All individuals and businesses are liable for government tax in every country. While each is expected to follow the rules set by the US government, having a basic understanding of it can assist in business development and proper planning of life. Tax season has already begun since 1st January 2022 this year and employers can continue filing the annual tax till 15th April. Before he gets a tax consultant to the duties, let us understand the changes about tax deductions that are applicable from the current year.
The Internal Revenue Services (IRS) has declared tax deductions for 2022 along with tax tables for various slabs. Because of the increased inflation in the country, these tax rates have sky-rocketed to new levels. An important point to be noted here by the businessmen is the numbers available from the 1st January 2022 should be used to file tax returns in 2023.
- What are Tax Deductions?
- Why care about Tax Deductions?
- How do Tax Deductions work?
- 2022 Standard Tax Deductions
- Where can an Employer claim tax deduction?
- What is Itemization and who can claim it?
What are Tax Deductions?
A tax deduction is an expense that an employer can deduct from his taxable income. It gives the taxpayer an advantage by paying less tax as his expenses get subtracted from the income amount. For this, the business owner’s expenses must meet the criteria given by IRS. The employer can list his expenses using the section 179 form when he files the incomes tax.
Why care about Tax Deductions?
When the employer is filing his annual tax returns for the year, he must be aware of what things are included in expenses for a sole proprietor or the business partners. While some of the deductions might be related to the proper functioning of the organization, others included in the tax deductions could be regarding personal use which a small business owner should be knowledgeable about.
A small business owner can miss out on certain expenditures because he is filing the income tax form at the last moment. At such times, he can make a big loss by not reporting expenses related to employee programs such as a lavish dinner in one of the grandest restaurants in America. This can dent a big hole in his pocket as he failed to take advantage of tax savings. Hence, the employer must maintain accurate records using bookkeeping that shall help while filing taxes.
How do Tax Deductions work?
If the industrialist is filing income tax for the first time as he has just completed some time after the launch of the start-up or is a complete novice with tax deductions, he should understand its methodology before making appropriate calculations. Even if the employer has minimum deductions, the IRS permits him to take a standard tax deduction for which he won’t be questioned. With this standard deduction or even tax credits, the amount on which he would be paying the tax automatically gets reduced.
The employer should keep in mind the following points -
- He can either opt for a standard tax deduction or even specify the expenses while filing an income tax return. These tax credits are expenses permitted by the IRS which reduces his taxable income.
- Furthermore, in tax deductions, the industrialist cannot add personal expenses such as a home mortgage, medical bills or any charity he has been part of. However, if he decides to include them, he should stick by his records noted in tax deductions as the IRS staff can suddenly come for an audit.
In addition to this, 2 more points to be noted are -
- The standard tax deduction for the year 2022 has been set at 1,400$ higher for those whose age is more than 65 years or are blind. It is 1,750$ higher if the person is unmarried and he is not a surviving spouse.
- If your spouse claims you as a dependent then his/ her tax deductions will be smaller.
2022 Standard Tax Deductions
The following figure can help you understand the tax deductions amount as per the government’s standards -
The amount goes up to 12950$ for an individual or if a married couple decides to file for tax deductions separately. It is charged at 19,400$ for the family’s head and 25,900$ for the couple who wants to file for tax deductions together. The amount is the same for a surviving spouse. Here the key point an individual taxpayer should know is - The standard tax deduction amount for dependent individuals, mostly kids or ailing parents cannot be more than 1,150$ or it must not exceed the permitted deduction amount.
To file tax deductions: https://www.irs.gov/individuals/tax-withholding-estimator
Where can an Employer claim tax deduction?
If a small business owner has no idea about what can be claimed in tax deductions while filling the form, he must consult a tax consultant or CPA before claiming it in his annual income tax form. An employer can claim the things listed below -
- Advertising and promotion
- Business insurance
- Business interest and bank fees
- Business use of the employer’s car
- Business meals
- Contract Labour
- Home Office
- Legal and Professional Fees
- Moving expense
- Rent expense
- Salaries and benefits
- Telephone and internet expenses
- Travel expenses
- Bonus: Personal expenses
To know more details about these tax deductions, check these short snippets -
- An employer can advertise or promote his business to hire new talent or even for product marketing. The HR can prepare brochures or invite cards to clients for a major company event.
