What is a Tax Write-Off and Tax Deduction for Small Businesses?

why couldn't have taxes just been talked to you in grade school wouldn't have been easy if they just taught us taxes while we're learning multiplication division subtraction and addition we would be so much further along in life as taxpayers if we just had a little bit more education when we were learning about christopher columbus sailing the ocean blue my name is carlton dennis and in this video today i'm going to teach you guys tax deductions and how you can go about leveraging the tax code to reduce your tax bill a lot of this information wasn't talked to you when you're younger in this video you're going to learn the difference between deductions and write-offs let's dive in [Music] [Music] [Music] [Music] in case you're wondering there truly is no difference between deductions and tax write-offs taxpayers and even tax accountants use this word interchangeably and so i want to go over what it actually means to take a tax deduction and many taxpayers think that when they write something off on their tax returns that that's money coming back to them and to be honest that's a myth i need you guys to know that when you write something off on your tax returns it does not necessarily mean that that money comes back to you so what does it mean to take a write-off what does it mean to take a deduction let's talk about it so what is a deduction a deduction is not the same as cash what we're going to do is we're going to jump into the ipad and go over how you can understand a deduction and the tax implications of taking a write-off so to break the myth right now a deduction is not cash back into your pocket if i spend ten thousand dollars on my business and deducted ten thousand dollars it does not mean that i'm earning ten thousand dollars back so we're gonna go over an example right now so let's just say that we made fifty thousand dollars a year on a job you're a w-2 on that job you're making 50 000 this is your gross income if you do not have any other deductions then you would pay tax on this 50 000 and it would become your taxable income in this example your gross income and your taxable income are the same in order to calculate your taxable income you will take your gross income minus your deductions and you will receive your taxable income now if we had no deductions we're going to pay taxes on 50 000 and we'll pay tax based on whatever tax bracket we fall into but let's go over an example of what it would look like to actually take a deduction so let's just say that we had fifty thousand dollars but we were receiving a ten thousand dollar tax deduction well then our new taxable income would be forty thousand dollars anytime as a taxpayer that you are taking a tax deduction you are reducing the amount of taxable income that you are subject to and you could be reducing the tax bracket that you might end up falling into based on the income you've earned so the next thing that we're going to talk about is what are tax brackets okay in order to understand how tax brackets work we have to understand how tax brackets are calculated in order to understand how tax factors are calculated the government adds up all of our federal and state income and then we fall into various different brackets in the united states there are seven federal tax brackets you could fall into the 10 percent the 12 percent the 22 percent the 24 the tax brackets go all the way up to 37 but one thing that we want to do for simplicity's sake is understand what could our tax savings be if we were to take a deduction as a small base business owner now for simplicity's sake let's just say you're in the 25 marginal tax bracket in order to calculate what your tax savings would be on claiming a deduction you would multiply your tax deduction by your marginal tax rate to receive what your tax savings would be so let's go over an example let's say we're in the 25 marginal tax rate marginal tax rate means that we're not associating our tax rate by filling up each bracket we're assuming that all income is being taxed at the 25 bracket so if we had all of our money being taxed at the 25 bracket what would be our tax savings if we were to have a thousand dollar tax deduction we would take the ten thousand multiply it by twenty five percent to receive twenty five hundred dollars in actual tax savings so this would be money that would come back to us in the form of a refund in the event that all tax has already been paid understanding tax brackets lets us know how much money we actually get to receive coming back to us in the event that we decide to take a tax deduction as a business owner or as a wc taxpayer i like to think of tax deductions like a rewards credit card every time you spend money on something you get benefits and bonuses back based on the tax bracket you're in so if i'm taking tax deductions i would like to look at the marginal tax bracket that i fall into to be able to calculate how much i could receive back in tax savings this puts a little bit more control on me the taxpayer on managing my finances and my expenses so now that we understand a little bit more about how tax deductions impact us as taxpayers and how the federal tax brackets pay into the amount of money we receive in tax savings we need to understand how deductions work so as a small based business owner we're going to talk about how you can take deductions that make sense with a home-based business brick and mortar business or any other type of business a portion of the expenses may become tax deductible some of your everyday expenses qualify as business expenses and most business expenses turn into tax deductions and we should talk about them i'm going to list out for you tax deductions that most w-2 taxpayers spend their money on that small based business owners are able to write off as being business owners part of the reason why small-based business owners are able to write these items off is because as a business owner you now utilize some of the personal items that you had inside of your business to help make you income and if you are utilizing these items they become ordinary and necessary expenses in the pursuit of the income that you wish to make so let's go over some of the common deductions that you can take as a small base business owner what i'll do is i'll list out 10 common deductions that most everyday taxpayers spend their money on that business owners get to write off let's start off with number one the cell phone bill every taxpayer that i know has a cell phone because i talk to them and if you have a cell phone you probably want to be able to deduct a portion of that cell phone bill if your cell phone is used inside of your business for more than 50 of the time then you can claim your cell phone as a business deduction based on the portion that you're using inside of your business so cell phone becomes a business expense number two rent and mortgage a majority of taxpayers are working from their homes or they're renting out a studio or some type of place where they can conduct their business if you're spending your money on mortgage or on rent and you're using that space couldn't you utilize that space inside of your business to help generate income for you this is what a lot of taxpayers are doing to get an