Spend at the end? How to know if you need to take a business tax deduction

Business tax deductions are arguably one of the most misunderstood parts of entrepreneurship. Many business owners are overconfident in their ability to understand this dynamic and complicated business area.

Unfortunately, that overconfidence leads to costly mistakes.

So, today’s goal is to help you identify ways to know if you need to take a deduction and, if so, the safest places to take it, no matter what business you are in.

Let’s go!

  1. Your business is in the money

High profits may seem like an obvious indicator, but this can be overlooked in the hustle and bustle of business. So, keep track of those numbers because even silver clouds have a grey lining.

Speaking of grey linings, a great business year may push you into a higher tax bracket in your personal returns, especially if you have a pass-through entity like an LLC. If this is the case, it’s time to start looking for eligible deductions.

If you’re in this (wonderful) dilemma, look at your marketing budget. Marketing expenses are some of the most easily deductible expenses, and they bring in more business.

  1. You’ve been deferring expenses and investments

We’ve all read stories about business owners who put off buying things, and that can be a good practice. However, it can also come back to bite you if it hinders daily operations or gets in the way of future plans.

So, now is the time to take stock of your current and long-term goals to determine if making that equipment, inventory, or supply purchase will provide a double benefit of getting a tax deduction and propelling your business forward.

Just be sure to check with your CPA to determine whether the planned expense is a valid deduction in the eyes of the Internal Revenue Service.

  1. You need to increase employee loyalty

Bonuses are a great way to reward employees who go the extra mile. They increase loyalty and can potentially serve as a business tax deduction. Just be mindful that the bonus must be compensation for services rather than a gift.

So, talk to your CPA about a legal bonus system for your rainmakers and go-getters.

  1. You need to plan for retirement

It’s good to take care of employees who take care of business, but you must take care of your own needs, too. If you haven’t maxed out your retirement contributions, doing so before the end of the year can reduce your taxable income.

  1. Carryover losses

If your business lost money last year, those losses might be eligible for a tax loss carry-over.

Essentially, if your business suffered a loss in one year, the losses can be applied to a profitable year in the future. This requires some planning and a little study to implement legally. So, take a little time to read the linked information above or just speak with your tax advisor.

  1. You want to give to charity

This one almost didn’t make the list because giving donations directly to charity and deducting them through your business can be tricky. There are contribution limits, income limits, and business entity considerations that require consulting a tax professional.

However, a quick workaround is to sponsor an event for an eligible charity. For example, if you sponsor a hole at a golf tournament for a qualified charity and they put your name on their signage, you can probably deduct that as a marketing expense.

Still, it’s good to consult with your CPA on these, as well.

The Bottom Line

Recognizing when you need to take a business tax deduction is half the battle in allocating money where it can do the most good. Following the indicators above will help with that part. The other half of the battle is doing the deductions correctly and legally. For that, keep your CPA on speed dial and be sure all your deductions are part of a larger tax strategy.