Financial Focus: The Path to a Bigger Tax Refund for 2021 – Business & Self-Employment (Part 4 of 7)
By Professor Anthony Rivieccio MBA PFA
If you have been keeping track of our income tax deduction series, you should have learned much already on our first two subjects: children and itemized deductions. Please go to our prior issues to look up these subject matter specifically, this issue will be specifically geared toward the world of small business and self employment.
Whether you own a storefront or provide goods or services in your home for other income, entrepreneurship, over the last 30 years, has helped to spur economic growth. And in the last two years, the federal government has lowered business tax rates, significantly even more, to assist in this business. Almost two times lower than traditional lower rates for individuals and families.
So, as I share with my clients: income is easy to understand and record right? Wrong!
Business (non wage) income and expenses are recorded on a Schedule C form.
Now, according to the IRS , Part 1 of the form, “Business Income”, is pretty easy to calculate. If you had any cost of goods sold or inventory, the form will have you subtract this from your gross income to become now, before expenses.”
Now comes the entrepreneurs’ dream part! Part 2: expenses.
Treating the expenses like tax credits–a dollar for dollar deduction–because now you take your direct expenses, subtract them from your business Adjusted Gross Income to bring you to “Net Income” of which you are finally taxed.
So yes, we can’t stress enough that you keep track of both your income contracts and expenses receipts. Now, just put them in it’s appropriate business categories:
Part 2 on the form: Expenses
Examples of deductible advertising expenses include:
*Purchased email lists
*Manufacturing expenses of promotional items; such as pens, & calendars
*Printing costs for business cards
*Advertising or website costs
Vehicles & Machinery Cars and Trucks
You can deduct either the actual expenses of operating your car ; such as ; gas, oil, repairs, license, registration, insurance, tires or the standard mileage rate, which for tax year 2019 is 58 cents per mile. You can also deduct parking fees and tolls.
Rental or Lease of Vehicles, Machinery, and Equipment.
If you leased, for example, for 30 days or more for business purposes.
Wages, Commissions, & Fees
You can deduct all the money you paid to employees as wages. However, you can’t deduct money you paid to yourself or any money deducted elsewhere in your return. Make sure that anyone whose wages are included on this line receives a W-2 .
Legal, Accounting, or Professional Services.
Companies who provided a service , as well as companies that produce a physical product . If you have an accountant, the fees they charged for tax preparation can be split, and those for preparing your Schedule C can be deducted here. The cost for preparing the rest of your personal return isn’t deductible.
Commissions and Fees.
A category for any money you paid to other businesses or individuals for services. An example might be commissions you paid to salespeople.
Depreciation and Section 179 Expense Deduction
Depreciation, refers to deducting the cost of a large purchase in portions over its useful life, instead of in one lump sum in a single year.
The Section 179 Expense Deduction allows you to deduct the full value of most tangible items in a single year instead of spreading it out.
Employee Benefit Programs
You can deduct your own medical, dental, or long-term care insurance premiums . This can also include premiums for your spouse and children.
You can also deduct premiums you paid for employees . This includes things like health insurance, group term life insurance, accident insurance, or childcare assistance programs.
Contributions you made on your employees’ behalf to pension or retirement plans can be deducted . These can include SEP, SARSEP, SIMPLE, or 401k plans. There is a business credit available for establishing a retirement plan for employees.
Insurance (Other Than Health)
You can deduct the cost of any insurance you carry strictly to protect the business (such as general liability business insurance, or errors and omissions insurance).
Do you have property for business use that is secured by a mortgage? If so, the interest noted on Form 1098 that you received is deductible . If you used money from a loan secured by a home mortgage for business use, you can deduct a portion of that interest here also.
The costs of maintaining the property where your business is located can add up throughout the year. Luckily, you can deduct these costs:
Rent or Lease of Other Business Property
You can deduct any amount you paid in renting or leasing office space, warehouse space, or other real estate, rental of vehicles, machinery, or equipment.
Repairs and Maintenance
It covers any costs in repairing or maintaining your machinery, property, or buildings that don’t actually add to its value. Repair would include expenses like paying a plumber to fix the bathroom .
Covers any payments your business makes, such as, electricity or gas. Phone service is also considered a utility.
Such as postage, paper, envelopes, and pens can be claimed. Other miscellaneous examples of these might be toilet paper, cleaning supplies, coffee for employees and customers, small hand tools, or first aid kits.
Taxes and Licenses
Put down the sales taxes you have paid as the seller of goods or services.
Deductions that fall here include licenses or regulatory fees (liquor licenses may need to be amortized due to cost and duration).
Federal Unemployment Tax
Social Security and Medicare taxes paid for your employees
Real estate and personal property taxes on your business assets
You cannot deduct federal income taxes here, although you can deduct half your self-employment tax.
Travel, Meals, and Entertainment
Business Travel. If you go on a business trip, your hotel, plane ticket, taxi fares, parking, and tips for the bellboy are all deductible. You must keep your receipts for all these items, as this is one area that the IRS frequently audits. Expenses that are “extravagant or lavish” will be disallowed.
Since, presumably, you would need to eat , you may deduct only 50% of the cost of meals consumed for business purposes . This includes meals with your clients. “Lavish or extravagant” meals are not allowed. You should keep a record of the date, place, attendees, business purpose, and cost.
So if your gross Income, say $50,000 but you had $30,000 of expenses , then you get taxed on only $20,000, at your regular taxable rate. If it is at say (federal and state ) 20 percent, then yes you must pay $4,000 in taxes. How much did you save in taxes ( $30,000 x 20 percent)? $6,000.
If you would have $50,000 on wage income, based on the same tax bracket ( would be higher) you would pay $10,000 in taxes (before deductions)
Entrepreneurship brings many benefits and many hard aches. Our country understands, whether it’s big or small or a home-based business-selling, servicing and expenses will happen, and in most cases, taxes are lowered, to make it easier to grow our Industrial revolution which had never really stopped.
Next week: Rent out an apartment? A home? The world of rental income/expenses.
Professor Anthony Rivieccio, MBA PFA, is the founder and CEO of The Financial Advisors Group, celebrating its 25th year as a fee-only financial planning firm specializing in solving one’s financial problems. Mr. Rivieccio, a recognized financial expert since 1986, has been featured by many national and local media including: Kiplinger’s Personal Finance, The New York Post, News 12 The Bronx, Bloomberg News Radio, BronxNet Television, the Norwood News, The West Side Manhattan Gazette, Labor Press Magazine, Financial Planning Magazine, WINS 1010 Radio, The Co-Op City News, The Bronx News, thisisthebronX.info and The Bronx Chronicle. Mr. Rivieccio also pens a financial article called “Money Talk”. Anthony is also currently an Adjunct Professor of Business, Finance & Accounting for both, City University of New York & Monroe College, a Private University. For financial assistance, Anthony can be reached at (347) 575-5045. Have Facebook? Our professional page is: www.facebook.com/iwantmytaxmoney