If you are a smoke shop owner and are worried about hefty tax burdens, this article provides you with ways that will help. The simplest way to reduce tax expenses is to use the tax deduction or tax write-off method. The business expenses that meet the IRS tax deduction standards can be deducted from taxable income, resulting in a lower tax burden. Below are the various tax deductions that may result in a decrease in the tax expenses of a smoke shop:
Promotion and advertising tax deductions:
Expenses for advertising and marketing are fully deductible. However, the advertising and promotion of smoke products differ from that of other retail products. While communicating with consumers through a social media campaign or event, keep in mind FDA disclosures such as health warnings and terms and conditions regarding the age limit. Expenses such as hiring a logo designer, producing business cards, purchasing ad space in print or online media, and launching a website are all tax-deductible expenses.
The smoke shop owner should have a separate business account or credit card to deal with business transactions. The bank’s annual or monthly service charges, money transfer/withdrawal fees, and overdraft fees are deductible from the taxable income. Personal bank account expenses should not account for deduction from taxable income. The smoke shop owner can deduct the service charges from the third-party money transfer service providers like PayPal from their taxable income.
According to the Tax Cuts and Jobs Act (TCJA), a business owner can deduct 50% of business meal expenses incurred during business travel, business meetings, and meals provided to employees during their work shifts. The business owner and employee must be present at the business meal. The documentation, such as the amount of expense, date, place, business personnel with whom you dine, and the purpose of the business meal, must be signed and dated as proof of deductible expense.
A smoke shop businessowner is eligible to deduct the vehicle expense from their taxable income. If the vehicle is used solely for business purposes, the entire vehicle expense is deductible from taxable income. Suppose the vehicle is used for both business and personal use. The portion of the vehicle expense related to business operations will be eligible for a deduction. The smoke shop business owner can deduct the vehicle expense by using the following methods:
Standard Mileage Rate Tax Deductions:
The business owner can multiply the miles traveled for business operations by the IRS standard mile deduction rate, i.e., $0.585 per mile to calculate the deductible amount. For example, if your car drives 1000 miles for business purposes, the amount deductible from the taxable income will be 1000 miles * $0.585 = $585.
Actual expense method Tax Deductions:
The smoke shop owner will track all the vehicle expenses like lease, gas, oil, repair, and maintenance throughout the year. For the calculation of the deductible amount using the actual expense method, the owner is required to multiply all the vehicle expenses by the percentage of miles covered for the business. For example, if your car drives a total of 4000 miles, of which 1000 miles are for business purposes, and the vehicle expense is $2500.The deductible amount from taxable income is (1000miles / 4,000 miles) * $2,500 = $625.
Taxes and Licensing
Franchise tax, excise tax, fuel tax, payroll tax, business license, and real estate taxes must be write-off from the income tax.
The IRS allows the smoke shop to depreciate the purchase of furniture and equipment and acquire a tax benefit by writing off the expense from taxable income. The IRS allows the owner to deduct up to $1080000 as depreciation on business assets such as machinery, computers, and software under Section 179 property. The smoke shop owner can deduct 100% of the cost of business assets through bonus depreciation.
Wages and Employee Benefits
Wages, bonuses, commissions, and contributions to the employee retirement plan or benefit plan are all tax-deductible expenses that help to reduce the smoke shop income tax.
The smoke shop owner can also use his home for the business and can still deduct the home office expense at the rate of $5 per square foot of the space used for business or by tacking all the maintenance expenses such as a mortgage, housekeeping, or repair and multiplying them to the space occupied for business use. The owner can also deduct the rent, lease, or improvement costs like carpeting, plumbing, painting, and décor expenses.
Cost of Goods Sold
Cost of goods sold, also known as cost of sales, refers to the expenses incurred by businesses that manufacture or sell goods and services. This cost includes the following sub costs that are allowed to deduct from the taxable income:
It is the raw material or supply that is required for the manufacture of goods such as tobacco.
Direct labor cost
Direct labor cost refers to labor directly involved in the manufacturing process but not the labor hired for selling the product, such as labor that made handmade cigars.
Inventory refers to the product that the smoke shop owner purchases or imports from another country for resale purposes. The cost of inventory sold is a deductible expense. But the unsold inventory is treated as a business asset and cannot be deducted from taxable income.
Tax expenses affect the business earnings because they are a liability that has to be paid to the government on time to avoid penalties. By retaining the above-mentioned legitimate tax deductions, the smoke shop owner can reduce the tax liability while increasing profits.
Here at Accountants Now, we manage your monthly bookkeeping with all deductions and benefits in mind year-round. Business tax-filing (as well as officer's personal) are included and will be filed with all possible deductions applied.