A deduction is anything you spend or incur in your business that is an expense of some sort. It's a deduction against the revenue of your business, whether it’s a cost of goods, an expense, or even a home office deduction.
Tax deductions are not always 100%. Some are partial deductions and meals, in particular, are only 50% deductible as of 2021.
That being said, the business can pay for what it needs to pay for as long as it has a business purpose. However, within the tax arena, deductions are those things that get to be reduced from your income before tax is calculated.
There are several types of tax deductions. Oftentimes, it’s not a matter of if you “can” but more a matter of “how.”
Types of Tax Deductions
- Merchant processing fees or credit card fees (the amount you pay the credit card processor for them to collect and remit the sales you sold).
- Third-party seller fees. They've got to be listed out separately as a cost of goods deduction.
- Legal expenses (contracts vs. intellectual property).
- Shipping and supplies (this is a cost of goods deduction).
- Postage and delivery that’s not related to fulfilling a sale.
- Dues and subscriptions vs. software subscription services.
- Training and education (mastermind, one-on-one coaching, virtual vs. in-person).
- Office supplies (versus office equipment; this is an asset so it’s not an income statement account but a balance sheet account).
- Wages and salaries vs. contract labor vs. virtual assistant services.
Different types of expenses
- Sales tax expense
- Property tax expense
- Income tax expense
- Other tax expense
You definitely want to maximize your tax deductions. When you're consistent about the application of an expense, you have a better chance of understanding what percentage of your income is being spent.
It can be a complex world out there. Just be consistent and have a process in place and you'll be fine.
Don't blame your bookkeeper if your tax return ends up not being right. You need to look at your books because you’re the one who’s going to have to stand up for them in the event of an audit, not them. Therefore, understand where you need to allocate things and what expenses are what. Once you make those decisions, you won't have to make them again anyway.
If you want to learn more about Top 50 Tax Deductions in 2021, check out Episode 066: Top 50 Tax Deductions in 2021.
