Taxes are deductions that the government makes on earnings for businesses and people. The taxes are vital to the economy and enable governments to function.
Businesses need to pay for certain services to run smoothly. These are known as business expenses. All businesses have expenses that appear in their income statements.
There are special categories of taxes. Some expenses are allowable, while others aren’t. Allowable expenses are expenses that do not increase your taxable income. These are essential expenses that keep the business functional.
Now that we know about tax allowable expenses, where does milage lie? And more importantly,
Is Mileage Reimbursement Taxable?
Mileage reimbursement is not taxable under special conditions. You must ensure that the milage falls under the maximum rate that the IRS allows. The IRS allows businesses to incur a milage expense of 58.5 cents for every mile. Any amount above 58.5 cents incurs tax.
When preparing an income statement, a business needs to include the expense. It will reduce the employee’s taxable income.
Tax Allowable Business Expenses
If you own a business, there are many tax allowable expenses. These are business costs that reduce your taxable income. You should take advantage of such expenses to avoid paying excess taxes.
You must keep your account books accurate and indicate these expenses. There are two types of self-employment tax deductions. These deductions cover Medicare and Social Security. These deductions are about 15.3% of your total earnings.
Medicare expenses go toward your health insurance fund. If you are an employer, you have to match your employee’s contributions to both schemes. You less the Medicare and Social Security payments from your taxable income amount.
If you have a health insurance provider, your contribution to the premiums is tax allowable. It covers healthcare and any dental plan provided by a private insurance firm.
You can extend the cover to your children if they are less than 27 years old. You can also include your spouse in the insurance cover. The IRS excludes such payments from your taxable income amount.
Did you know that you can expense your internet and phone bill expense to your business? If the business uses the internet and phone calls for its operations, you can deduct the amount from your taxable income.
Note that these expenses have to fall in line with the nature of the business. The expenses include fax services.
Businesses take loans to meet short-term and long-term expenses. Note that it differs from the cost of capital. When paying back any loan amount, the interest on the loan increases the business expenses.
The interest expenses are tax allowable, reducing the business’s taxable income. You should indicate interest payments on your income statement.
Some meals count as tax allowable. These are meals that you take when traveling for business reasons. They also include meals for client meetings and even business conferences.
The IRS requires that you keep all the meal receipts proof that they are business expenses. You do not deduct the full value of the meal as tax allowable. The IRS states that only 50% of the meal expense is allowable.
Home office expenses are deductible. These are expenses you incur when running your business out of your home. You must account for these expenses for them to qualify as tax allowable.
The home expenses get set according to the size of the office. The office incurs a percentage of the cost of the floor space. Larger home offices, therefore, have more expenses.
Any expense you have on the business car is tax allowable. These do not include expenses from using the car for personal trips. You should keep records of the miles on the car.
The expenses on the car also cover servicing and basic maintenance. It does not cover labor hours spent if you hire a driver. It covers insurance. You should also note the annual depreciation for each tax year.
Expenses you have when traveling for the business are tax allowable. These are expenses you have that need you to spend time away from your home. They do not include trips for leisure or downtime.
During the trips, you should conduct business activities such as client meetings, sales, pitches, etc. You should keep track of all the expenses you incur during the period.
If your business rents an office, you should deduct the amount incurred from your taxes. These rent amounts include rent on machines, plants, and equipment. It covers any leasing agreement.
But what if you own the property? You cannot have tax allowable rent expenses if you own the property. Ensure you note the depreciation on the plant and equipment as they reduce the taxable earnings amount.
Any subscriptions for magazines and relevant publications are tax allowable. These are magazines that relate to the business field. They do not include general subscriptions to items like comic books unless your business sells them.
A law firm can use legal magazines, and a beauty firm can have beauty magazines. If the law firm gets a subscription to a beauty magazine, it is not taxed.
You can start a retirement fund plan, and any contribution to the fund is tax allowable. If you have your own business, your retirement plan has to be less than 58000 dollars for a year.
Your employees can have as much as 19500 per year. In most cases, the law requires that employers match their employee’s contributions towards their 401K plan.
All business insurance payments are tax-deductible. It goes beyond the premiums you pay on your business car. It includes insurance on property, plant, equipment, liability, etc.
These payments must be on the income statement, and you should itemize them properly. The insurance payments are free from taxes.
Advertising and business promotion activities are tax allowable. Any amount you spend to get the business services out there is an allowable tax expense. It covers online ads, billboards, TV, and radio ads.
Did you know that there are tax allowable education expenses? If you want to improve your skills in your line of work, you can get a tax break. You can expense the tuition amount and costs you incur to buy books for the business.
If you seek further education in a different field, you cannot count that as an expense to the business.
When you are starting a business, you need capital. You can get capital through equity, debt, or both. You will eventually need to pay interest on the capital to the investors. These payments are tax allowable.
The IRS will not allow you to deduct more than 5000 dollars of expenses in a single year. You need to spread the payments across several years.
Types Of Tax Rates
There are different types of tax rates. These get classified according to their structure and the incomes of people who incur them. These taxes are:
Progressive Tax
It is a tax rate that increases proportionate to your income. The taxes get separated in brackets. Lower-income earners pay a low percentage of their earnings to tax. High-income earners pay a larger percentage toward tax.
Regressive Tax
Regressive taxes have lower-income earners paying a larger percentage of their earnings towards tax. They include taxes on most consumer goods.
Proportional Tax
These are taxes that are fixed proportionately to everyone’s earnings. It includes taxes like sales tax, where you pay a fixed percentage regardless of the sales volume.
Tax Avoidance Techniques
Did you know that you can legally avoid paying some taxes? Many loopholes allow you to avoid tax without legal consequences. They include:
Offshoring
Offshoring is setting up your business in a tax haven. These are places with less strict tax laws that welcome businesses. Such investments enjoy low or no taxes because they are foreign investments.
Standardizing vs. Itemizing
Itemizing your expenses ensures that you pay fewer taxes than standardizing. Itemizing is better as it treats each deduction separately. You can enjoy reduced taxes on your mortgage when you itemize deductions.
Workplace Expensing
If you classify them as allowable business expenses, you can reduce or avoid some taxes. You should be careful not to commit fraud when you expense certain costs to the business.
Retirement Savings
Set up an Individual Retirement Account to reduce your taxable amount. Any contribution you make to such an account cannot get taxed if you don’t go beyond the limit.
Conclusion
Is mileage reimbursement taxable? Under some situations, mileage reimbursement doesn’t get taxed. You must guarantee that the mileage does not exceed the IRS’s maximum rate. The IRS enables companies 58.5 cents each mile traveled. Any payment over 58.5 cents is subject to tax.
Businesses need to list expenses when creating an income statement. It lowers their employees’ taxable income.
Businesses must pay for some services to function properly. These are known as business expenses. Every firm has expenses that are on the revenue statements. There are several types of taxes. Some expenses are allowable.
