Every small business owner wants to save some money. Small business tax deductions can help you save that money. Taxes can be complicated especially for small business owners.
What is a tax deduction?
A tax deduction also known as tax write-off is an expense that you can deduct from your taxable income. Tax write-off allows you to pay a smaller tax bill. You take the amount of the expense and subtract it from taxable income. The expense has to fit the IRS tax deduction criteria.
When you deduct an expense on your tax return, you’re lowering your taxable income and thereby reducing your tax liability. This means you have more money to invest in your business by reducing the amount you owe to the IRS each year.
Following are the most common tax deductions for small business:
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Car and truck expenses:
Most small businesses use a car, van or a small truck for business purposes. Cars can be used to drive for meetings with the clients or using a light truck to transport equipment. When it’s time to pay the taxes, you can choose to deduct your actual expenses such as gasoline, parking, toll, maintenance etc. OR you can choose a straightforward route of using the IRS standard mileage rate i.s. 58 cents per mile. So for example you drove 3000 miles for business purposes , you’ll be able to deduct $1740 off your taxes.
The option you choose depends upon how economical your car is, how much it costs you to drive throughout the year, and how well you have documented your car related expenses. So, it’s better you start saving those receipts.
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Home office:
Are you utilising part of your apartment as a home office space? If yes, then this is great news for you! You will be able to deduct expenses for the business use of your home, which include mortgage interest or rent,real estate taxes,housekeeping or landscaping service,homeowners association fees, insurance, utilities, repairs and depreciation. This deduction allows small business owners to deduct $5 for every square foot of your home office for upto a maximum of 300 square feet.
This type of deduction is ONLY allowed for you to use your home office space for business purposes on a daily basis.
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Qualified Business Income:
According to the new tax law, small businesses including S corporation, partnership, sole proprietorship, LLCs will be able to deduct 20% of their income on their taxes. The Tax Cuts and Jobs Act of 2017 made significant changes to the tax code. For small businesses it was the creation of qualified business income deduction. For example you have earned $1,00,000 in profit, so now you can deduct $20,000 before ordinary income tax rates apply to you.
However, there are few limits to claiming this deduction. Once your income exceeds $1,57,500 for single filers or $3,15,000 for pass-through business owners who file a joint return, this deduction will phase out. To see if you’re eligible for this pass-through entity deduction also known as 199A deduction reach out to tax pro.
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Rent:
As we all know rent is always going up. The cost of renting a space for your small business is deductible, it includes a shop on a busy downtown street, a cupcake shop, an office space for a travel agency etc.
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Advertising and Marketing:
You are eligible to deduct the cost of printing business cards on your tax return. So, basically anything you use to promote your business to bring in new customers from social media ads to billboards, all is 100% deductible. All this includes launching a new website, sending cards to clients, sponsoring an event, hiring someone to design a business logo, running a social media ad campaign etc.Great News! Isn’t it? But remember you cannot claim, amount paid to influence legislation i.e. lobbying or sponsor political campaigns or events.
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Office supplies and expenses:
Every business requires stocking up on traditional office supplies such as printer inks, pens, post-it notes. These office supplies are totally deductible. Also, if you have bought a new laptop, smartphone or some software that you can use for your small business during the year, you can write-off the entire cost of that expenses. You can also deduct work-related postage and shipping cost if any. Be sure to document all receipts for office supply purchases.
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Utilities:
You’re in luck! Everything you spend on utility bills (electricity, phone, internet, water, heat and sewage) for your business is fully deductible.
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Repairs:
If you require to repair your office property or it just requires regular maintenance to keep running efficiently, you can write off these costs on your taxes too.
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Travel:
Many small business owners have to travel for business purposes. But of course! These expenses of travelling and staying comes with a price. But there is some good news here! You can deduct those expenses for you and for your employees if the trip is taken for a business purpose. For a trip to qualify as a business purpose, it must be ordinary, necessary and away from your tax home. The business travel expense includes the following:
- Parking and toll fees
- Tips
- Meals and lodging
- Business calls
- Dry cleaning while on business trip
- Using your car while at a business location
- Travel to and fro from your destination by plane, train , bus or a car
- The cost of public transportation used on business trip
- Just keep in mind to save all the receipts and keep detailed records from your travels.
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Meals:
If you have taken those meetings out for meals with your clients, well you’ll be able to deduct 50% of the cost for business lunches only if:
- The expense is an ordinary and necessary part of carrying your business
- The business owner or employee must be present at the meal
- The meal cannot be lavish or extravagant under certain circumstances.
The cost of providing meals to your employees at a company picnic or a holiday party are fully deductible. Be sure to keep the documentation for the outing that includes the amount of each expense, the date and place of meal and the business relationship of the person you dined with.
But remember, ‘entertainment expenses’ with your clients like sporting, events or concerts are not deductible.
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Salaries and Employee benefits:
The wages, salaries, bonuses, commissions, vacation time paid are all tax deductible business expenses for your employees. You can also deduct contributions to their retirement plans, education assistance and most other employee benefit program costs. If you have freelancers or contract workers you pay is also tax deductible. This applies only if it fulfills the following criteria:
- The services were actually provided
- The salary is ordinary, necessary and reasonable
- The employee is not a sole proprietor, a partner, or an LLC member.
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Taxes:
There are many taxes that you can write off. You can write off $10,000 of state and local income tax, sales tax, real estate tax and personal property taxes. You can also deduct the following taxes:
- Excise taxes
- Franchise taxes
- Occupational taxes
- Payroll taxes
- Fuel taxes
- Business licenses
- Part of your self-employment tax
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Insurance:
Every business needs to be protected. To protect it by insuring your business. The cost for insurance premiums like property coverage for your furniture, equipment and buildings,liability insurance, fire and flood insurance, malpractice insurance, workers compensation coverage, auto insurance for business vehicles, business owner’s policy are all deductible. Medical insurance for your employees is also tax deductible under certain circumstances.
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Legal and professional fees:
You have the right to deduct and legal or accounting fees charged by attorneys, bookkeepers, and accountants that are related to your business operations.
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Telephone and Internet expenses:
If telephone and internet are integral to your business, they can be deductible as well. Keep in mind, if you have a landline at home , you cannot deduct the cost of your first line even if it’s used for business purposes. However, if you have a second line at home used for business purposes , the cost of this line is 100% deductible. If you use a cell phone and internet both for personal and business use, you can only deduct the percentage allocable to business use. In case you are audited, keep an itemized bill and details of records to prove the amount of business use.
Conclusion:
One of the simple ways to reduce your income tax bill is by claiming all the tax deductible available for your small business. Consult with your accountant before claiming a deduction on your tax return.