How does a Business Tax Write-off Work?

March 1, 2016 / Reading: 3 minutes

Small businesses can live and die by tax deductions and write-offs; when you don’t have a lot of free capital, you need to find any way that you can to grow your capital.

Write-offs allow businesses to lower the total taxable income owed. With enough write-offs, a business can even drop to another tax bracket, greatly reducing your taxes.

Common Tax Write-Offs

The IRS provides various levels of deductions, some being full deductions of the total write-offs, and others with a cap or limit. Travel and medical expenses qualify for full deductions, while property investments have a predetermined limit. There is also a limit on tax write-offs in that you cannot use them to reach the point where you qualify for tax refund. Zero is as far as you can go. If you have tax credits to be issued, of course, then you’ll be able to collect that refund.

For the average small business, things such as office supplies, computer upgrades, furniture, and heavy equipment. Commercial rent and utility bills paid for your office space can qualify for tax write-offs.

Transportation-related costs, such as rental cars, company vehicles, and cost of fuel can be deducted at a certain rate. Insurance write-offs also exist for medical, business, and car insurance if you drive a company car, pay for your own premiums, and for the percentage of the insurance of your own home.

In the case of a home office environment, you are able to deduct the portion of your office space from the total square footage of your home. Alternatively, you can get up to $5 per square foot, for a maximum of 300 square feet.

Lastly, charity, educational, and training and other team-building investments can count for some sizeable tax write-offs. These things can add up quickly, as long as you keep your educational material and training programs documented.

How to Process Write-Offs

If you want to qualify for write-offs, you need to save all your receipts, unlike traditional filings. You should expect to be audited after doing write-offs. It’s recommended to keep records of all pertinent business expenditures for at least seven years.

If you file as an individual, you can further reduce your taxes with the help of Schedule C of your 1040 form. For business-related expenses, that goes under Form 2106. The best way to keep track of all this information is through the help of a program like QuickBooks or by hiring your own personal accountant to do all the heavy lifting for you.

Don’t forget, if you have to hire an accountant or bookkeeper, you get to count that as a business expense and fully deduct the cost of their services from the Schedule C section on the 1040 form.

Tax season can either be a nightmare for small business owners or a time of celebration, depending on how well you utilize these tax write-offs. The best way to achieve this is to start planning your write-offs from day one, being meticulous about every receipt, bank statement, and written contract.

DISCLAIMER : While the information in this article is derived from sources believed to be accurate, it is not intended as tax or legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. It is always best to check with the IRS and see what their current rules and options are.