14 Biggest Tax Write Offs for Small Businesses! [What the Top 1% Write-Off]

LYFE Accounting

21 Oct 202018:43

EducationalLearning

32 Likes 10 Comments

TLDRIn this informative episode, Sherman from Life Accounting reveals how over 2 million taxpayers annually overpay on their income taxes by nearly $1 billion due to missed business tax write-offs and poor tax planning. Highlighting a common oversight among small businesses and self-employed individuals, Sherman shares a real-life example of a construction business owner who significantly overpaid taxes by not deducting legitimate business expenses. The video outlines the biggest tax write-offs for small businesses, including startup expenses, office supplies, home office deductions, and labor costs. With a focus on educating viewers on maximizing their tax savings legally and effectively, Sherman emphasizes the importance of a good accounting system and provides actionable advice for businesses looking to reduce their tax liability and keep more money in their pockets.

Takeaways

📊 Over 2 million taxpayers overpay on their income taxes by close to 1 billion dollars annually, often due to poor tax planning or missing out on significant tax write-offs.
💼 Small businesses and self-employed individuals commonly pay more in taxes than necessary, missing out on the biggest tax write-offs that could save them money.
📝 A business tax write-off, also known as a tax deduction, includes eligible expenses that can be deducted from income for tax purposes, which should be ordinary and necessary for the business.
🚀 Startup and organization expenses are deductible for new businesses, allowing for up to $5,000 of startup costs and organizational costs.
🖥️ Office expenses, including technology and supplies, are deductible if they are used to operate the business.
🏠 Home office deduction is available if a part of the home is used for business, allowing deductions for mortgage interest, insurance, utilities, and more.
📱 Cell phone and service expenses used for business can be written off, with the need to calculate the business-use portion of the expenses.
🛍️ Cost of goods sold, including selling costs and direct labor, can be deducted for businesses that sell products.
💰 Labor costs, including payments to employees and contractors, are deductible, provided the appropriate forms (W-4 and W-9) are in place.
🚗 Business mileage is deductible, with the requirement to differentiate between business and personal use.
✈️ Business travel expenses are deductible, but only for the duration of the business purpose of the trip.
🍽️ Business meals can be written off up to 50%, as long as they are considered ordinary and necessary for the business operation.
📊 Business interest expense related to business debt is deductible, specifically the interest portion of debt payments.
💡 Retirement contributions to qualified accounts, such as traditional IRAs and 401k plans for employees, are deductible.
🏥 Health savings account contributions are deductible and can be used for health-related expenses, effectively avoiding taxes on these contributions.
🔍 Converting to an S-corporation can potentially reduce self-employment taxes by paying a reasonable salary and avoiding self-employment taxes on the remaining income.
📉 The qualified business income deduction allows business owners to write off up to 20% of their business income, subject to certain rules and income limits.
📋 Implementing tax write-offs requires a robust accounting system to track and aggregate expenses for each category.

Q & A

What are some common reasons why small businesses overpay on taxes?
-Small businesses often overpay taxes due to poor tax planning and not taking advantage of eligible business tax write-offs. This can include not deducting valid business expenses or not being aware of specific deductions they are entitled to.
How can the top one percent minimize their tax liability according to the video?
-The top one percent often minimize their tax liability by using tax laws to their advantage. This includes strategic planning and utilizing all permissible deductions and credits to reduce taxable income.
What inspired the creation of the episode discussed in the transcript?
-The episode was inspired by the CPA's interaction with a client from the construction industry who was significantly overpaying taxes due to poor accounting practices, including not deducting eligible expenses.
What is a business tax write-off?
-A business tax write-off, also known as a tax deduction, refers to eligible expenses that a business can deduct from its income for tax purposes. These are costs that are ordinary and necessary for running the business.
Can you provide examples of simple tax write-offs for new businesses?
-Simple tax write-offs for new businesses include startup and organization expenses. Businesses can deduct up to $5,000 of startup expenses and another $5,000 of organizational costs, such as legal fees for creating a corporation or partnership.
How does the home office deduction work?
-The home office deduction allows business owners to deduct expenses related to business use of their home, such as mortgage interest, insurance, utilities, and depreciation. The deduction is based on the percentage of the home used for business.
What should be documented to deduct cell phone expenses for business use?
-To deduct cell phone expenses for business use, a business owner needs to calculate and document the portion of cell phone usage that is for business versus personal use. This documentation helps in deducting the business-related portion of the cell phone expenses.
What is the significance of keeping W-9 forms for contractors?
-Keeping W-9 forms for contractors is crucial as it allows the business to issue 1099 forms for services rendered. This documentation is necessary for the business to properly deduct the payments as business expenses and for contractors to report their income.
What are the limits on the business travel deductions?
-Business travel deductions are limited to expenses that are directly related to the business activity. For instance, if a business trip is extended for personal reasons, only the expenses incurred during the business-related part of the trip are deductible.
How does the Qualified Business Income Deduction benefit small business owners?
-The Qualified Business Income Deduction allows business owners to deduct up to 20% of their business income, thus reducing their taxable income and potentially saving significant amounts in taxes. However, it is subject to certain rules, including eligibility based on the type of entity and income limits.

