This is the first post in our blog series on Business Tax Deductions in 2022. This multi-article blog series focuses on tax-deductible expenses you can leverage to reduce the tax bill in your business.
Taxes can be a headache to business owners. Despite the ever-changing tax laws, paying taxes is a burden to most established businesses. The good news is that you can significantly reduce your tax bill while staying compliant with IRS regulations. As a result, you save money for other profitable business activities.
This article will walk you through the tax deductions you can claim to reduce the tax bill in your business. But first, let’s start with the basics.
What is a tax deduction?
A tax deduction is an IRS-approved expense you can subtract from the business’s taxable income. Tax deductions reduce your federal and state taxes. Suppose your annual taxable income in 2021 was $100,000, and you spent $20,000 on IRS-approved deductible expenses. In that case, your taxable income reduces to $80,000.
Ever-changing tax deduction regulations: what’s new in 2022?
The deductible mileage rate for 2021 was 56 cents per mile if you used your vehicle for business and tracked the mileage. In 2022, the deductible amount has increased by 2.5 cents— 58.5 cents per mile.
What business expenses can you deduct from your taxable income?
This section walks you through tax deductions that may apply to your business to reduce the tax burden in your business.
1. Business insurance premiums
You can deduct business insurance premiums from your taxable income. That’s because IRS considers insurance a cost of doing business. The types of deductible business insurance include:
- Business interruption insurance
- General liability insurance
- Cyber liability insurance
- Workers’ compensation insurance
- Commercial property insurance
Not every business insurance premium is deductible on your taxable income. The premiums must meet the IRS’s definition of an ordinary and necessary business expense. A necessary insurance expense is appropriate and helpful in your business. On the other hand, an ordinary expense is accepted and common in your industry.
2. The cost of using a vehicle for business purposes
If you use your vehicle exclusively in your business, IRS allows you to deduct the resulting expenses. The deductible expenses for using your car for business include:
- Depreciation of the vehicle
- Vehicle lease payments (if any)
- Gas and oil costs
- Car insurance premiums and repair expenses
- Registration fees
If you use the vehicle for both personal and business purposes, you will have to split the expenses depending on actual mileage.
3. Business interest expense
If you take a loan to use in your business (including real estate and mortgage), the interest you pay when returning the loan is deductible from your taxable income. However, IRS has set a limit on how much business interest is tax-deductible.
According to IRS, the maximum deductible interest expense is 30% of your taxable income. Suppose you repay a loan with an interest of $60,000, and your taxable income is $100,000. In that case, the maximum business interest expense you can deduct is $30,000 (30% of $100,000).
4. Bad debts
If someone owes your business money that you can’t collect for some reason, you may have a bad debt. However, IRS has set some rules regarding bad debt deductions. For a bad debt deduction, you must prove that when you were lending the money, you intended to give out a loan, not a gift.
For example, if you lend business money to a friend knowing that the person may not repay it, the IRS considers it a gift that is not deductible from your taxable income. Examples of deductible bad debts in your business include:
- Loans to employees, suppliers, and clients
- Business loan guarantees
- Credit sales to your customers
5. Rent expenses
If you’ve rented your business space, you can deduct the rental fee from your taxable income. Rented business space may include a warehouse, office space, parking garage, or other business-related property.
6. Professional and legal fees
The charges you incur for hiring professional and legal services in your business are tax-deductible. These fees include:
- Costs for resolving business tax issues
- Costs for hiring a lawyer
- Fees for hiring bookkeeping and accounting services
7. Employee salaries and benefits
If your business has one or more employees, you can deduct the salaries, vacation pay, and benefits from your taxable income. These benefits include bonuses and commissions you offer employees. You can only deduct the wages and benefits from your taxable income if you incur these expenses in the same year you claim the deduction.
8. Marketing expenses
Marketing expenses are tax-deductible, provided they fit the IRS’s definition of an ordinary and necessary expense. Examples of marketing expenses include:
- Costs of online advertising
- Influencer advertising
- Costs of producing marketing materials
We’re on top of tax deductions so that you don’t have to be
Working your way through the ever-changing tax regulations is tiresome and consumes a lot of time. At Foncannon, we’re on top of tax regulations. You can trust us to maximize your tax deductions and significantly reduce your tax burden. We are ready to help you manage your tax expenses and take your business to the next level. Schedule a call today for any inquiries.