It’s sad but true in that far too many new businesses fall behind in their quest for fast growth because they pay too much in taxes. Overpaying tax is a common but relatively ignored problem in the modern world of commerce. Maybe entrepreneurs overlook the potential savings because taxation, as a topic, is viewed as boring and too complex. Perhaps that’s why owners tend to focus on fostering growth through other means, like pouring money into advertising, hiring efficiency consultants, etc.
Ironically, one of the most powerful tactics for fostering growth is to minimize the financial bite and end up with more cash left over for marketing campaigns and other growth-friendly approaches. This problem is particularly common for home-based businesses where founders squander their precious capital on avoidable taxes. What’s the best practice? In this case, it’s smartest to take as many deductions and credits as possible and only pay the government what you owe them. Whether entrepreneurs are willing to admit it or not, tax minimization is the most potent tool for enhancing the growth and long-term expansion of any enterprise.
Corporations that currently lead their respective industry sectors learned early in their careers how to keep their state and federal tax bills as low as legally possible. But, for today’s home-based owners, there’s even better news. There are plenty of impactful deductions and credits available. The trick is working with a competent accountant and making sure to consider every possibility. What are some of the prime areas people should be looking at? The ones with the highest financial potential include:
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- Claiming the home office deduction
- Investing in real estate
- Marketing expenses
- Money spent on supplies
- Travel costs
- Payroll expenditures
- Rental payments
- Interest paid on company-related debt
- Vehicle purchases and maintenance costs
- CGS (cost of goods sold)
- Insurance premiums that are related directly to operations
Home Office
The laws for taking a home office deduction can be complex. That’s because the IRS offers taxpayers two ways to calculate the amount. The first is based on the actual expenses incurred, and the math can become mind boggling very quickly. The second and much wiser choice is based on square feet of exclusive use space. Unless you use more than half of your living space for work purposes and for nothing else, consider using the second method. The form only asks about the square footage of the space that’s exclusively used for work purposes and the total area of the home or apartment. It’s a quick and hassle-free way to score a decent write-off and pay less to Uncle Sam.
Invest in Real Estate
If minimizing taxes is a best practice for growth advocates, there’s no better arena for achieving that goal than real estate ownership. There are many tax benefits on rental properties that make investing in real estate a highly attractive proposition for those from all walks of life. Plus, growing your new real estate business is easier if you know how to take advantage of the potential tax breaks that come with all kinds of property ownership. One of the most popular techniques relates to the ownership of vacation rentals. Keep in mind that large numbers of homeowners slash their tax bills by putting their homes up on rental platforms like HomeAway, Airbnb, and others. Part of the benefit comes from the direct tax write-offs that renters can take in certain situations. The main goal is to reduce your total taxable income via legitimate expenses related to the rental property.
However, owners who opt for this tactic must make sure that their rentals meet the basic IRS guidelines first. Once jumping that important hurdle, you can explore the many potential deductions, and there are many of them on the IRS list. To get started, learn what the government’s qualification criteria are. Then, make a list of the tax deductions for which you would likely qualify. When investors follow the right steps, they can retain more of their income and use the money to purchase additional units. That’s just one way that paying less tax can supercharge your business growth.
Marketing
For millions of smaller companies, planning a winning marketing strategy is one of the highest operational costs. This is particularly true for sole proprietors and e-commerce firms. Likewise, service providers who operate out of a converted bedroom or attic in fields like massage therapy must advertise to get clients. It’s common, in fact, for a first-year therapist or esthetician to spend at least half of their available capital on ad campaigns, marketing programs, and sales efforts. In general, all such expenditures can directly reduce income on quarterly or annual statements. Don’t forget to keep meticulous records as backup documentation. IRS forms routinely ask if you have written proof of the listed expense. Even if you hire a paid preparer, remember to show them all the receipts and proof of payment forms. If the IRS challenges a self-reported expense for which you don’t have proof, you’ll lose the deduction in most cases.
Services
Some write-offs are obvious, and the services category is one of them. Did you spend money on things like locksmith fees, janitorial work, computer repair, room renovation, equipment installation, plumbing, etc.? If so, and if the services were 100% related to commercial operations, then there’s a high likelihood that you’ll be able to reduce your taxable income by the full amount of each of those bills.
Supplies
In modern commerce, amounts spent on supplies can add up fast. The old pencils, pens, and paper category now includes items like computers, routers, modems, ergonomic chairs, desks, carpeting, basic furniture, cyber security systems, special lighting, dedicated walkways, and parking spaces, and more. In an average year, supplies can take a significant bite out of your available capital. The bright side is that owners can subtract almost all those expenditures from gross income.
Travel
Travel-related deductions can be tricky. The main thing to keep in mind is that if the trip is necessary for your profit-making activities, you’re almost certainly on the safe side of the situation. Where people get into murky areas is when they try to combine pleasure and official travel. If you must attend a trade conference, keep detailed records of all related costs, like hotels, plane tickets, and fees for attendance. Always consult with an accountant to be double sure that company-related traveling costs are fully deductible.
Rent
Why do home-based owners take rental deductions? Typically, it’s for things like storing inventory, temporary office space during a busy season, or maintaining a separate, permanent office for a small support staff. In the digital era, many principals operate from their private homes but set up traditional workspaces in metropolitan or suburban commercial parks. If the rental costs are tied directly to the pursuit of profits and daily operations, they can serve to reduce taxation liabilities.
Payroll
Payroll might seem like the most obvious of all write-offs for an entrepreneur. However, the IRS will be happy to deny the claim if you don’t have written records of the work done, the names of those who did it, rates of pay, and social security numbers of workers you hired for tasks. Many sole practitioner accountants hire a few college students to help them process returns each April. If you issue 1099 forms to each temporary employee and don’t bring them on as full-time workers, you’ll almost certainly be able to deduct the full amount against earned income.
Vehicles
For many entrepreneurs, the vehicle expense category can be a challenge. That’s because, as a spare bedroom converted into a workspace, most use their personal vehicles to conduct at least some of their commercial activity. This is a case where it pays to keep very careful records of mileage, fuel, maintenance charges, etc. The IRS is okay with the joint use of a vehicle for business and everyday use. Note that many small companies keep at least one car or pickup truck as a work only vehicle. This makes it much simpler to calculate deductible amounts at filing time.
CGS (Cost of Goods Sold)
Some have trouble understanding the conceptual framework behind CGS (cost of goods sold). The basic premise is that any money spent on creating and bringing an item to market is an allowable expenditure for the purpose of taxes. An example, if Sally Jones sells hand-made quilts for $300 each on an e-commerce website, she might list CGS for each item as: “Fabric: $45, Thread: $5, Cotton filler: $10, Spray sealant: $3.”
In that hypothetical situation, Sally’s CGS for each quilt would be $63, an amount that comes directly off the sales price, and that’s not including the other possible write-offs she would have for her one-person craft business. In reality, there are other possible components of CGS, especially for manufacturers, but the concept is an important thing to remember. Paid labor, shipping fees for the supplies, and storage fees for the quilts are other potential line items that Sally could include in her total CGS figure.
