Small businesses work on thin, sometimes absurdly thin, profit margins. On average, small businesses see around a 7 percent profit margin. Of course, that number can drop precipitously if you suffer from high overhead.
Not surprisingly, small business owners want every financial advantage they can lay their hands on. This becomes even more true when tax season rolls around and you want a way to reduce your taxes.
Enter the small business tax write off. Familiar with the term but hazier on what it actually means in practice? Keep reading for a quick breakdown of what tax write-offs are and what that means for your tax return.
What Is a Small Business Tax Write Off?
In broad terms, write-offs are IRS-approved tax deductions that you can take on your tax return. These write-offs lower the amount of income that the IRS deems taxable.
So, let’s say that your home-based side hustle brings in $15,000 in income. Let’s say that you find $2700 in business write-offs. Assuming the IRS approves of your write-offs, you’ll only owe taxes on $12,300.
That can mean the difference between owing the IRS money and getting something back if you make your quarterly estimated payments.
Types of Tax Deductions
The trick for most business owners is figuring out what qualified as a write-off for their business. Two terms the IRS throws around are necessary and ordinary. That’s their way of saying that the expense you want to deduct must prove something that is common for most of the businesses in your industry.
For tax purposes, these expenses generally go into general categories, such as:
- Home office expenses
- Business meals
- Advertising
- Business travel
- Rent
You should spend some time learning what deductions apply in your industry and what don’t. The rules also vary based on location. You can head over here to see some examples of what you can write off in Australia now.
How to Prepare a Tax Return
The exact preparation of your tax return will depend on what kind of business you run. Most sole proprietorships and LLCs function as pass-through entities, which means your business info goes on your regular tax form. You put your business info and write-offs onto a Schedule C.
S corp returns also go on your individual return, but use an attached 1120s form. If you’re running anything more complicated than a one or two-person LLC, though, you probably want or need an accountant to prepare your taxes.
Write-Offs and Your Business
The small business tax write off can save you a lot of money when you file your taxes. The IRS even helps you out by giving your broad categories of write-offs they accept.
If you do plan on using write-offs, though, make sure you keep good business records. For example, keep records of your rent payments or business travel expenses. That way, you can prove your deductions if they audit you.
Looking for more tips on keeping your business finances in order? Check out the Finance posts in our Business section.