At the end of each year, tax dues are something that comes across everyone’s mind. For business owners, they not only have to think about their personal tax liability, but also the liability of their company. Today we’re going to break down just what tax liability is and a few ways that you can reduce what you may owe for your business.
What is Tax Liability?
Before we can talk about reducing the tax liability of your business, it’s important to understand what it is. In simple terms, your tax liability is the amount of tax that you’re responsible for paying to a taxing authority based on income earned, gain from the sale of an asset, or other taxable events. Tax liability can be broken down into different categories: income, sales, and capital gains tax. These taxes and their rates are set by and paid to tax authorities like the federal, local, and state governments, which then use the funds to pay for services and programs.
Is it Deductible?
Claiming your business expenses as tax deductions is one of the simplest ways to reduce your tax liability for the year, but what expenses can be considered deductible? The most important thing to remember when determining if an expense is deductible is that the expense must be both ordinary and necessary. An ordinary expense is something common and accepted for the trade or business, while necessary expenses are ones that are helpful and appropriate. It is important to remember that personal and capital expenses are not considered deductible. A few examples of expenses that are deductible include:
- Education – The costs of education can be fully deductible as long as the curriculum serves to maintain or improve the level of expertise in your field and add value to your business. The biggest thing to remember is that the education programs’ costs must be relevant to the current business. Workshops, classes, and webinars can all be deducted when they pertain to building skills that benefit your work in that industry. Even the cost of your transportation to and from these classes can be deducted from your tax liability.
- Travel Expenses – There are a few requirements before you try and claim travel expenses as a deduction. In addition to the requirements of being ordinary and necessary, the trip must also take you out of your tax home for longer than a typical day’s work. Your tax home includes the entire area or city that you conduct business from. If the expenses meet these requirements, then travel, meals, and lodging costs can all be used as tax deductions for the year they happen.
- Advertising & Promotion – Spending money to spread awareness of your brand is something that is 100% deductible from your taxable income. Advertising for your business can include anything from the cost of printing business cards, launching a website, or wrapping your vehicles. All of these marketing opportunities can be written off your taxes as advertising and promotion expenses.
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