When you are trying to take your business to the next level of success, it is important to understand the various expenses that are tax deductible in order to make the most out of your profits. Business expenses are categorized as those costs that influence the progress of the trade or business. If profits can be made from this, these expenses are qualified to be tax deductible.
- Cost of Goods Sold
The most important aspect of any major business entity or startups looking to expand is to evaluate inventory and itemize each cost at the end of each tax year which is used to evaluate the cost of goods sold. This applies for businesses that manufacture products as well as those that purchase for retail.
Some of these expenses include figuring the cost of goods sold and is deducted from your gross receipts to evaluate your gross profit for the year. In case an expense is included in the cost of goods sold, you cannot deduct it again as a business expense.
- Capital Expenses
The costs that become a part of your capital investment are considered capital expenses. These are considered your business’ assets. These include business startup costs, business assets, and improvements. For startups, you can choose to either deduct or amortize the capital costs.
- Personal and Business Expenses
It is wise to keep your personal finances and business finances separate so you can itemize more effectively when opting for tax deductions. This is because while your business costs are eligible for tax deductions, your personal expenses are not.
If your business is set up at your home, you can deduct expenses for the business use of your home which include mortgage interest, insurance, utilities and repairs. For car usage in both personal and business purposes, you must divide the costs by mileage and you’ll be eligible for deduction on the business ends.
- Miscellaneous Expenses
Other expenses that qualify for tax deductions include the employee payroll, retirement plans for your employees and yourself, rent expense, business interest, and insurance. Business interest includes amounts you may have borrowed for business purposes, and insurance schemes that involve your trade, business, or profession can be qualified for tax relief.
Eligibility for Tax Deductions
Business expenses that are tax deductible must be considered both ordinary and necessary. Ordinary expenses are those that are commonly encountered in the course of business and necessary expenses are those that are useful for your trade and business purposes. Necessary expenses may or may not be considered indispensable to be included in tax deductions. You should always itemize your taxable assets in order to get the most out of tax deductions.
For more information about business expenses deductions contact Smith & Smith CPAs Today.