Are you trying to lower your taxable income? Let’s face it: no one likes to pay taxes. As a business owner, you are able to take qualifying deductions for business-related expenses.
Ensuring you are taking all available deductions helps you lower your taxable income and put more of your hard-earned money back into your pocket. In this article, we’ll cover everything you need to know about tax-deductible expenses.
Understanding Tax-Deductible Expenses
Tax-deductible expenses are costs associated with running your business. Taxing authorities allow you to deduct these costs from your gross income, creating net taxable income. For example, let’s say you earn £100,000 in revenue. In order to run your business, you have to pay £5,000 in insurance and £20,000 in supplies. Instead of being taxed on the full £100,000 of revenue, your business is only taxed on the net amount of £75,000.
Under UK legislation, allowable expenses are costs directly related to your business. Private purchases are specifically excluded. US legislation follows the same guidelines. In addition, US tax-deductibility requirements state that the expense must be ordinary and necessary. Ordinary means the expense comes up in the general course of business, while necessary is defined as costs that are fundamental to running your business.
Common Small Business Tax-Deductible Expenses
The industry you operate in will determine the types of business expenses you will encounter. Here’s a list of common tax-deductible expenses:
- Travel Expenses – Lodging, meals, car rentals, dry cleaning, and airfare associated with business trips are tax-deductible.
- Home Office Expenses – Utilities, rent payments, mortgage payments, homeowner’s insurance, renter’s insurance, and repairs are potentially tax-deductible. Depending on your business structure, these costs might be deducted through expense claims.
- Production Expenses – These are costs that relate to the production of your products, such as raw materials, shipping, and direct labor.
- Depreciation – Depreciation is a non-cash transaction that deducts a portion of the “useful life” of business equipment. Tax depreciation can differ from book depreciation, so it’s best to consult with an accountant on this expense.
- Promotional Expenses – Sales salaries, advertising, commissions, and marketing are all tax-deductible.
- Other General Expenses – Insurance, office wages, bank charges, office or warehouse rent, repairs, office supplies, legal fees, meals, employee training, contract labor, subscriptions, and telephone costs are all tax-deductible.
This list isn’t comprehensive. If you have a question about a specific expense or cost, reach out to an accountant.
Documentation and Record-Keeping Best Practices
Claiming expenses is a great way to lower your taxable income, but you need to be sure you have proper supporting documentation. For each business expense, you should have a receipt, invoice, log, or journal. For example, if you took a client out to lunch, you should keep a copy of the receipt to support your tax deduction.
Many tax authorities will not accept bank or credit card statements as sufficient proof. This is because the line items on these statements do not show what was actually purchased. Instead, it just shows the merchant, date, and amount. Tax authorities want to be sure that the items or services purchased have a direct connection to your business activities.
Documentation for your tax-deductible expenses should be kept until your return is no longer at risk of an audit. In the UK, authorities can go back four years to audit returns, while US tax authorities can only go back three years. Maintaining clean records can be done by investing in expense management software, like N2F.
Rules and Limits
There are rules and limits to claiming business tax deductions. For one, if you claim expenses that exceed your income, losses might be suspended. For example, let’s say that you have revenue of £50,000 and have expenses totaling £55,000. The £5,000 of excess losses might not be deductible on your return and instead carried forward to offset future income.
For expenses that are both business and personal, you are generally allowed to take a percentage of the cost. One example would be a trip for both business and personal purposes. Only the business portion of the trip is deductible. For example, if you have a seminar that spans two days, but you extend the trip to five days, the lodging for the extra three days would not be deductible.
The rules and limits for tax-deductible expenses can quickly become complex, which is why it’s important to consult with a qualified accountant before filing your return.
Organizational Tips
When it comes to maximizing compliance with tax authorities and ensuring all tax-deductible expenses are claimed, there are a few tips to keep in mind. First, invest in accounting software that tracks your business transactions. Popular accounting software for small business owners includes QuickBooks, FreshBooks, and Wave.
Next, find an invoice and expense software that integrates into your central accounting software. Software that specializes in payables allows you to create robust expense reports, store receipts and invoices, and track company spending.
When selecting your expense software, choose a company that has mobile app capabilities, like N2F. This gives your employees the ability to snap expenses on the go, infusing accuracy and completeness into your expense function.
Another organizational tip is to ensure all employees understand the importance of documentation and how to submit reimbursements. Take the time to train your employees and put together a comprehensive manual to streamline your expense reporting. Not only will you have greater transparency in spending, but tax time will be a breeze.
Summary
Are you claiming all tax-deductible expenses your small business is eligible for? Don’t wait until the week before your return is due to track down qualifying business expenses. Instead, invest in expense management software, like N2F, to start tracking your tax-deductible costs.
N2F infuses simplicity and accuracy into your expense management function. With our mobile app allowing employees to snap pictures of invoices and receipts, you can add efficiency, accuracy, and lower your taxable income. Reach out to a team member today to schedule your free consultation.
