Saving money is the goal of every small business owner and small business tax deductions are the way to do just that. Most business owners aren’t aware of the tax deductions, and this is because they aren’t keeping their business expenses records or don’t want to spend time crunching numbers.
Every small business requires tax filing and this involves reviewing invoices and receipts quarterly. Filing taxes sometimes result in spending money rather than saving it. De facto, if you properly file your tax, you can benefit from the small business tax deductions available to your small business.
If you’re in need of those small business tax deductions, this guide will surely help you capitalize on those deductions. Here is a list of the most common small business deductions and the process of claiming them.
What Is a Small Business Tax Deduction?
First things first, what actually a tax deduction is. It’s an expense deductible from your taxable income by paying a smaller tax bill. Internal Revenue Service (IRS) has laid out guidelines for what can be deducted from business expenses. According to IRS, only ordinary and necessary business expenses can be deductible from your taxable income. The necessary expense is one that’s suitable for your business while an ordinary expense is common and accepted in your business.
Note that, you can only claim tax deductions as per your business entity type.
How Do Small Business Tax Deductions Work?
By lowering your taxable income, thus lowering the tax amount you owe as part of your tax return. To learn about how to claim the most deductions, it’s better to consult or hire Certified Public Accountant (CPA). Getting help from such professionals can help you figure out what tax deductions are available and how they apply to your small business.
Small Business Tax Deductions
Here is a list of small business tax deductions that can be claimed by all kinds of business entities such as sole proprietorships, C-corps, S-corps, partnerships, and LLCs.
- Startup Costs
According to IRS, startup costs are considered capital expenses, being it the investment in your small business. Deductions for such expenses usually occur over many years and this is called amortization. This benefits small businesses to measure profitability each year. To learn more about deductions for business expenses, check out the IRS Publication 535.
If your business model involves manufacturing products or buys them for resale, a deduction can be claimed by deducting the inventory cost, or the cost of the goods sold. The cost of goods can be determined by valuing inventory at the start and end of each year.
Any utilities you use for your small business are tax-deductible. The utilities include water, power, trash, and phone bills. However, if you’re running a home-based business and use a landline, the cost of the subsequent landlines are deductible only.
Every small business requires some kinds of insurance and that usually includes health insurance, business continuation insurance, and the business owner’s policy that are all 100% tax-deductible. The common types of deductible insurance policies include real estate insurance, personal injury insurance, malpractice insurance, workers’ compensation, auto insurance, life insurance, and business interruption insurance. A small business providing health insurance may also qualify for up to a 50% tax credit as well.
- Business Rent
If your business is operational on a rented or leased property, deductions can be made via deducting your lease or rental payments from taxes. For a home-based business, check with IRS with an eligibility test to see if there are deductions available for you. The deductible includes mortgage interest, insurance, utilities, repairs, and depreciation. You can also get more information via IRS Publication 587.
- Business Cars
If your car is being used for work-related purposes, you can deduct the costs related to operating and upholding it. If it’s being used for both business and personal purposes, you can deduct the costs associated to the business users only. The mileage can be claimed for business purpose by deducting the miles traveled for business, or by using the standard mileage deduction of $0.58 per mile driven. For more information, check out the IRS Publication 463 on travel, entertainment, gift, and car expenses.
The cost of leased equipment or machinery can also be fully deductible and this includes printers, vans, and trucks. The depreciation on these can also be claimed but over several years. According to IRS Section 179 deduction, you can deduct up to $1,020,000 from new or used equipment or machinery in service during a taxable year.
The supplies for the business purposes include papers, envelopes, notebooks, binder items, filing cabinet, boxes, writing implements and more. Al these items cost you money and are deductible from taxes.
The furniture and fixtures are considered a type of office supplies and can be deducted from your taxes.
- Software Subscriptions
Any software purchased or downloaded for business purposes is deductible. As per Schedule C tax form of IRS, such expense can be claimed under “Other Common Business Expenses>Other Miscellaneous Expenses”.
- Advertising and Marketing
Any money spends on advertising and marketing for your small business can be claimed as tax deduction. This includes online ads, billboards, business cards, print ads, webinars, direct mail, mobile ads and more. Even if you hire someone to do a job for you such as freelancers, you can claim it.
- Entertainment Expenses
Any necessary expense relating to entertaining your clients with meals or events are deductible. Most meal costs are deductible to 50% whereas some meals cost such as provided at an office party or celebrations are 100% deductible.
- Travel Expenses
Business travel expenses including ticket fare, hotels, car rental, tolls, lodging, dry cleaning, and more can be written off at tax time. You can also refer to the IRS website for a full list of business travel deductible expenses. The travel should be related to your business and the travel location should be different from your tax home. In addition, travel time should be longer than a normal working day.
- Interest Payments
If your business has applied for small business loans, paying monthly interest payments are fully tax-deductible considering the loan amount is used for business purpose. In order to claim this tax deduction, the business owner and the lender must have a “debtor/creditor” relationship and be legally liable for the debt.
- Bad Debts
Any money provided to an employee or vendor without receiving it back is considered bad debt. By proving it a business bad debt you can claim it back. The types of business bad debts include loans to employees, suppliers, distributors, credit sales, or business-loan guarantees.
- Business Taxes
Do you know business taxes are also deductible? Business taxes can be federal, state, real estate, or sales taxes. Your employer taxes include a share of FICA, FUTA, and state unemployment taxes, which are also fully deductible.
Usually, your employee salaries are also deductible and this includes bonuses and commissions as well. Though, this tax deduction is not applicable to sole proprietors, LLC, and partners.
- Employee Benefits Programs
Certain employee beneﬁt programs such as education support, dependent care help, life insurance adoption assistance, and retirement plan accounts are also fully deductible. If you’re self-employed, paying money to your own retirement plans are considered personal deductions and can be claimed under IRS Form 1040.
- Employee Gifts
According to IRS Publication 463, employee gifts are fully deductible up to $25 per year, per employee.
- Independent Contractors
If your business has independent contractors or freelancers as a part of your staff, you can claim tax deductions. If you’re paying $600 or more in a tax year, you must issue form MISC-1099. In addition, if they are paid by other means like PayPal or credit card, the payment processor must issue the worker form 1099-K to that independent contractor or freelancer.
- Legal and Professional Fees
There could be any reason you might need an accountant or legal expert for your small business. You can also deduct 100% of their fees as tax deductions.
- Energy Efficiency Expenses
Any upgrades to make your business energy efficient can be deductible for tax credits. The upgrades can include solar panels, solar water heaters, and wind turbines.
- Foreign-Earned Income Exclusion
If you’re an American citizen and have a business in another country, you can claim foreign-earned income from that business as tax deductions under certain circumstances. You just need to have proof of that money as a foreign income.
- Natural Disasters
If your small business has suffered a natural disaster or experience theft during a tax year, you can claim that loss, which is not covered by your insurance company, into a small business tax deduction.
- Last Year Carryovers
There are few small business tax deductions like a capital loss that can be carried from last year to the current year. In order to claim that tax deduction, make sure you’re updated with the latest IRS regulations.
- Unpaid Goods
If your small business has goods which you produce but didn’t get paid in a tax year, you can deduct the cost of these goods.
There are so many tax benefits available for your small business and it’s up to you to utilize them. Start with keeping organized records, save expense receipts, and document them properly. Keeping track of these will put a smile on your face when you see your tax bill.