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5 Misconceptions About Tax Deductions Business Owners Make

tax deductions

Tax deductions. These are two of many business owners favorite words when tax season rolls around. While taking tax deductions are great, many business owners tend to misunderstand what this really means for their business.

Take a look at these misconceptions about tax deductions that business owners make.

Misconception 1: Expenses are always valuable tax deductions

It’s become a trend among many business owners to rack up on expenses so that they can reduce their tax bill. While being able to write off business expenses is great, you’re not actually saving yourself money if you’re spending it on things you don’t need.

Think about it this way. When you write off a business expense, let’s say you save 25% in tax due to that deduction. However, you’re still out of pocket the remainder of what you spent on that expense. So if you’re spending money just to save on taxes, it’s time to rethink your system.


Misconception 2: Business owners can write-off all gifts, meals, and entertainment

It’s become a common misconception that any meal, gift, or entertainment that’s remotely business-related are completely tax deductible. That is simply not true… well not entirely. While some of these items are partially tax deductible, none are 100% tax deductible.
Tax deductions for gifts are limited to $25 per person per year.
Tax deductions for meals can be tricky. Luckily, Bench has put together this handy chart that lays out the general rules for writing off meals and entertainment:
  • Entertaining clients (Golf, concerts, games, etc.) – 0% deductible
  • Business meals with a client – 50% deductible (100% if purchased from a restaurant)
  • Office snacks and meals – 50% deductible (100% if purchased from a restaurant)
  • Company-wide parties – 100% deductible
  • Meals and entertainment provided as compensation – 100% deductible

Misconception 3: Deducting your home office is a red flag for an audit

While writing off a home office may have been a red flag in the past, this is no longer the case. Home offices have become so commonplace that this tax deduction no longer automatically sets off the IRS alarms. While deducting a home office does come with increased scrutiny, they are now so common you don’t have to be afraid about claiming it as a legitimate tax deduction. If you do deduct a home office, just be sure to accurately and honestly report your home office space.

Misconception 4: Tax deductions and tax credits are the same

When thinking about the money you will save on your tax bill because of tax deductions, be sure not to confuse that with tax credits. Tax deductions reduce the total amount of taxable income while tax credits directly reduce the amount of taxes you owe. So deducting $10 of an expense is not the same as deducting $10 off the amount of taxes you owe.
For example, if you owe $10,000 in taxes, a $1,000 tax credit will reduce your overall tax bill to $9,000. On the other hand, if you’re in the 22% tax bracket, a $1,000 deduction will only reduce your tax bill by $220.

Misconception 5: Being incorporated allows you to take more tax deductions

Actually, tax deductions for those who are self-employed (sole proprietors and s-corps) are pretty much equivalent to corporate tax deductions, with the exception of health insurance. Many small business owners spend thousands on legal and accounting fees to get their start-up incorporated only to decide they want to change the direction of their business or the business name. Or many small business owners will incorporate and then not make any money for the first few years. This leaves them stuck with no income and having to pay the minimum corporate tax payments.
If you’re new in business, consider holding off on becoming incorporated until you’re absolutely ready.

We’re here to help!

If you still have questions regarding tax deductions, are looking for tax support, or simply need some guidance, reach out to us! Our expert team of accountants is ready to be partners in your success.