5 Tax Deductible Purchases You Didn’t Know Of
There are two unquestionable certainties in this world, which are death and taxes. Benjamin Franklin rightly puts it that “…. but in this world, nothing can be certain except death and taxes.”
Taxes are monetary tools levied on individuals and organizations. These levies aid the government in providing adequate amenities to the benefit of everybody regardless of financial status. Tax acts as a crucial way to play a pivotal role in economic development and reduce the gap between the rich and poor. These and more make the government enforce the adherence of tax payment with eagle eye strictness. However, tax avoidance and tax evasion theory clearly show that an average person is reluctant to pay tax no matter how much they have. Money is never enough, and the law of “to have” is to have more, and people are ready to dare the consequences just to avoid payment of tax.
There is, however, a silver lining and a relief for most taxpayers and especially business owners. These reliefs reduce the taxpayer’s taxable income and consequently reduces the tax to be paid and offer more tax refunds. These deductions are called Tax-deductible Purchases.
What are Tax Deductible Purchases?
This comes as a break for taxpayers and businesses against the certainty of paying tax. Tax-deductible purchases are deductions or reductions in the taxable income, which ultimately reduces the taxpayer’s liability. The deductions from the taxable income are recognized if it was incurred while generating income.
As popular as Tax deductions, there are some that an average taxpayer is not aware of.
Here is a list of some of them.
1. Donations to Charity
Contributions made to charitable organizations are deducted from the taxable income, which reduces tax liability. This both applies to an individual and organization. An individual taxpayer can log for such deduction when filling the personal tax form and an organization when filling the corporate tax refund.
2. Sales Tax
Sales taxes are levied and paid on the sales of certain goods and services. The consumer usually bears these taxes at the point of purchase. A taxpayer has the option of deducting the sales tax from the federal income tax. Also, deductions of sales tax on taxable income are maximized when it’s an expensive buy, like the purchase of a car or a diamond ring.
3. The premium on health insurance
Medical and health bills can put a huge dent in taxpayers’ income; this is so because of the advance and expensive healthcare system. The internal revenue service (IRS) takes this into account and thereby allows a tax deduction on the cost of health insurance premiums. The claimed deduction has to be 7.5% of the adjusted gross income. This does not apply to an individual or self-employed taxpayer who is fully responsible for his insurance. Such an individual has access to a full premium cost deduction from their taxable income.
Most small businesses and sole proprietorships have not been able to maximize this tax-deductible purchase, as it is most common in large corporations. Depreciation offers the proprietor the opportunity to write off the cost of a fixed asset over its useful life. Businesses can deduct the calculated depreciation value of the fixed asset spread over its useful life from the taxable income. For example, Let’s say company XYZ bought machinery for 200,000 dollars and calculated the depreciation to be 5,000 dollars spread over years of the machinery’s useful life. So, the company will deduct $5,000 from their taxable income every year until the end of the machinery’s useful life, except the depreciation is adjusted.
All expenses incurred educationally geared towards adding value to the business are all deducted from the taxable income. However, there is a catch as the educational course of study, seminar, or webinar must improve skill and expertise. The qualifying deduction is based on the following;
- Workshops, seminars related to your field
- The course of study or classes related to the field
Journals, articles, and publications
Many funds expended by businesses qualify for a tax deduction but note that these deductions are subjected to the tax rule. These tax rules and reforms are so dynamic that they change every time. This serves as a boost for the taxpayer or business owner to be well informed about the current tax law on tax deductions or hire a skilled accountant to handle this aspect of the business.
Businesses are advised to keep a trail of claimed deductions. These claims can either be journalized or kept electronically. The amount, date, and the purpose of the expense served should be kept in records for the IRS team. Furthermore, businesses should keep clear separate expenses between personal and business. Personal expenses should not be paid with the business account as this will cast shadows when filling the tax form.