Taxation Guide: What Business Expenses and Assets are Deductible?

Last Updated November 4, 2021

No one wants to give away their earnings in taxes. However, it’s the national and civic duty of every individual and business to file taxes. In fact, a good taxation system actually improves the index of ease of doing business. 

While tax filing is indispensable, there are legitimate ways through which people and businesses can reduce or put a cap on their taxable income.  Americans paying taxes every year is not surprising but what’s most astonishing is that many are unaware of the types of expenses and assets deductible from taxes. 

In this article, we will lay out detailed information about business assets, expenses, and the list of deductibles you might not want to skip at all. 

 

What are Business Assets? 

IRS usually calls them property as the valuable items owned by a business. Assets exist in many forms like cash, land, building, etc. 

Without an asset, a business cannot operate such as machinery, plant, and equipment. So with time these assets also depreciate hence making them deductible from taxes too. 

 

1. Tangible and Intangible Assets 

The two most common and popular categories of business assets are tangible and intangible. As the word describes, tangible assets can be seen or touched like a car, land, computer, etc that are used directly for the business. Intangible assets are goodwill, intellectual property like trademarks, patent rights, copyrights, etc.  

In taxation, it is necessary to mention which types of business assets are used for operations. 

 

2. Assets in Taxation

We just talked about asset depreciation above. IRS has divided assets (the property) into depreciable and non-depreciable categories as well. Yes, that’s right. Not all assets lose their value due to wear and tear. 

To expense, an asset happens when tax is deduced in the first accounting year after the purchase. Current assets and low-cost fixed assets can be expenses. For instance, you may have paid the cost of a computer in the first year instead of installments. 

Depreciation is the deduction from business taxes recovering an asset’s cost over a specific number of years its been used. Tangible assets are depreciable and some intangible property as well like copyrights. 

 

3. Amortization in Assets 

People often confuse depreciation with amortization. As noted above, the majority of intangible assets are amortized. Depreciation is an expense that lowers the asset’s value but an accelerated depreciation brings tax benefits. Amortization is similar to depreciation but it only qualifies for intangible assets over a 15 year period. 

 

4. Use the Asset 

To make asset deductible from taxation, you need to use it to claim the expenses. Once the asset is “placed in service” it nominates the asset is ready for use. It does not matter even if you are not using it at the given time. 

Keeping this information in mind, you can better understand how assets can be deducted from taxes. 

 

What are Business Expenses?

There is a wide range of expenses that can be deducted in income tax filing. Any item purchased or spent the cash on for business purposes is considered an expense. 

Some of the major expenses deductible in taxation are mentioned down below. 

 

1. Your Marketing Expenses

Yes, you can deduct your promotional expenses from taxation. For that, it is essential to particularly outline them in your account bookkeeping. The cost incurred due to paid advertisements whether on print media or online channels like Google Ads etc are also included in it. 

Any promotional ad given a “boost” will cost the business. Hence the item can be included as a deductible expense. 

 

2. Your Business Insurance

In many instances, businesses need to cover through liability insurance as per the requirement of the given industry. Since this coverage is part of the business requirement, you can classify it out of the taxation net.

The insurance is deductible on your tax return. For instance, home office space qualifies for a tax deduction. 

 

3. Business Vehicles

Vehicles that are being used at the business can also be deduced from the taxation. However, if you use a business vehicle for personal use as well, then this deduction might wear off. The mileage used for business purposes can be calculated on actual miles or a standard mileage

A comprehensive vehicle tax deduction also includes fuel and repair expenses. Work with an experienced tax preparation firm to make sure your business vehicles will remain non-taxable in the best possible manner.

 

4. Travel related Expenses

Expenses written off for traveling are also deductible. It includes airfare, hotel bookings, tips, dry cleaning, etc. you can find a more detailed list of traveling expenses that qualify for deductions. 

There are some conditions that qualify as a travel expense to like; 

• • The trip must be solely for business purposes. 
  • A business trip must take you away from home town. 
  • The trip takes a longer time than a normal workday etc. 

 

5. Cost of Goods Sold

Even if you are running a small business, it is really important to take a complete account of the cost of goods sold. 

It is the difference between your net and gross profit. 

Otherwise, you will be paying some hefty amounts to the regulators that could be saved. Work with some bookkeeping experts to put a definite number on the cost of goods sold. You are well within your rights to apply for the deduction of this amount from your taxable income.

 

6. Capital Expenditure

All the costs used up in buying equipment and assets are not taxable. However, there are some caveats attached to it. For instance, you can’t deduce the entire value of a purchased real estate all at once since you are not going to exhaust its use in a single fiscal year.

If you want to make the most of tax deductions, then it is recommended to file taxes with the help of any seasoned tax preparation firm. We will shed light on some more businesses that can be deduced from the taxation in the next part.

 

7. Employee Health Coverage

If your business is providing collective health coverage to the employees, then you might be able to take that monetary contribution out of the tax net. 

Work with any bookkeeping expert of a tax preparation firm to ascertain how much amount you can deduce from the taxation in this regard.  As per some tax preparation experts, small businesses with 25 employees or less are eligible for this deduction.

 

8. Full-Time Employee Salaries

Small businesses can also file taxes while deducing the salaries they are paying to full-time employees. Nevertheless, not all doled-out wages are tax-deductible. For instance, the payments made out to freelancers and contractors can’t be deduced from the taxes (taxation). To get more clarity on this, get a tax preparation firm on board.

 

9. Rental Expenses

If you are operating out of rented space then its cost can be deduced from the taxes. However, make sure that you are categorically mentioning it at the time of filing taxes. 

The IRS classifies rents as a cost of doing business and thus it can also be deducted from the taxable income. Similarly, other utility expenses can also be waived off from the taxes.

 

10. Overhead Cost of Home Office

Many small businesses are operating out of the house of the owner. However, many people don’t know to use this feature to their benefit in terms of tax deduction. You have the room to deduce some of your overhead home expenses from taxation by declaring it in a home office.

For instance, you can deduce mortgage payments from your taxable income if you are declaring your abode in a home office. To avail of this tax deduction, it is better to hire the expertise of some seasoned tax preparation firm.

 

How do Deductions in Taxation Work? 

In business tax deduction the taxable income is lowered. The amount of tax owed to the government is decreased as part of the tax return. 

Business owners need to consult professional CPAs to find out the possible claim for most deductions. Any accountant can also give the necessary details you need to know about tax deductions. 

At this point, Form 1099 is used. All the income that you earn from the sourced (other than employment) is mentioned in this form. This also includes the tax deductions. 

 

Conclusion 

All things considered, there are plenty of avenues particularly for a small business to keep its taxable income minimum. The discussion in this blog, about taxation, also suggests that availing of maximum tax deductions is only possible when you are working with professional bookkeeping experts or a tax preparation firm.

My Count Solutions provide bookkeeping and accounting services to small businesses. Get in touch if you are not working with in-house bookkeeping experts. The experts can pave a way for you to claim the right number of assets and expenses on your taxable income. For more guidance, you can contact us.

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