Is your online business taking advantage of tax deductions? Stick around because today we're going to review seven of the biggest tax write offs for your small businesses, starting today.
Today, we're going to talk about seven of the most commonly missed tax deductions that you can use in your online business. Let's jump into this all right. Shall we?
Tax Write Off #1 – Office Expenses
Let's start with number one and that is office expenses, technology, supplies, all those things. So next time you run out to Staples to buy paper for your printer or pens to take notes with or notebooks or anything like that, or you're purchasing technology, all those apps that you're spending 50 bucks a month on. The operating agreement that I have for sale down, plug for that, anything like that, that you're using technology-wise or anything like that in your business. Those are all deductible expenses. So you want to make sure you're tracking that and the tool that I use to do that, now there's a couple tools. What I use is QuickBooks Online. Other people use Xero.com, another popular choice. Other people use FreshBooks. I don't particularly like FreshBooks because it's really just invoicing.
It's not a full accounting solution for your business, but QuickBooks Online, they're making it easier and easier and easier for everyday people to use. If you get it set up correct, it's a fantastic tool. It's got great reporting and it makes it really easy to capture all the things that you're doing in your business. They even have a function now that you can use to capture receipts. So you can go online. You go to staples, you buy your office supplies, you take a picture of the receipt. It automatically uploads into your account syncs with your bank statements. It's awesome. I use it every day and for the 30 or 40 bucks a month that I pay for this subscription, it is a phenomenal tool. Probably the most often-used tool that I use in my law practice.
Tax Write Off #2 – Phone Services
All right. Number two, cell phone and cell phone service. So this is actually two deductions wrapped into one. You can deduct the cost of your cell phone and you can also deduct the service plan that you use. So whether you're with Verizon or Sprint or AT&T or somewhere else or something else. You can deduct the cost of purchasing and using your cell phone in your business. And this is a great little deduction because if you do most of your work with a cell phone for business, you can deduct that. And now you have to be careful because you can only deduct the percentage you use for your business. So let's say you use it 90% for business and 10% for personal. Then the 90% you use for business is what you can deduct and you can't deduct the other 10%. But what a lot of people will do is they'll buy one cell phone for business use and one for personal use.
That's a great way to do it. That is a great deduction that you can use to save you money right away, and you get the cell phone at a deal, so that's nice.
Tax Write Off #3 – Travel
Okay, this third one is a huge deduction that you can use. It's travel. Now I know a lot of you are out there going to conferences. You're going to events. You're going to different things for your business. If you own rental properties, you might be going to visit your rental properties. I would encourage you to purchase rental properties, places that you want to visit because it gives you an excuse to go there and visit, right? So anytime you go to any of these things, you can deduct the travel expenses from the day you travel to that place, the travel expenses for the day that you returned from that place, and any travel expenses in between on days when you're doing business.
So if you go on a 10-day vacation and you wrap it around a business trip, that's two days, you can deduct those two days in the middle that you were doing business. The rest of the days are going to be personal, but then you also can deduct the expenses related to getting to and going from the destination of your choice. So that is a really great way to deduct a lot of expenses.
Tax Write Off #4 – Meals
Pro tip here, if you want to deduct your meals, which is the next deduction, I'm going to talk about the meals and entertainment deduction, which is actually really only the meals' deduction now because they did away with entertainment back in 2018. Hopefully, that'll come back in a couple of years from now. But for right now, it's only meals you can deduct. Pro-tip: Here is a link to the government website that you can use to figure out what the per diem is in some of the cities that you might visit, you can deduct the per diem cost for the meals.
And then if you eat on the cheap, let's say, you go out and buy Ramen and don't do anything fun. So you can capture the difference between that. And you can deduct the per diem for the city where you're at, as opposed to your actual cost. Now, if your actual cost is significantly more than the per diem, then you want to do that. You can do a 50% deduction on all your meals while you're traveling. And along with that, you can also do a 50% deduction on all meals that you do while you're talking business. So if you take referral sources out to lunch or coffee or happy hour or whatever, and you're talking business, then those are meals that will qualify for the 50% deduction for meals and entertainment. Even though entertainment doesn't really count now.
Tax Write Off #5 – Self-Employment Deduction
All right, next one is the 20% self-employment deduction. This is a huge one. Basically, you get deducted all the profit from your business. You get to deduct 20% of that profit on your taxes. So if your business, let's say, you made $100,000 and you paid yourself a $50,000 salary. And then you took $50,000 as profit. You're able to deduct 20% of that $50,000, profit, or $12,500 on your taxes. And so that's going to save you roughly let's say you're in a 25% bracket that's going to save you four or $5,000 in taxes.