Outlines

00:00

📊 Tax Overpayment Among Small Businesses

The video begins by highlighting that over 2 million taxpayers, particularly small businesses and self-employed individuals, overpay their income taxes by nearly 1 billion dollars annually. This is often due to inadequate tax planning or ignorance of significant tax write-offs. The video contrasts this with the top one percent who strategically use tax laws to minimize their liabilities. The speaker, a CPA named Sherman, introduces himself and his accounting firm, Life Accounting, which aims to assist small businesses with their financial growth and management. Sherman also encourages viewers to like and subscribe for more informative content and reminds them that the information is for general purposes and not a substitute for professional legal or accounting advice.

05:00

💼 Common Tax Write-Offs for Businesses

The speaker outlines what a business tax write-off is, referring to it as tax deductions for eligible expenses that can be deducted from income for tax purposes. He explains that the IRS permits businesses to write off expenses that are ordinary and necessary for their trade or business. The video then delves into various tax write-offs such as startup and organizational expenses, office expenses, technology and supplies, home office deduction, cell phone and service expenses, cost of goods sold, labor costs, and vehicle expenses for business use. Each write-off is briefly explained, providing a clear understanding of what qualifies and how it can benefit businesses during tax filing.

10:02

🍽️ Advanced Tax Write-Offs and Deductions

The video continues with more advanced tax write-offs, including business meals, business travel, business interest expense, retirement contributions, health savings contributions, self-employment taxes, and the pass-through tax deduction. Each of these write-offs is discussed with an emphasis on how they can be beneficial, the conditions under which they apply, and strategic planning to maximize their use. The importance of distinguishing between personal and business expenses is also stressed, particularly for travel and vehicle use. The video advises viewers to have the proper accounting systems in place to track these expenses effectively.

15:03

📝 Implementing Tax Write-Offs and Final Thoughts

The final paragraph emphasizes the need for a robust accounting system to track and aggregate expenses for tax write-offs. Sherman offers services like bookkeeping and tax planning to assist with these tasks. He recaps the key points of the video: defining tax write-offs, listing general deductibles, and detailing the biggest tax write-offs available to small businesses. Sherman concludes by encouraging viewers to like and subscribe for more business growth content, ensuring they have a good accounting system in place to make the most of the tax write-offs discussed.

Mindmap

Keywords

💡Tax Write-off

A tax write-off, also known as a tax deduction, refers to eligible expenses that a business can deduct from its taxable income. This is a fundamental concept in the video, as it outlines various types of expenses that can be deducted, thereby reducing the tax burden on businesses. For example, the script mentions startup and organization expenses, office expenses, and home office deductions as potential tax write-offs.

💡Ordinary and Necessary

This phrase is used by the IRS to describe the criteria for business expenses that can be deducted. An expense is considered 'ordinary' if it is common and accepted in the industry, and 'necessary' if it is helpful and appropriate for the business's operation. The video emphasizes the importance of this criterion in determining which expenses qualify for tax write-offs.

💡Depreciation

Depreciation is an accounting method that allows businesses to deduct the cost of assets with a long-term useful life over a period of time rather than all at once. The video mentions depreciation in the context of expensive equipment, where the IRS may require businesses to spread the cost over several years instead of writing it off in a single tax period.

💡Home Office Deduction

This is a specific type of tax write-off where business owners can deduct expenses related to the business use of their home. The script provides a hypothetical example where if a home office occupies 250 square feet in a 1,000 square foot home, the business owner could potentially write off 25% of all home costs.