additional deduction on their tax returns taxpayers are taking advantage of the home office deduction while also being able to take advantage of writing off their rent if they're renting out a space where they're conducting business if you're a taxpayer that is utilizing a space a wework or a home office you are able to claim the portion of your home that is business purpose as a tax deduction on your tax returns and this is a deduction that you get to receive year after year over and over again contrary to popular belief home office deductions are extremely popular amongst taxpayers and it's a growing tax deduction that you should not feel afraid to take write off number three car expenses the car expense is a big tax deduction for many taxpayers because taxpayers spend a lot of money on cars and if you're someone that recently purchased a vehicle you'll come to know that there are tons of ways that you can write off your vehicle you can choose to take actual you could choose to take mileage and that comes with you being able to depreciate your vehicle which means writing off the vehicle's purchase price over the course of time if you guys have any questions on how to write off your vehicle visit this video here above where it teaches you how to write off your vehicle underneath your business let's jump into the next one write-off number four the car insurance now many taxpayers are going to have insurance associated with being business owners personal liability insurance business insurance as well as insurance for their car if you have an automobile that has car insurance this now becomes a business expense no longer a personal expense if you're utilizing your vehicle for more than 50 business so we want to make sure that we're capturing all car expenses not just the car payments number five electricity electricity often gets missed over as taxpayers sometimes will include their home office expenses but they won't think about the utilities they're associated with having a home office this includes the gas if you're utilizing your home office space that includes some of the utilities associated with your home the gas bill is a utility expense that you have by being a homeowner that gets to be grouped into your home office deduction you can also group water into your home office deduction electricity gas and water are everyday expenses that most taxpayers are utilizing inside of their home working from their home office i want to make sure that you know that these deductions can also be grouped into your home office deduction as long as you're keeping track of them all right internet internet's a big one many taxpayers realize that their internet bill went up over this past year because they're looking for high-speed internet working from home and if you are one of those individuals that called your internet company to increase your speed i commend you because faster internet gets deals done if you have an internet bill i want to make sure that we're grouping this into your deductions internet's a big tax deduction that we want to make sure that we're claiming every single year all right this leads into number nine laptop and computer most taxpayers who are starting a business have a laptop and they already purchased a laptop before they decided to become business owners doesn't mean that we can't take the laptop as a deduction your laptop and your computer and any equipment associated with it can be tax deductions for you if you're using them inside of your business so we want to make sure that all of these items laptops printers staplers are being included as part of your electronics and last but not least eating out i'm a big foodie i talk about this in some of my videos but part of the reason why eating out is going to become a very big tax deduction for you this year is because the government has extended the cares act to allow for business owners to receive a hundred percent deduction on meals if you're someone that is out eating meals with potential clients or business partners or if you invite potential business partners or clients over to your house to have these meals you're able to deduct these meals that you're eating i want to make sure that you understand how you can become a savvier taxpayer and eating is something you have to do every single day why not get creative and turn some of these everyday meals that you have into business meals to help you reduce your overall tax bill these are the types of deductions that most everyday taxpayers are spending their money on that business owners get to take advantage of all right now that we're tackling a couple of subjects deductions how the tax brackets work and really understanding write-offs let's go over an example of how tracking your expenses can end up serving you as a taxpayer let's say that we had joe who's a taxpayer that made 50 000 working his w-2 job for the year and let's say that he was going to get a tax refund of 1500. well that's pretty nice but he's already paid tax of eleven thousand five hundred dollars well when you think about it as a w-2 employee he's already paid federal and state taxes because he had that withheld on his paychecks but when you think about it he really only paid ten thousand dollars in taxes because he received a fifteen hundred dollar federal refund so that reduced the amount of taxes that he was going to pay now what if joe could get back closer to the full ten thousand dollars that he had to pay in taxes wouldn't that be nice let's continue now let's say joe has a cell phone bill that he's paying for every single month and after talking with his tax count he realizes he can allocate that over into his business and let's say that cell phone bills a hundred dollars a month well that ends up coming out to twelve hundred dollars a year let's just say that joe's in the 35 tax bracket well the 35 tax bracket times 1200 gives us tax savings of around four hundred and twenty dollars now you guys might say four hundred and twenty dollars is not a whole lot of money but if you add up the four hundred and twenty dollars plus the fifteen hundred that he's already received in tax refund we're up to nineteen hundred and twenty dollars in tax savings already now you guys can see that just chipping away a little bit more at joe's tax deductions can end up leading us to getting back closer to that ten thousand dollars and that's what it's all about understanding your deductions and becoming a savvier taxpayer if you got one step smarter today i'd like you to do something for me feel free to like comment subscribe on this video it'll help out the youtube algorithm and allow for me to create more videos like this for you i'll see you guys on the next video [Music] you

Channel: Karlton Dennis

Views: 152,019

Keywords: limited liability company, llc, how to form an llc, taxes, income tax, independent contractor, understanding your deductions, taxes made simple, tax strategy, tax expert, karlton dennis, taxes made simple karlton dennis, deductions in taxes, tax deductions, tax planning, tax tips, taxes made easy, taxes explained simply, small business, how to start an llc, what is an llc, What is a Tax Write-Off and Tax Deduction for Small Businesses?, tax write offs

Id: qc0MhgdG-0g

Length: 12min 46sec (766 seconds)

Published: Fri Oct 22 2021