Here’s the thing; when you are a small business owner, like a really small business owner, you operate in this weird gray space. If you’re a single-owner LLC or a Sole Proprietor you aren’t really a “business” in the eyes of the IRS but you also aren’t really an “individual”. The technical term for us is a “pass through entity".
How vague!
So one of the problems you run into when looking into small-business tax advice is that most of it is not relevant to you. That’s a shame though. There are millions of us small businesses out there and most of us are just not that interested in hunting down and deciphering the cryptic tax codes.
Which is why so many of us turn to the professionals for help. If you decide to go with a tax professional to do your taxes, great. There is no one better. Some of us don’t have the money or the interest in tax professionals however; and prefer a DIY approach. This blog is for you.
You are my people!
What can I say, I am a sucker for doing things the hard way.
I am not a tax professional. I cannot in good conscience give you tax advice. (Nor would I want to if I’m being honest.) However; I am a small business owner, I have a degree in Business Finance and I’ve done my own taxes long enough to understand the basics. So while I cannot give you sound tax advice - this is your disclaimer - I can tell you what deductions and credits you can look into for the maximum tax savings this year.
Qualified Business Income Credit
This is one of those fun deductions that count only for us pass through entities. Yay, Inclusion. There are tax tables and caps here and only certain (although most common) types of income qualify. Most tax software will calculate that for you, but be sure to look for it. It can mean a 20% income deduction.
Phone and Internet
If you use your phone and internet for business - who doesn’t - you have the option to deduct some of those expenses. You cannot deduct your entire phone or internet bill unless it is a dedicated line or connection. (How boujee) However; you can deduct a portion. To do this you simply calculate the amount of use that is utilized for your business and do some quick math to calculate the deduction.
For example if your internet bill is $50 and you work a standard 8 hour work day from home. We can assume you use your internet for personal use for 8 hours every evening, and your sleep the remaining 8 hours. This would mean you can deduct 50% of that bill or $25 a month.
Phone usage is a little less clear cut to calculate because you don’t use your phone for 8 hours straight. You will have to use your best judgement here. I probably use my phone for personal use maybe 20% of the time. However, for simple math I use the same calculation and deduct 50% of my phone bill. On any given day, even the weekends, I am using my phone for business at least 50% of the time. #smallbizownerlife, am I right?
Home Office
If you do not have a dedicated home office, skip this part.
At my old apartment I worked in an oversized coat closet. That qualified for the home office deduction. I was able to deduct that space. At my new apartment my office is blended into part of the living room. I can no longer claim this deduction.
In order to claim a space as a home office it has to be used ONLY for business, and you have to do most of your business from that space. Hince, my closet. I used the closet space for nothing other than my work, and I worked in that danky closet every single day.
Now even though I have an “office space” and I work here every single day. It does not qualify because I use this space for other personal activities.
Thanks open concept living!
The easiest way to claim this deduction is to use the simple deduction which calculates your deduction based on the square footage of that space. All tax software will do this for you automatically, when you put in the square footage.
Contractor/Employee Expenses
This may seem like a no-brainer but you would be surprised how many people miss this one. If you are reporting your sales/revenue for your business the IRS assumes that 100% of those profits go to you. Hince the pass through entity we mentioned earlier. Your money and the business’ money is seen as one in the same.
If you are paying contractors or employees, even those you are not required to send a 1099 to, you need to be deducting that money. It is an expense.
Let’s look at an example: Let’s say I do a logo design for a client and that client pays me $2,000. The $2,000 is assumed to be my profit. However; I may have paid my graphic designer - good guy he is - $1,000 for his portion of that project. If I do not claim that as an expense then I am being taxed on an additional $1,000 that I, personally, did not receive.
Multiply that be 100+ projects a year and I am just donating money to the IRS.
Which isn’t my thing, so I try to avoid it.
Fees
This is a big one. If you work on Upwork I am looking at you! But there are fees for invoicing via Paypal, Square, Quickbooks, you name it. There are fees on everything! You need to be deducting these fees for the same reason you would deduct any other expense. It is reducing your profits.
When I calculate my sales for any given month, I do so based on the total sales. So if I’m using Upwork that is the amount of work I did and the value of that work according to my contract. Of course, I do not see all of that money because Upwork will only give me my portion of the income AFTER taking their sweet cut. So I include a line item on every week’s and/or month’s sales/revenue reports to account for the fees. The same is true with Paypal.
If you only account for your profits and the actual income you receive then you may not have to consider this; but as a numbers girl I like to see my total sales for any given time period for tracking growth and such. So I calculate total sales and then deduct any fees associated with getting my money.
Advertising
Everything advertising related is typically deductible. Full Stop. Bought business cards? Deductible. Ran a Facebook Ads? Deductible. Bought promotional pens to hand out at a trade show? Deductible, and likely so is the travel and accommodations to and from said trade show.
Software
Here’s another money pit for small business owners. Software. Do you pay to host your website? Pay for a social media scheduler? Pay for corporate emails? Use Quickbooks and pay an arm and a leg for that nonsense? All deductible. Any software that is necessary for business and that you pay for is deductible.
Start-up Expenses
The IRS has a pretty generous limit of start up expenses. So if you recently launched a business, like we did, pay attention to this. You can deduct your LLC filings, your registrations, your logo design, your website creation, your domain, everything that you used to launch.
If you have an actual store front this deduction may be even more valuable. There are limits and restrictions, though so be sure to double check on this and everything else I’ve mentioned thus far. Not a tax professional, remember.
Taxes
If you paid quarterly taxes during the year, make sure you deduct these. If you are using any form of tax software this is more or less impossible to miss but it bears reminding.
Education, Training and Certifications
This one is a little trickier. The general rule of thumb is any formal training, education or certification costs that you incurred in order to be able to perform your job is deductible. The rules have changed since the tax-reform bill of 2018, though. So consult your tax professional or answer those handy questionnaires in the tax software to help you determine eligibility.
Pay Attention to your Personal Deductions
As a pass through entity your personal taxes, credits and deductions will make a difference in the amount of taxes you owe. (Thank goodness my spouse works a day job and I have produced an heir or we would owe hoards more than we do.) Be sure you are optimizing those deductions and credits as well.
Some common personal dedication to watch out for are:
Medical Expenses
Tuition Fees
Student Loan Interest
Mortgage Interest
Child Tax Credits
Earned Income Credits
Head of Household Credits
Retirement Contributions
College Savings or HSA Contributions
Charitable Contributions
Tax Preparation Fees
Taxes are unnecessarily complicated. It’s just a sad fact of American life. Don’t even get me started on how weird it is that the IRS decides that we need to pay taxes and then forces us to calculate the amount to pay. All while being all too comfortable fining or even jailing us if we get the numbers wrong. Who on Earth came up with this convoluted and unfair system anyway?
But I digress. The point is taxes are tough, but they can be a little easier if you know what to expect. Make a list of all the possible deductions you may qualify for and then go find your receipts. Also remember to take good notes. You will be doing this all over again next year, and the year after that. So if you notice you didn’t keep enough receipts last year make a system to correct that before your next filing.
As tough as taxes may be, small business owners are that much tougher.
You got this.
Of this I am certain!