💡Cost of Goods Sold (COGS)

COGS refers to the direct costs associated with producing the goods sold by a company. It includes the cost of materials, direct labor, and factory overhead. In the video, it is mentioned as a deductible expense for businesses that sell products, which helps in reducing taxable income.

💡Labor Costs

Labor costs encompass the wages and salaries paid to employees and contractors for services rendered. The video highlights that businesses can deduct these costs, which is especially important for service-based businesses. It also emphasizes the need for proper documentation, such as W-4 and W-9 forms, to ensure these costs can be legally deducted.

💡

💡Business Mileage

Business mileage refers to the miles driven for business purposes, which can be deducted as a tax write-off. The video provides the example that in 2020, businesses could deduct over 50 cents per mile for business use. It's crucial to differentiate business mileage from personal mileage to ensure accurate tax deductions.

💡Business Travel

Business travel expenses are deductible when they are incurred for business purposes. The script illustrates this with an example of a business conference in the Grand Cayman Island, where the full flight expense and five days of lodging can be written off, but personal vacation expenses cannot.

💡Business Meals

Business meals are those that are considered ordinary and necessary for the operation of a business. The video clarifies that businesses can deduct 50% of the cost of such meals from their income. It also advises on the importance of distinguishing between business and personal meals for tax purposes.

💡Business Interest Expense

This refers to the interest paid on business debt, which is deductible from a business's taxable income. The video clarifies that while the entire debt payment cannot be written off, the interest portion of the payment is deductible, which is a significant aspect of managing business finances for tax purposes.

💡Retirement Contributions

Contributions made to qualified retirement accounts, such as traditional IRAs or 401k plans for employees, are tax-deductible. The video suggests that these contributions can significantly reduce tax liability when planned carefully, making them an important consideration for business owners.

💡Pass-through Tax Deduction

This is an advanced tax write-off that allows business owners to deduct up to 20% of their qualified business income under the Tax Cuts and Jobs Act. The video explains that this can result in substantial tax savings, but it also notes that there are specific rules and income limits that apply to this deduction.

Highlights

Over 2 million taxpayers overpay on their income taxes by nearly 1 billion dollars annually due to poor tax planning or missing out on significant tax write-offs.

Small businesses and self-employed individuals often pay excessive taxes and miss out on key tax deductions.

The top one percent utilize tax laws to minimize their tax liability, leading to confusion among taxpayers.

Sherman from Life Accounting provides insights into the biggest tax write-offs for small businesses.

Tax write-offs, also known as tax deductions, are eligible expenses that can be deducted from income for tax purposes.

Almost all business expenses that are ordinary and necessary to operate a business can be written off.

There are specific rules, exceptions, and exclusions for various types of business write-offs, such as depreciation of expensive equipment.

Startup and organization expenses can be deducted up to $5,000 for new businesses.

Office expenses, technology, and supplies are deductible if they are used to operate the business.

Home office deduction allows business owners to write off a portion of home expenses related to business use.

Cell phone and service expenses used for business can be written off, with computation of business versus personal use.

Cost of goods sold, including selling costs and direct labor, is deductible for businesses that sell products.

Labor costs, including payments to employees and contractors, are deductible for service-based businesses.

Business mileage can be deducted at a set rate per mile driven for business purposes.

Business travel expenses, including flights and lodging, are deductible for trips taken for business reasons.

Business meals with clients or employees can be written off up to 50% of the cost.

Business interest expense from debt can be written off, with specific considerations for the total payment made.

Retirement contributions to qualified accounts, including those of employees, are deductible.

Health savings account contributions are deductible and can be used for health-related expenses.

Self-employment taxes can potentially be reduced by incorporating as an S-corporation.

The qualified business income deduction allows business owners to write off up to 20% of their business income.

A strong accounting system is essential for tracking and taking advantage of tax write-offs.

Transcripts

Browse More Related Video

What are Tax Write-Offs? Tax Deductions Explained by a CPA!

What are Tax Credits? CPA Explains How Tax Credits Work (With Examples)

9 HUGE Tax Write Offs for Individuals (EVERYONE can use these)

Every Way to Get Small Business Grants in 2022! [Local, State, and Federal Grants]

How to AVOID Taxes... Legally (Do This Now)

Bookkeeping Basics for Small Business Owners