For any starting business owner, the financial aspect is the scariest looking of them all. Deductible taxes continue to haunt you long after you’ve tightly grabbed the ropes of your firm, actually. Luckily, we did the work in your stead and filtered out the most important things any small business owner should know in the first stage about tax deductions. We promise, no fancy technical talks will be involved.
Deductible Taxes: Definition and Introduction
More commonly known as tax deductions, these kinds of taxes refer to a reduction in the amount of the income that is the subject of various forms of taxing. Compared to, say credits, deductions reduce the taxable income as opposed to reducing tax.
They are usually the result of some sort of business expense and they serve as a method of reducing the taxable income that you would have otherwise owed.
For a better understanding, take a practical example. Let’s say you now stand in front of a $100,000 income. If you have $20,000 worth of deduction, you can subtract these money from the total and leave only the remaining $80,000 as taxable.
Types of Tax Deductions
There are a few main types of deductible taxes that you need to keep in mind and, for a better understanding, individually research further.
Regardless of whether you are going for a standard or itemized deduction, as long as you meet the application requirements, you can claim this type of deduction. The first step to knowing which specific thing qualifies is by checking the famed Form 1040.
These are some deductions that you will very likely stumble across at some point:
- Traditional IRA contributions;
- Student loan interest;
- HSA contributions;
- Moving expenses;
- One-half of self-employment tax.
In the USA, a standard deduction claims federal taxes in the case of most individuals. Amounts, laws, and other characteristics are variables which fall into the hands of each governing authority of every state. However, in general, the amount is highly dependent on filling status and age. This category includes tax deductions such as property tax and charitable donations.
When it’s time to make a claim, you typically get to choose between standard and itemized. If you go for the latter, the deductions are only taken as far as amounts higher than standard’s are concerned. The super colloquial way of putting it is: itemized deductions become available when they exceed those of standard deductions.
Some common types of itemized deductions that you will find are:
- Home mortgage interest;
- State and local income taxes;
- Real estate taxes;
- Charitable contributions.
There is also a branch of itemizing. It’s very thoroughly known as “miscellaneous itemized deductions, subject to the 2% AGI floor.” However, it’s only applicable if said deductions exceed 2% of your total gross.
And this is a wrap on the beginner’s guide for newbie business owners who got completely tangled in the web of complications known as deductible taxes. Reading up on a basic guide is definitely good, but taxes are no joking matter, so make sure to get your hands on a skilled financial advisor.