Top Small Business Tax Deductions: How to MAXIMIZE Savings

Posted on May 15, 2024

Maximizing Deductions…

This is one of my favorite topics to discuss with business owners. The fact is, business owners for far too long have been told that in order to lower their taxes they need to go out and buy things. “Go buy a truck” (that you don’t need), “go buy a new TV” (that you don’t need), and so on and so on.

After reading this today, my hope is that you look at maximizing deductions in a completely different lens and change from this conventional way of thinking. To do that we need to cover some concepts and then dig into what maximizing deductions actually means.

Want a complete guide? Check out The Ultimate Guide to Maximizing Business Deductions and Write-Offs!

What Are Pre Tax vs After Tax Dollars?

  • After Tax Dollars: Money you spend after it has been taxed.
    • As a W2 employee you have your gross wages and then all of these taxes are taken out and whatever is left over gets deposited to you as your take-home pay. Your take-home pay is “after tax” dollars.
    • Now, if that W2 employee is working from a home office and went out and bought a desk and chair, they used after tax dollars for that spending. They get no tax deduction for it.
  • Pre Tax Dollars: Spending done prior to the money being taxed.
    • As a business owner you have your sales or revenue and then all of your expenses that offset it and whatever is left over (your profit) is then taxed.
    • Take that same example as above but now you are a business owner. That home office you are using (utilities, internet, maintenance, lawn care, etc) is all partially deductible. That desk and chair you bought is a tax deduction.
    • Spending you do with-in the business is considered pre tax, you are spending dollars prior to them being taxed.

This is an incredible advantage that business owners have.

We want you to always be strategizing on how you can find after tax dollars that can be moved to pre tax dollars. How can you find a business purpose in everyday spending that allows you to move the expense into the business and getting a pre tax business deduction?

What Can I Deduct As A Business Expense?

Within the day-to-day life of your small business, you will incur ordinary and necessary expenses that you can deduct when filing your taxes.

What does “ordinary and necessary” mean?

  • Ordinary
    • Common and accepted in your industry
  • Necessary
    • Helpful and appropriate in operating your small business.

Basically an ordinary and necessary expense means that it is typical in your line of work and appropriate or helpful for your business. Helpful to find new clients, keep current clients, get talent, retain talent, maintain day-to-day operations, etc.

To meet this test the expense does not have to happen often or be a recurring expense (although it can be). It also does not have to be indispensable to be considered necessary.

What Are Examples of Business Expenses?

First, check out our The Ultimate Guide to Maximizing Business Deductions and Write-Offs which is a great resource for you to begin getting ideas from. If you have not downloaded it yet, do it now!

In there we did an entire series on various different expenses which can also be found on our Podcast, YouTube Channel, and Blog. With that being said, here are some general ideas of expense categories: 

  • Advertising
  • Automobile Expenses
  • Business Assets (sometimes depreciation involved) 
  • Dues and Subscriptions
  • Commissions or Fees
  • Contract Labor
  • Cost of Goods Sold
  • Employee Benefits
  • Gifts
  • Insurance
  • Interest
  • Legal and Professional Services
  • Meals (Entertainment = No longer deductible in most cases)
  • Office Expenses
  • Payroll Taxes 
  • Rent or Lease
  • Repairs and Maintenance
  • Supplies 
  • Taxes and Licenses
  • Travel
  • Utilities
  • Wages and Salaries

This is just scratching the surface and some general ideas to get you to start thinking of different ways to maximize deductions.

How Can I Maximize Business Deductions and Write-Offs?

Now that we laid some groundwork, lets get back to the core question and give some take-away tips that you can be utilizing to maximize your deductions WITHOUT simply buying things you do not need.

  • Many of the Core Tax Strategies we talk about in TaxElm and our Podcast start with this concept as a base. How can you move spending you are already doing from after tax spending to pre tax spending by finding a business purpose!
    • Ex: Auto, Cell Phone, Electronics, Health, Hiring Kids, Home Office, Internet, Meals, Medical, Travel, etc. 
  • Go Through Your Personal Credit Card Statement
    • Take some time to go through your personal credit card statement and see if you can find a business purpose to spending you have already done and utilize an accountable plan to reimburse yourself for that business related item.
  • Every time you swipe your card ask yourself, “Is there a business purpose for this?” and if so, run it through the business and get a pre tax deduction for it.

What Do I Need to Document When Maximizing Deductions?

To close up we want to talk about a few things you want to ensure you’re doing to bullet proof these deductions from an IRS audit.

  1. This is General Advice
    • Not every tax deduction may be allowed for your specific business. Be sure to talk with your tax professional before acting to ensure it’d valid in your line of business. What is a valid deduction for one business owner, may not be the same for another.
  2. Have a Separate Bank Account (and Credit Card) for Your Business
    • If the IRS challenges you, they will ask for bank records and if they see business and personal items commingled into one account they will scrutinize expenses at a higher level.
  3. Keep Great Records and Receipts
    • Write directly on every receipt: the business purpose and background behind the transaction. The more info you can document the better.
    • Do this right away. If you need this down the road you have it on file and will not have to try and remember the business purpose 3 years later.
    • Take a picture and store them in a digital file (Google Drive, Dropbox, HubDoc, etc.) should you need them down the road. No need to hold on to the physical paper copy.
  4. Do Not Get Greedy
    • Always do the “sniff test”. If I was in front of an auditor would the documentation and business explanation I have be something they agree with?
    • Make sure your expenses are proportionate to your income and make sense in relation to the industry you are in. If you have $5,000 in income and $50,000 in travel expenses it may be hard to defend it being ordinary and necessary.
    • Bottom line, do not get greedy but also do not be afraid to take advantage of the tax laws that are available to you.

Remember, once the calendar rolls over to the New Year, the majority of tax planning opportunities get tossed out the window. You have time now, take a couple hours to strategize and implement so you can ensure when you file your tax return you are paying the least amount in taxes as legally possible!

  • The Time Is NOW To Start Paying Less In Taxes. Join TaxElm and start eliminating taxes and growing your wealth!

    What you’ll get:

    • Tax Savings Blueprint and Training: We’ll provide you with a customized tax plan that is tailored to meet your specific needs and goals. Along with that, you have access to our library of training modules, implementation guides, supporting documents, and more.
    • Unlimited Access to Tax Experts: Got a specific question about a tax strategy? You’ll have access to our team of tax experts to get the accounting and tax answers you need.
    • Annual 1-on-1 Live Consultation: Once a year you get a live meeting with a tax expert to discuss anything tax savings you would like. This is your time to get your questions answered live 1-on-1.
    • Annual Bookkeeping Analysis: Annually you will submit your financials to our team of accountants and we will put together a high level business financials overview report custom to your business.
    • Monthly Group Webinar and Training: Every month, we host a live, virtual training session on a key tax topic. Join us live and bring your questions or view the recording on your own schedule.
    • Partner Directory and Discounts: You get exclusive, members-only rates and access to our expert referral network for accounting, bookkeeping, tax preparation, payroll, financial planning, legal, retirement planning, tax resolution, and more!

    It is like having a tax strategist walking with you along this entrepreneurial journey!

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