Across all industries, the average small business pays a tax rate of approximately 19.8 percent, according to tax professor Jean Murray. Below are several tips on how you can save the most money possible once taxes come due -- if not for this year, then the next.
Here are seven tax breaks to keep in mind for 2019:
1. Write off the cost of inventory.
If you sell physical products (online or offline), you can write off the cost of all that inventory once it’s sold. This can end up being a big chunk of money saved since the cost of inventory is often a top contributor to business overhead. Remember, you only have to pay taxes on the profits of your business, not on all the revenue that your business generates.
2. Your home office can lead to savings.
Rather than buy expensive office space elsewhere, many startup entrepreneurs choose to work from home. And doing that won’t just save you money on the front-end, you can also write off the cost of your home office. You’ll need to determine the square footage of your home office as a percentage of your home’s entire square footage. Then, you can write off that same percentage of mortgage or rent as a home office business expense.
3. Utilities make a difference.
Just as you would claim your home office as a business expense, you can also claim a percentage of the associated utilities (electricity, water, plumbing). Here’s As TurboTax explains, a home office that occupies 20 percent of the house lets you deduct 20 percent of your bills for utilities, homeowners insurance, repairs, maintenance and homeowners association fees.
4 Business insurance leads to tax breaks.
Don’t forget to write off any insurance costs that you have for your business. If you use a home office, then a portion of your house’s insurance could be tax deductible. And if you have a business in an industry which requires additional levels of coverage (malpractice coverage or liability coverage, for instance), you can write those premiums off as well.
5. Freelance costs can play a role.
At the end of the year send qualifying freelancers (those to whom you paid $600 or more during the tax year) a 1099-MISC so that you can write off those paychecks as a business expense.
6. Don’t forget about work trips.
A portion of most of the money that you spend while traveling for work can be written off as a business expense -- but this deduction largely depends on what, exactly, you’re writing off. Fifty percent of food purchased for business purposes can be deducted from your taxable income. And the entire cost of plane tickets, gas or other transportation expenses can usually be deducted, as well. The IRS defines it as being away from your home for “substantially longer than an ordinary day’s work.”
7. There are major S-corp advantages, too.
As a startup entrepreneur, you may find it tempting to take the path of least resistance and simply leave your business as a “sole proprietorship.” If your business pulls significant profit you could save a lot of money by transitioning your company from a sole proprietorship to an S-corp. That way, you don’t have to pay double taxes on corporate income, only on what you actually pay yourself. Entrepreneur contributor Tom Wheelwright explained it this way: “One of the biggest benefits of forming an S-corp versus remaining a self-employed contractor is asset protection. An S-corp also does not have a legal responsibility to pay taxes on its corporate income.”