Small Business Deductions
Lesson 5 from: The Small Business Simple Guide to FinancesAmy Northard
Small Business Deductions
Lesson 5 from: The Small Business Simple Guide to FinancesAmy Northard
Lesson Info
5. Small Business Deductions
Lessons
Know Your Worth
1The Foundation of Your Business
09:38 2Creating a Usable Bookkeeping System
05:52 3Taxes
06:45 4Get Paid
05:48 5Small Business Deductions
06:30 6Retirement Contributions
06:12 7Income Statements
05:26Balance Sheet
05:39The Foundation of Your Business
Lesson Info
Small Business Deductions
1 (upbeat music) 2 Welcome to lesson five. 3 Today we're going to discuss tax deductions 4 and how you can make the most of your expenses. 5 Our goals for this lesson are 6 understand how tax deductions 7 help keep money in your pocket, 8 be aware of the deductions commonly used 9 by the small business owners, 10 and understand how to calculate 11 some of the trickier deductions. 12 First of all, it's good to understand 13 how tax deductions work. 14 Tax deductions reduce your taxable income. 15 Remember though that the value of your deductions 16 isn't actually how much you save. 17 For instance, $5,000 in deductions 18 saves someone in the 22% tax bracket $1,100 19 in taxes owed, 20 but you can see from those numbers 21 that lowering your taxable income saves you big bucks 22 when it comes to tax time, 23 so it's important to keep track of your expenses 24 and categorize them carefully throughout the year. 25 Don't forget to keep your physical 26 or digital receipts like we've disc...
ussed. 27 Next, I want to quickly show you a list of deductions 28 commonly used by small business owners. 29 In our lesson five guide, 30 you'll find this list along with some notes 31 to help you remember the costs 32 that may go into these deductions. 33 Also, in the guide, you'll find a business tax checklist 34 to help keep you on track. 35 For the remainder of today's lesson, 36 I'm going to cover some of the more complicated deductions 37 that require a little more explanation than the others. 38 The first deduction I want to talk about 39 is the cell phone expense. 40 Whether you're emailing, posting on social media, 41 or making calls, 42 you're likely using your personal cell phone for business. 43 Luckily, for you, a portion of your cell phone expenses 44 can be included as a business expense. 45 You'll need to pull out your monthly phone bills 46 to calculate this deduction. 47 If they list each call made, 48 you can figure out your business use by adding up 49 all of the minutes used for business purposes 50 and dividing the business minutes by the total minutes 51 to get your business use percentage. 52 If you can't find that information, you can estimate, 53 but I recommend keeping it on the conservative side. 54 The next deduction that can be tricky is business meals. 55 This includes your food and drinks during business meetings 56 and while traveling for business. 57 You'll want to record the expenses at the full cost 58 when you do your bookkeeping, but just keep in mind 59 that when you do your taxes, the deduction will only show up 60 as 50% of the expense. 61 Now, if you purchase food or drinks for a conference 62 or a workshop you're hosting, 63 that's considered more of a supply for the event 64 and it's deducted at 100% at tax time. 65 If you don't wanna worry about keeping receipts 66 while traveling for business, 67 you can use the per diem rate set by the government. 68 And if you really wanna maximize your expenses, 69 you can figure out how much you actually spent 70 and then figure out what the per diem rate is 71 in the place you traveled, 72 and use the higher of those two numbers. 73 The next deduction I wanna cover is clothing. 74 This one really seems to fire people up 75 because most clothing purchases, 76 even if they can only be used for business purposes, 77 won't qualify as a business expense. 78 This means that even if you buy extra comfy shoes 79 and an all black outfit that you only wear while on site 80 to photograph a wedding, those items can't be deducted 81 as a business expense. 82 The reason is that you could wear those items 83 for other events or even daily use. 84 Now, if you have to buy a special logoed polo 85 because it's required by a client to work at their event, 86 or you have a uniform like the mail person or firefighters, 87 those items will account as deductions. 88 The next deduction is pretty self-explanatory, 89 but it's one I get a lot of questions about. 90 It's digital downloads. 91 You won't see this as a category on any tax form. 92 You'll have to add this under the other expenses category. 93 I think that freaks some people out, 94 but just know that you can make up whatever category 95 you need to fit your business. 96 If you purchase a lot of fonts, stock photos, 97 digital images, or album layouts, 98 you may wanna think about adding 99 the digital download expense category 100 to your bookkeeping program. 101 Software subscriptions is another category 102 that essentially has been made up, 103 and it will go into your other expenses bucket 104 on your tax return. 105 Here you can include software you pay 106 on a monthly or annual basis. 107 The last two deductions I'm going to go over 108 are the home office deduction 109 and the auto expense deduction. 110 For both of these, you have two methods to choose from, 111 and you should use whichever one 112 will give you the higher deduction. 113 You can also find a worksheet for both of these deductions 114 in our lesson five guide. 115 We'll start with the home office deduction. 116 The first method for calculating your home office deduction 117 is the easiest. 118 You'll just count up your home office square footage 119 and multiply it by $5. 120 You can use up to a max of 300 square feet here. 121 The second method is the one 122 that's a little more complicated. 123 With this one, you'll start 124 by dividing the home office square footage 125 by the entire home's square footage. 126 Then you'll multiply that number 127 by all of your home expenses, 128 things like mortgage interest, rent, 129 utilities, internet, and even a housekeeper's fee. 130 Now, let's look at the business auto deduction. 131 The first method for this is the actual expense method. 132 With this method, you get to deduct the business portion 133 of your actual auto expenses. 134 This includes things like gas, oil changes and repairs. 135 The second method is the mileage method. 136 With this method, you'll just multiply your business miles 137 by that year's mileage rate. 138 For 2022, 139 it's 58.5 cents per mile. 140 Now it's checklist time. 141 Use the checklist and the worksheets at the end 142 of our lesson five guide to remind yourself 143 of possible deductions 144 and how to calculate them so you can make the most 145 of your expenses. 146 In our next lesson, 147 we'll talk all about retirement contributions 148 and make sure you're planning for your future. 149 I'll see you in lesson six.
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