Top 3 Tax Questions Every Small Business Owner Needs to Know!

Hey there, small business owner! Do you dread tax season as much as I do? Even as a CPA, I've faced tax situations that made my head hurt. 

Today I'm revealing the Top 3 Tax Questions every small business owner absolutely needs to know. 

Just for reading my blog post, I have a special gift for you. It’s my latest Tax Deductions Cheatsheet. It's free!

Question 1: What Can I Write Off as a Small Business Owner?

This is really common question. Basically, if it’s something that you need to run your business, it’s probably a tax deductible write off. The IRS has a thing, where the business expense needs to be both ‘ordinary’ and ‘necessary’, for your business, for it to be tax deductible. 

This can include a wide range of costs including, but not limited to, the following:

• Office Supplies: Anything needed to keep your office running smoothly—paper, printers, pens, and even those sticky notes.
• Rent: Renting office space, equipment, storage areas, or even vehicles.
  
• Insurance: Such as liability insurance, special policies, like professional liability, cyber insurance. 
• Software: Accounting programs, video editing tools, or project management apps, Microsoft Office, etc. 
• Utilities: electricity, water, gas for heating, and even the internet. 
• Payroll: Salaries for employees, and any benefits like health insurance or retirement contributions. 
• Travel Expenses: If you need to travel for your business, meeting clients, attending conferences, or even visiting a job site.
• Professional Fees: Costs for expert advice from lawyers, accountants, or other specialists. 
• Equipment Purchases: Equipment or machinery for your business. 

This list can go on and on. Basically if you need it for your business, and it’s a typical expense for your type of business, then it’s probably deductible. It’s always best to consult with a tax professional if you’re not sure.

Now, if it’s an expense that’s not used 100% for business, then you need to back out the personal use part of it. Since that wouldn’t be deductible.

Question 2: How Do I Calculate Business Expenses When Using My Personal Car?

Using Your Car for Business: When you drive your own car for work related tasks, like visiting clients. Well, you've got options for deducting those costs. 

There are two IRS allowed methods: The actual expense method, and the standard mileage rate method.

Actual Expense Method: This requires keeping track of everything you spend on your car, from gas, oil changes, repairs, as well as calculating depreciation. For most people I don’t recommend this since it can get complicated. 

Standard Mileage Rate Method: With this method, you basically keep track of your business miles driven. In 2023, you can deduct 65.5 cents for every business mile you drive. I personally like this method since its simpler and often times more advantageous.

It’s also important to note that commuting miles can not be deducted.

Here's a pro tip: No matter which method you choose, it's important to keep a detailed mileage log or use a mileage tracking app. This is critical, especially if you ever get audited. The IRS is pretty strict about wanting to see mileage logs to evidence business mileage deductions. If you don’t have it. They can deny your mileage deduction entirely.

Question 3: Do I qualify for the home office deduction?

To qualify for the home office deduction, there are two primary things you need to meet:

Exclusive Use Test: The space you designate as your home office must be used exclusively for conducting your business. That means the space can't be used for any other personal activities. For example, an office that's also used as a guest bedroom, usually wouldn't qualify.

Regular and Principal Place of Business: The home office should be the primary place where you conduct business or a place where you meet your customers. In other words, it should be used regularly for business tasks.

So, if it’s a space that’s used both exclusively and regularly for your business, the next thing to think about is the percentage of your home, used as your home office. 

You need to calculate the square footage of the home office space relative to the total square footage of your home, which gives you the home office percentage.

Now there are two methods, the IRS allows: the regular expenses method and the simplified method. The simplified method is much easier to calculate. The regular method can get a bit more complicated.

Do know that both owners and renters can qualify for a home office deduction.

Thanks for reading and see you in the next blog post!