Published September 15, 2023 – A tax deduction is a good thing for the taxpayer as it reduces the taxable amount on their income. This provision has been included in the tax code to cushion investors against unforeseen losses, and the risk of doing business. You can either choose a standard deduction which is a fixed amount or itemize deductions on Schedule A of Form 1040 or 1040-SR. If your total itemized expenses exceed the standard deduction, then you will save more by itemizing your deductions.
Some examples of such deductions include student loan interest, mortgage interest, state and local taxes, self-employment expenses, gambling losses and investment losses.
Tax Deduction for Self Employed and Small Businesses
Since the pandemic hit the job world by storm, many people opted to be self-employed as freelancers and on a gig basis. A recent research study has stated that there are more than 20 million Americans currently in this niche. One of the most imperative deductions for entrepreneurs includes those for half your medical care, social security taxes, premiums from insurance deductions and the home office deduction.
Another important deduction for sole proprietors and small business owners is that which defers their taxes on their contribution to retirement plans. Such tax-deferred retirement plans include solo 401(K), SIMPLE IRA, and the SEP-IRA.
Businesses qualify for a wide range of deductions with one of the most prevalent being corporate state tax and local tax deduction which permits businesses to deduct the taxes already paid to the state government. The other two most common deductions include:
- Net Operating Loss- Businesses that are facing losses are allowed to deduct them from previous or future profits hence reducing their taxable income.
- Capital losses- In case your business incurs an overall net capital loss for the year, one is allowed to deduct up to $3000 of that loss from other incomes such as income from interest and salary.
The process of understanding how you can take full advantage of the tax deductions that you qualify for might be complex. It is therefore advisable to use the assistance of tax experts. We at JTC CPAs are licensed accountants who help small businesses wade through tax regulations while aiding them in maximizing their profits year after year. We have made sure that our clients have all their accounting and tax questions answered.
Standard Deductions vs. Itemized Deductions
One of the dilemmas people face is knowing whether they should itemize their deductions or just use the standard deduction criteria. Using the standard deduction amount depends on a variety of factors including; age, income, blind or not and filing status. There are however taxpayers that can’t use the standard deduction:
- If the person filing is married but the spouse itemizes their deductions.
- If a person file returns for a period of less than 12 months due to the change in their accounting period.
- If the person was a non-resident alien or had dual citizenship during that year. One is however allowed to use standard deduction if they are married to a U.S. citizen or a resident alien but choose to be treated as a U.S. citizen for tax purposes.
Itemizing your deductions can aid you in reducing your tax payable. You should therefore go for the itemizing option if your allowable itemized deductions are more than your standard deduction.
You can greatly benefit from itemizing your deductions if:
- If during that year you have large unreimbursed medical and dental expenses.
- Paid interest on your mortgage or real property taxes for your house.
- If have a large unreimbursed casualty or loss from theft from declared disaster by the federal government.
- Gave out a large amount to qualified charities
Some of the tax deductions every business owner should know
New entrepreneurs and some of the existing ones do not know the number of tax deductions they can get from operating their businesses here are some:
- Home office – People who work from home and specifically have an area that they use as their office are allowed deductions from furnishing and maintaining their home office.
- Expenses incurred when starting up- The amount you use in advertising, training, marketing and all other activities to start are liable for a tax deduction.
- Insurance for your business- If running your business requires any form of insurance even if is to compensate your workers, then you are liable for a tax deduction in your taxable income.
- Donation to charities- If your business is involved in a qualified charitable event then you can claim a tax deduction.
- Bad debts- Did you know that you can claim a tax deduction due to bad debts? As long as you can prove that the amount in question was directly from the company and you also do not see it returning.
Limits to a tax deduction
Even though there is no maximum tax refund that one can get, the tax deductions have some limits. One is that it limits mortgage interest up to $750,000 or 1 million dollars for people who bought a house earlier than Dec. 16, 2017. The other one is that if you are itemizing your health costs the amount you pay for yourself, spouse and children must be over a certain percentage of your adjusted gross income.
Note that even though people think that itemizing is the best option sometimes using the standard option may result in a taxpayer saving more on taxes owed.
Understanding the tax deductions that you can access to save on your tax owed can help you greatly in saving your finances. Whether you prefer to use the standard deduction or itemize your expenses always look for the option that saves you more money. Take advantage of tax experts as they understand the tax terrain better and will help your business in getting the maximum deductible amounts.