I'm pretty sure my math is wrong on that, but you can say it's a significant tax saving. So as an easier way to look at it, let's say you had $100,000 in net income and you can deduct $20,000 and that's going to save you roughly $5,000 in taxes there. Better numbers there. So this is a huge deduction. There's a lot of rules related to this deduction. So you have to make sure you do it correctly. It's a big one out there. You do not need to be incorporated to use this deduction. You do need to have your own business. So it does not work for wages that you might be paid through W2.
Tax Write Off #6 – Mileage
My next deduction is mileage. Many people forget to use this when they're doing their taxes for their business. They just completely gloss over this one. But when you drive for business purposes, and this does not count commuting to and from your office but when you drive for business purposes, you're able to deduct 58 cents a mile that you can deduct off your taxes. And the way this works is if you track your mileage, then you can pay yourself out of the business and expense-check 58 cents per mile that you drive. And then you can deduct that on your taxes. This is a great deduction. A lot of people just completely forget about this and another great way to use QuickBooks Online. I know I talked about that before. They have a mileage tracker built into the software on your app on your phone, which means that whenever you go and get in your car and you drive someplace, it's automatically going to track your mileage for that trip.
And it's going to ask you, was this a personal trip or a business trip? It's a business trip, then you're going to get the deduction and it tracks that for you. Super cool function in the QuickBooks Online App, highly recommend you check it out. This will save you thousands of dollars every year.
Tax Write Off #7 – Retirement
All right, number seven is retirement. Now, one of the huge benefits of being self-employed is you can make use of the various retirement plans that are available for self-employed individuals, such as a SEP-IRA, a Simple IRA, or a solo 401k. You can't use a solo 401k if you've got employees, you have to use a regular 401k for that. But regardless, these are great tax benefits and retirement planning tools that you can use if you're self-employed. Now if you use a SEP-IRA, you can deduct up to 25% of your payroll.
So if you pay yourself $50,000, you can deduct up to $12,500 each year that you put away into a retirement plan. And the big benefit to this is you get the deduction as of the end of the year, but you don't actually have to put the money into the fund plan until you file your taxes. So if you file an extension, you file your taxes in September. Then you have nine months to put that money away for the prior tax year, as opposed to if you're doing it for an IRA, you only have until April 15th to fund that plan. That is a really great deduction, the SEP-IRA. Solo 401k, if you're truly a solo business, or if it's just you and your spouse, you can use a solo 401k and the benefit to that is you can still do 25% of your payroll, but you can also do an additional $19,000 just flat, which means that you can pay yourself less and deduct a whole lot more in retirement versus the SEP.
You're limited. So back to my previous example, if you had $100,000 in income from your business, and you took $50,000 as payroll, you can put away $12,500 to a SEP-IRA versus solo 401k you can still put away the 12,500, but you can put away an additional $19,000 on top of it by being a solo 401k. So that's a super cool option if you are a solo with your online business.
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All right now, I knew I told you I had seven, but I actually have two bonus deductions for you to think about as well.
Tax Write Off #8 – Health Savings Account
The first one is going to be the Health Savings Accounts. If you have a high-deductible health plan, you can contribute to health savings accounts for the tax year and you have until April 15th to do those contributions for the current tax year. And these are huge.
Now, unlike IRAs that have income caps on how much you can contribute for a health savings account, there is no income cap, which means that you can contribute that amount and it's fully deductible. This is a great benefit. It's a great vehicle to save money tax-free. As long as you're using that money for health-related expenses, then you have no issues with that. So that is a super cool tax deduction that you should be making use of, whether you are an employee or you're on your own, with your own online business.
All right now, I have one bonus and this is one that I didn't originally think of as a tax deduction, because it's not a tax deduction, but it is a tax strategy and that is electing your S-corp election. The biggest benefit to this is when you elect that S-corp status, then you pay yourself a reasonable salary and the reasonable salary you're going to have to pay self-employment taxes on, but everything above that you don't.
So under our previous example, if you made $100,000 and you paid yourself $50,000 in payroll, you're going to pay self-employment taxes on that. The $50,000 in profit that you make out of the business assuming no other deduction you would not have to pay 15% self-employment taxes. And so that roughly works out to what, $15,000, I believe, no, I'm sorry, $7,500 that you're going to save in taxes just by having that S-corp election for your business. This is huge, a lot of people don't do this. This is one of the main reasons why I recommend you get that LLC filed as soon as you possibly can, as soon as you're money in your business, get that LLC filed so that you can decide whether or not you need to file that S election. As I said before, when you're making 30, 40, $50,000 a year out of your business net, take-home.
You need to start thinking about filing that S election because it's going to save you a ton of money in payroll taxes. Once you get that file, but you have to have an LLC in existence or a regular corporation in existence before you make that S-corp election.
If you would like a full list of deductions that will help you with this, go ahead. Here's a link to get on my email list for that. And then I'll email you a cheat sheet and you carry that around with you if you want. I mean, because who doesn't right, who doesn't want to carry around a full list of the deductions with them? This guy does. That's it for today!