4 Tips to Lower Your Small Business Tax Rate

Many savvy entrepreneurs claim business deductions to lower their small business tax rate. You should too, and reinvest the money you would have overspent in taxes into your business. However, don't go overboard and raise red flags for your business. Every expense you deduct must be ordinary and necessary to your business.

1 - Home Office Tax Deductions

The first place to look for deductions is at home. Most small business owners use their home in some way for business purposes. It's most often a home office, and tax laws allow you to deduct most reasonable expenses, including a percentage paid for:

  • Mortgage
  • Insurance
  • Maintenance and repairs
  • Property taxes
  • Utilities

A home office can be located in a garage, closet or room in your home. Renters who don't own the property can also take advantage of deductions.

2- Personal Car Used for Business

You can deduct expenses for business purposes, even when you use your personal vehicle. For example, the cost of gas, toll and parking fees you pay for meeting with a client at their place of business is deductible according to tax laws. You have to keep good records to claim this deduction, because it's based on actual mileage. Most office supply stores sell a book that you can purchase to help keep track of miles. It's hard to remember to write down information about each trip, and keep all of your receipts, but it can play a role in lowering your small business tax rate. An alternative to your own record keeping is to use the IRS' standard mileage rates, which may be lower than your actual mileage rates.

3- Costs of Goods Sold

If you manufacture or resell goods, you can deduct the cost of goods sold before you determine your gross receipts.  These include:

  • Factory overhead
  • Raw materials
  • Freight costs
  • Direct labor costs
  • Inventory storage

The more you deduct for those costs, the lower your small business tax rate.

4- Small Business Insurance

You'll need one or more small business insurance policies to operate your small business if you want to shield yourself from liability. Even if you incorporate your business, small business insurance can help to protect the business from personal property damage due to a fire or natural disaster, for instances where the court might "pierce the corporate veil" (where you'll be personally liable even if incorporated). Monthly premiums paid are deductible as a business expense, as long as it's small business insurance. For example, a homeowners insurance policy that's comprehensive may in effect cover home business activities or your home office, but those payments won't be deductible.

Don't view lowering your small business tax rate as something that some business owners do to "cheat". You have a duty as an entrepreneur to find all the savings you can, and all of these deductions are legal. You'll be missing out on savings if you don't take advantage of business deductions, and the taxes you end up owing could have a negative impact on your business in time.