deduct reasonable compensation as a business expense. The was previously mentioned as a “self-employed health insurance deduction,” and you as a business owner can deduct up to 100% of the cost of health insurance for you, your spouse, and your dependents as an “adjustment to income” which reduces your taxable income. What percentage of medical premium are tax deductible under Section 125? The IRS does allow you to pay medical insurance premiums for yourself, your spouse, and your dependents using pre-tax payroll deductions via a Section 125 Plan, or Cafeteria Plan.
2. Importance of BookKeeping for Maximizing Tax Deductions
In the world of business, it is important to manage all costs, and there are several ways to do that, just like maximizing the opportunity to save on taxes. It is crucial to take advantage of every deduction accessible. A tax deduction is an incentive issued by the government to decrease taxable income and thus taxes. And Baxter Bailey & Associates has saved many companies hundreds of thousands of dollars with one simple tax reduction they didn’t know existed, the Domestic Production Activity Deduction (DPAD). This valuable tax deduction usually surprises clients with how much they will eventually save. Cost of Goods Sold for trucking is 70%. And since this reduction is part of the cost of goods sold, it includes 70% of other percentages that reduce tax, screen payments, FICA tax, Federal unemployment, etc.
Regardless of the condition your business is in, you should follow best practices to keep records of all expenses at all times. It may be beneficial to purchase an expense tracking book that will help you become organized in terms of documenting expenses. As you progress in your business, the specific deductions will also increase in number and complexity. You need to be prepared at all times to handle and keep a record of all transactions of your business. This will help ensure you are maximizing your potential deductions and saving money. With all records kept orderly, it would be easier to file your taxes and monitor the profit generation of your business. This is also evidence in case of an audit or a court case if fees happen for violation as claimed by the taxpayer.
3. Benefits of Working with a CPA for Accurate Tax Filing
Need help deciding if your business accounting software and DIY business taxes are truly the right investments for your business’s financial health? Contact us today so we can discuss what small business accounting and tax preparation package best meets your company’s unique financial situation and needs. We value collaboration and the best tools, and that’s why we believe there’s a level of financial trust that should be established between any small business owner and his top-tier qualified accountant. We believe in you and welcome the opportunity to show you why.
We get it. Preparing and filing your business taxes can be intimidating since there are so many variables that can make the process confusing and sometimes overwhelming, especially if you are a small business owner trying to get your financial statements in order before the tax deadline. A QuickBooks accounting and bookkeeping error could potentially float under your radar and set off an IRS audit. Legal changes and regulations can be pretty hard to keep up with when you are trying to run a small business, finish a project, or need to make a last-minute run to purchase more material. That’s why so many business owners in Houston and the Mainland area choose to work with us. CPAs exist for the very reason to make sense of these rules, changes, and regulations, provide sound advice, and help verify and record your business’s financial transactions in a way that is accurate, up to standard, and compliant with all federal, state, and local tax laws.
