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For small business owners, there are few sweeter phrases than “small business tax deductions.” After all, everyone wants to save money, and small business tax deductions allow business owners to do just that.
But in most cases, business owners just aren’t aware of the many small business tax deductions out there when doing their business accounting. In other cases, they just aren’t keeping detailed records of their business expenses or don’t want to spend the time and effort itemizing expenses and crunching numbers.
If you think this might be the case for your small business, this article will make sure you’re capitalizing on the most overlooked (but valuable) deductions when doing your small business taxes. But first, let’s learn a bit more about what tax deductions are, and how to claim them.
A tax deduction is an expense a business owner can deduct from their taxable income. This allows you to pay a smaller tax bill.
However, the IRS has strict guidelines for what can be deducted from business expenses. According to the IRS website, a business expense is only deductible if it is both “ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
Note that the small business tax deductions you can claim also depend on your business entity type.
To claim small business tax deductions as a sole proprietorship, you must fill out a Schedule C tax form. The Schedule C form is used to determine the taxable profit in your business during the tax year. You then report this profit on your personal 1040 form and calculate the taxes due from there.
Now to our list of the top small business tax deductions. Note that all of these deductions can be claimed by sole proprietorships, as well as C-corps and S-corps, partnerships, and LLCs (although there might be different rules for each).
Our first small business tax deduction comes with a caveat—it’s not actually a tax deduction. Business startup costs are seen as a capital expense by the IRS, since they are an investment in your business (the money hasn’t actually left the business, it was just transformed into an asset). Deductions for capital expenses typically occur over several years. This is known as amortization, and helps businesses accurately assess profitability year over year. You can check out chapters seven and eight of IRS Publication 535, which covers business expenses for more information.
Some inventory-based businesses will manufacture products or purchase them for resale. If this is your business model, you can deduct the cost of your inventory, or the cost of the goods you sell. You generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold.
The following are types of expenses that go into figuring the cost of goods sold:
Any utilities that you use for your business are fully deductible. This includes things like water, electricity, trash, and telephone bills. However, if you have a home office and use a landline, the cost of the first landline is not deductible, but subsequent landlines are.
Most businesses will take out some form of insurance. The cost of the business owner’s health insurance, business continuation insurance, and the business owner’s policy are all 100% deductible. Other types of deductible insurance policies include property insurance, liability coverage, malpractice insurance, workers’ compensation costs, auto insurance, business provided employee life insurance, and business interruption insurance.
Note that with health insurance, a small business may also qualify for up to a 50% tax credit under the qualified small employer health reimbursement arrangement (QSEHRA).
If you rent your business property, you can deduct your lease or rental payments from taxes. Alternatively, if you run your business from home, you can also run an eligibility test with the IRS to see if you are entitled to any deductions. Types of deductible home business expenses include mortgage interest, insurance, utilities, repairs, and depreciation. You can learn more through IRS Publication 587.
If you have a car for business purposes, you can usually deduct anything considered a car expense. However, you have to have records that prove business usage, as well as keep track of your miles. Conversely, you can rely on the IRS standard mileage rate, which is currently $0.58 cents per mile. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to Publication 463 on travel, entertainment, gift, and car expenses for more information.
If you lease equipment or machinery for your business you can fully deduct these costs. This can be anything from printers and copiers, to vans and trucks. You can also claim depreciation on equipment and machinery. However, these costs must be deducted over several years. In order to do this, you must claim a Section 179 deduction, which allows business owners to deduct up to $1,020,000 from new or used property in service during the tax year.
Paper, boxes, pens, staples… they may be small, but they all cost money (which you can deduct from your taxes).
Office furniture is also considered a type of office supplies, and can, therefore, be deducted just as you would deduct printer paper or cleaning products.
If you’ve bought or downloaded software for your business, this can be deducted. These types of expenses can be claimed under “Other Common Business Expenses>Other Miscellaneous Expenses” on your Schedule C tax form.
As long as you can prove they’re related to your business, you can claim back any money spent on ordinary advertising and marketing purchases. This includes things like billboards, business cards, Yellow Pages ads, as well as hiring a freelancer to design a business logo, or sending thank you cards to clients.
Entertaining clients with meals and events? This, too, can be deducted if necessary to your business. Note that most meal costs are only deductible up to 50%. But certain types of meals, such as a meal provided at an office party, are 100% deductible. Be sure to save your receipts and note the business purpose of the meal in order to maximize this deduction.
If you’re frequently on the go, you should deﬁnitely look into deducting your travel expenses. For a business expense to qualify as travel, it must be away from the city or area in which you conduct business. You must also be away from your tax home for longer than a full workday. Types of deductible travel expenses include airfare, tolls, taxis, and lodging.
If you have a small business loan, you’ll make interest payments on what you’re borrowing from the lender. Those interest payments are usually fully tax deductible as long as the loan is used to cover business expenses. To claim this deduction, the business owner must be legally liable for the debt, and the business owner and the lender must have a “debtor/creditor” relationship. In other words, the loan must be through a traditional lender, and not a friend or family member.
If you’ve ever lent money to an employee or vendor without receiving it back, you can claim that back as ‘bad debt’. You just need to be able to prove that it was business debt, rather than personal debt. The IRS defines bad debt as “a loss from the worthlessness of a debt that was either created or acquired in a trade or business or closely related to your trade or business when it became partly to totally worthless.”
The following are examples of business bad debts (if previously included in income):
As strange as it sounds, the taxes you incur from just running your business are deductible. These taxes might be federal, state, and local income, real estate, or sales taxes. Your employer taxes, such as the employer share of FICA, FUTA, and state unemployment taxes, are also fully deductible.
In general, your employee wages are fully deductible. This includes bonuses and commissions. However, this deduction does not apply to sole proprietors, partners, and LLC members, because these individuals are not considered employees.
You can also deduct certain employee beneﬁt programs, like education assistance, dependent care assistance, life insurance adoption assistance, or qualiﬁed retirement plan accounts. For self-employed individuals, contributions to their own retirement plans are personal deductions claimed on Form 1040.
Employee gifts are 100% deductible up to $25 per year, per employee, according to IRS Publication 463.
Do you use independent contractors or freelancers as a part of your labor force? The cost of hiring contracted labor is fully tax deductible. Note that you must issue form MISC-1099 to any contract worker receiving $600 0r more from you in a given tax year. If the employee is being paid via credit card or PayPal, the payment processor must issue the worker form 1099-K.
If you ever need to hire a legal or accounting professional for your business, you can deduct 100% of their fees.
All of these options are there for your small business, but it’s up to you to use them. So stay organized! Make sure you save receipts, and record every expense in a top-notch accounting software. There are even free accounting software programs you can use. Trust us, once you see your tax bill, you’ll be glad you took these extra steps.
Want more? Use our slideshow as a quick visual reference for all the small business tax deductions your business may be eligible for:
We’ve also made an ebook about small business tax deductions. If you follow the link below, you’ll learn the tax deductions from…