- The businessman can deduct coverage premiums for properties such as office furniture, employee life insurance, business car, worker.
- It’s always beneficial for a businessman to have a separate company bank account and credit card.
- If the employer uses his car for business purposes, he can claim tax deductions through a standard mileage rate or actual expense method.
- The industrialist can deduct the expenses he has had from office parties given to the employees provided he was present at the outing and it was not an extravagant party with a lavish meal.
- The employee can ask for tax deductions for part-time or contract-based employees if he pays less than 600$ during the contract year to the individual. If the salary amount is greater than this, he would be required to fill out a separate Form 1099-NEC.
- The industrialist can opt for section 179 deduction for depreciable property in his office space which includes furniture, laptops, machinery and other tools
- He can claim for educational expenses for self-improvement of business skills, certifications, workshops for himself and even if the company wants to sponsor a training program of the latest emerging technologies or platforms from industry experts.
- If the employer uses a home office to run his business, he can use it for tax deductions through a simplified method or standard method.
- The employer can deduct the interest paid on a business loan if he is legally liable for the loan, has a true lender-debitor relation with the provider and intends to repay it to the creditor within the speculated time.
- The financial fees he pays to bookkeepers, legal attorneys, tax professionals or even bookkeeping consultants for proper maintenance of business matters can be deducted.
- If the employer plans to move his work location to a different location or city, he can deduct these moving expenses while reporting the tax deductions.
- If the small business owner runs his business on rental premises, he can deduct the rent paid as a business expense.
- The monthly paystub given to employees is also tax deductions for an employer.
- He can subtract various forms of state taxes that are related to his business. This includes payroll tax, real estate tax for business property, sales tax, excise tax, fuel tax, state income tax etc. He can also apply for tax deductions for business licenses.
- The employer can subtract the bills of telephone and internet use from the income tax as his business expense.
- The business travel expenses are also included in tax deductions for an entrepreneur. These business meetings must be supported by travel tickets, lodging and meals, cabs and tips given to the driver, laundry etc.
What is Itemization and who can claim it?
Whether an individual is filing for tax deductions for individual or business purposes, he will surely come across the term Itemization. Itemized deductions for an employer are deductions he has incurred for the various expenses across the financial year.
Alternative Minimum Tax Exemptions Amount
The rule for a child’s unearned income has been named ‘kiddie tax’. This is applicable for children who are below 19 years and for college students under 24. This unearned income could be from the dividends and interest for an individual or it is inherited through Individual Retirement Account distributions and taxable scholarships. For 2022, the taxpayer cannot claim more than 1,150$ for dependants or the sum of an individual’s earned income plus 400$ should not be more than the permitted tax deductions amount.
Section 199A Deductions
According to the Tax Cuts & Jobs Act, the sole proprietors and business-owners operating S corporations can get 20% tax deductions on their qualified business income.
Tax deductions are a good and effective way to minimize the personal and business taxes for an individual. It not only assists the entrepreneurs in reducing their annual tax but also is a great help for the common man through his expenses and other deductions. Deskera is an excellent platform and a one-stop solution for managing your business expenses as well as keeping up-to-date records.
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1. A business owner can file for income tax deductions to reduce the taxable income for the year. The same rule is applicable for the common man in the US.
2. A small business owner who is a sole proprietor of the products, as well as an employer of a big organization, must file income tax for the year till 15 April 2022 so that he can claim the tax deductions next year.
3. An industrialist can claim deductions from the taxable income on various grounds for his expenses which include advertising, team training, company outing, work expenses related to systems, change of location, contract labor. This also includes legal fees, employee salary, telephone and internet expenses, business travel expenses, rent paid for office location, bank loans and interest, bonus, home office etc.
4. A common man can report tax deductions for his children under kiddie tax where he has to support his kid/s. He could also report deductions for spouses individually or jointly while filling the income tax form.
5. Tax deductions reduce the taxable amount for the taxpayer for a year. It could be big financial support for any individual in dire circumstances.