14 Biggest Tax Write Offs for Small Businesses! [What the Top 1% Write-Off]

Summary

In this video, Sherman from Life Accounting reveals the top tax write-offs that small businesses and self-employed individuals can leverage to save money. He shares practical tips on common tax deductions, from startup and office expenses to more advanced deductions like retirement contributions and self-employment tax savings. Through real-life examples, Sherman explains how business owners often overpay on taxes due to missed deductions and poor planning. He emphasizes the importance of proper bookkeeping and tax planning to reduce tax liability and maximize savings, offering valuable advice for improving business finances.

Takeaways

• 😀 Over 2 million taxpayers overpay on taxes each year, with the total overpayment reaching nearly $1 billion due to poor planning and missed write-offs.
• 😀 Small business owners and self-employed individuals often fail to claim significant tax write-offs, leading to unnecessary tax burdens.
• 😀 The top 1% of earners often minimize their tax liability through strategic use of tax laws, leaving others wondering how they pay more in taxes despite earning less.
• 😀 A business tax write-off is an eligible expense that reduces your taxable income, helping you pay less in taxes.
• 😀 The IRS allows businesses to deduct ordinary and necessary expenses related to operating a business, but there are specific rules and exceptions.
• 😀 Some of the simplest tax write-offs include startup costs, office supplies, and home office expenses.
• 😀 Business owners can deduct costs related to their cell phone, travel, meals, and mileage as long as they are used for business purposes.
• 😀 Labor costs, including wages for employees and payments to contractors, can be deducted from your business income.
• 😀 Health savings accounts (HSAs) and retirement contributions to qualified accounts like IRAs and 401(k)s can provide significant tax savings.
• 😀 Advanced tax write-offs include strategies like incorporating into an S-corporation to reduce self-employment taxes and taking advantage of the pass-through deduction for certain business entities.
• 😀 To fully benefit from these tax deductions, it’s crucial to have a well-organized accounting system that tracks your expenses and prepares you for tax filing.

Q & A

What is a business tax write-off?

A business tax write-off, also known as a tax deduction, refers to eligible expenses that a business can subtract from its income to reduce its taxable income. This helps lower the overall tax liability.

What expenses are considered tax write-offs for businesses?

Expenses that are ordinary and necessary for running a business are eligible for tax write-offs. These can include office expenses, technology costs, employee wages, travel, meals, and more, as long as they are directly related to the business operations.

How do startup and organizational costs qualify for tax write-offs?

New businesses can deduct up to $5,000 in startup expenses and another $5,000 in organizational costs. Startup costs include expenses related to creating the business, while organizational costs cover legal fees for setting up entities like corporations or partnerships.

What is the home office deduction, and how is it calculated?

If part of your home is used for business purposes, you can deduct a portion of your home expenses, such as mortgage interest, utilities, and repairs. The deduction is based on the percentage of your home used for business; for example, if 25% of your home is used for business, you can deduct 25% of the related expenses.

Can I deduct expenses for my cell phone if I use it for business?

Yes, you can deduct the portion of your cell phone expenses used for business purposes. You'll need to calculate the percentage of your phone usage that is business-related and deduct that portion of the phone costs, including the service charges.

What expenses can be written off if I sell physical products?

Businesses that sell physical products can deduct the cost of goods sold (COGS), which includes the cost of raw materials, direct labor, storage, and factory overhead. For example, if you sell coffee mugs, the cost of each mug and related manufacturing expenses are deductible.

How do I deduct labor costs for employees and contractors?

You can deduct wages paid to employees, including benefits and bonuses, as well as payments made to contractors. To claim these deductions, you need to have proper documentation, such as W-2 forms for employees and 1099 forms for contractors.

What business-related mileage can I deduct?

You can deduct mileage driven for business purposes, such as traveling to client meetings or business conferences. Personal use mileage cannot be deducted, so it's important to track the business miles separately to ensure you only claim deductions for work-related travel.

Are business meals deductible?

Yes, business meals can be written off at 50% of the cost, but they must be directly related to business activities, such as meals with clients or employees. Personal meals or meals without a clear business purpose are not deductible.

Can I deduct interest expenses on business debt?

Yes, the interest portion of any business debt can be written off as a business expense. However, the entire debt payment cannot be deducted, only the portion that is interest, not the principal repayment.

What are some advanced tax write-offs for businesses?

Advanced tax write-offs include retirement contributions to accounts like IRAs or 401(k)s, contributions to health savings accounts (HSAs), deductions for self-employment taxes through an S-corporation structure, and the pass-through tax deduction which allows business owners to deduct up to 20% of their business income.

What is the pass-through tax deduction and who qualifies for it?

The pass-through tax deduction allows business owners to write off up to 20% of their business income. It applies to certain types of businesses, such as sole proprietorships, partnerships, and S-corporations. There are income limits and eligibility criteria, so not all business owners will qualify.