Even if you know nothing about accounting and fully outsource your company’s entire taxation, payroll, and financial functions, it’s important to know about a dozen tax deductions you can take advantage of. Why? Because if you know how the government allows you to legally reduce your income, you can save big bucks year after year. There’s nothing unethical about maximizing your income write-offs.
In fact, it’s part of your due diligence duty as a business owner to know how to reduce overall expenses, and one of those costs of doing business is your tax bill. Here are the 12 major categories of deductions. Not every company can take all of them. See which ones apply to your business, and then have a discussion with your accountant about each one.
Anyone who manufactures anything is well-acquainted with COGS, which is accounting shorthand for cost of goods sold. Typically, COGS refers to the literal costs of the goods you sell, which includes things like overhead, containers, supplies, labor, packaging, and anything you spent to produce the items that you sold during the tax period.
2. Fleet/Delivery Expenses
If your company uses a fleet to make deliveries to retail or wholesale buyers, you can deduct most of the costs related to deliveries. For example, many businesses use GPS fleet tracking systems like those from Samsara to keep labor and fuel costs down. Fleet tracking also works to enhance safety, compliance, overall efficiency, and customer service. So, whatever your organization spends on fleet tracking systems, as well as other delivery-related costs like fuel, driver salaries, and truck repair, can usually be included on a list of deductible business-related expenses on your tax return.
3. Bad Debt
This one is a little bit tricky. Generally, you can deduct any bad debts from income, but only if you have previously counted those amounts as income on other accounting records. In other words, if customer X purchases $1,000 worth of product on credit, and you record the sale as an account receivable, then you would typically be able to deduct the bad debt if that particular customer never paid for the goods.
Travel, entertainment, and meals (TEM) don’t often account for more than a tiny percentage of all the deductions you can take as an owner, but they can add up over the course of a busy year of promoting your new products and entertaining prospective buyers. In years past, many owners abused this write-off category by including all sorts of unrelated meals and entertainment costs on their yearly filings. Then, the IRS cracked down and started setting strict rules for TEM, so it’s important to only include amounts in this category that are directly related to business functions, and not to exceed the stated legal limits (speak with your accountant about rules for your own industry).
Depreciation is a complex topic but there are some commonsense elements behind the concept. For example, if your company buys a piece of equipment for $50,000, you might have the choice to deduct that expense all at once, or to spread it out over several years as the machine wears down and loses usefulness. There are many ways to calculate depreciation, but most companies opt to spread out the cost of large capital expenses over 5, 10, 20, or more years, based on what the law allows for each particular kind of asset. The main thing to know about this very common deduction is that it is often the largest single write-off you’ll have in a given year, especially if you opt for what accountant’s call accelerated methods.
In addition to federal taxes, which are not deductible on your federal return, your company likely pays local, county, sales, state, depending on your region, and perhaps a few other kinds of taxes. In nearly every case, you can reduce your income by the amount of other taxes you pay to entities that are not the federal government. For some corporations, what they pay to states and municipalities can amount to huge sums of money and have a significant impact on their bottom line.
7. Rent (or Home Office)
Even if you are a one-person operation with an office in an extra bedroom of your home, rent expense can help you reduce the amount you have to pay to the government each year. For organizations that rent or own office space, this write-off can be considerable. It’s important that you let your accountant know about all the different kinds of rent you pay, which include not just the monthly bill for office space, but any expenses for storage of inventory in warehouses, or for machinery you rent to make the things you sell.
8. Office Supplies
When accountants say supplies, they’re usually talking about those office supplies you use every day to keep the company running smoothly. This can be a major cost for small and large entities because it includes so many things, like computers, shredders, Wi-Fi and broadband fees, staplers, copy machines, pens, markets, presentation supplies, files, folders, calendars, clocks, furniture, stamps, tape, water coolers, water, glue, first-aid kits, and hundreds more. Most entrepreneurs are surprised to discover that they spend much more on these items than they expect. In fact, for many medium-sized enterprises, office supplies often rank within the top five annual expense categories.
What you pay anyone who works for you can usually be taken as a direct write-off against income. This broad category includes manufacturing labor, office help, consultants and other professionals who are on staff, and executive salaries.
10. Insurance (Self or Group)
Whether you are a one-person shop and pay for your own health insurance, or are a larger entity with a major group plan, insurance can represent a significant cost of doing business. And because it is directly related to your company’s activities, it’s generally deductible.
This niche category includes any interest you pay on business-related loan or company credit cards. Remember to just take the interest and not the entire card or loan principal payment as an income reduction.
12. Legal Costs
These expenses include whatever you pay to attorneys for doing work for your company, but not for you personally. In some years, you might have no legal expenses, but in others, the totals might be significant.