Claiming all the available tax deductions for your small business is one of the simplest ways to reduce your tax bill. Before we dive into deductions it’s important to understand what a profit and loss statement is.
What is a Profit and loss statement?
- The profit and loss is how you determine the taxable income of a business. The profit and loss statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period. This statement lets you see whether or not your business is profitable and growing or if it's losing money and changes are needed. Bookkeeping is the process of categorizing transactions to generate a finalized profit and loss statement.
Why is Bookkeeping Essential?
When you want to calculate your profits and losses, bookkeeping is essential. At the end of the day, bookkeeping will provide accurate financial information on your business that you can use to make decisions and file your taxes.
- Tax Preparation
a) Bookkeeping makes filing a tax return easy for your business! Organized financial records will come in handy come tax time, and you won’t have to stress about last minute scrambling for receipts and invoices, because all your records will be updated and properly documented using bookkeeping.
2. Business Analysis
a) Analyzing your financial statements will give you a clearer picture of your profit and loss for the year. Bookkeeping assesses your business performances and allows you to make clear cut decisions for growth in identifying your strengths and weaknesses.
What’s a Tax Deduction?
- A tax deduction is an eligible expense that you can write off against your taxes by including it in the profit and loss statement. When it comes to tax deduction savings, you have to make sure you do bookkeeping to keep track of your expenses.
What Kind of Deductions Make Sense for Your Small Business?
- Home Office: If you use a home office for your business, it is important to know that you can deduct $5 per square foot of your home office up to 300 square feet. Under the current law you can only qualify for the home office deduction if you're self-employed.
- Utilities: Any utilities that you use for your business are fully deductible. This includes water, electricity, and even telephone bills for business devices.
- Business Entertainment: The IRS has temporarily issued, a 100% Deduction for Business Meal Expenses where the business may claim 100% of food or beverage expenses paid to restaurants, starting January 2,2021, through December 31, 2022. Do note that the business owner or an employee must be present at the meal, and the expense must be a necessary part in the growth of your business. There are certain types of meals like meals provided at an office party which can be deducted 100%. For all other entertainment and business meal expenses the 50% meal deduction would still apply. If you find yourself entertaining clients with meals and events not from restaurants your small business can deduct up to 50% of the cost. Be sure to save your receipt and record it in bookkeeping to make the most out of your business entertainment deduction.
- Standard Business Expenses: Equipment such as computers, printers, software and furniture purchased entirely for your office use is 100% deductible in the year of purchase. Website maintenance and updating changes can be tax deductible as long as they are considered advertising-type costs. Cost of goods sold includes all of the costs and expenses directly related to the production of goods.
Not sure what you can do for your deductions? We can help! Contact us at Bookmate
