15 Tax Deductions Every Small Business Owner Should Know About
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| 15 Tax Deductions Every Small Business Owner Should Know About |
The tax code is complicated, but running and growing your small business helps lower your taxes. The way it's done is through business deductions. These deductions will lower your business profit, ultimately lowering your tax liability.
While all small business owners want to lower their taxes, make sure you use proper tax planning. The best way of doing that is by hiring a professional tax consultant, but knowing what deductions are available is still important.
Unfortunately, too many small business owners do not take all the eligible business deductions because they are not aware of them or think they are too complicated.
The fact of the matter is that the deductions are not too complicated for your accountant to handle, but you must have the supporting documents, and the more you document, the more you will save.
The Meaning of Tax Deductions
A tax deduction is a sum of money that can be subtracted from a person's income before the total amount of tax due is calculated. A deduction is said to be exempt from taxation. It is therefore different from an exemption.
A tax exemption is when the taxpayer does not have to pay tax on the income. If the income is exempt, there is no need to include it in the income tax calculation.
For a small business, the money that is saved as a result of tax deductions can be reinvested in the business and help it grow. Understanding which expenses are deductible is important for all small business owners.
15 Tax Deductions for Small Business Owners
There are several tax deductions available to small business owners. You should know them so you can determine if you qualify for them. They include the following:
1. Home Office Deduction
Many business owners have home offices. The IRS allows a deduction for a home office, but be aware that the requirements for this deduction are very specific. To qualify for the home office deduction, you must use a specific area of your home regularly and exclusively for business.
This area of your home can be a room or other separately identifiable space; however, it does not need to be marked off by a permanent partition. Any expenditures related to the portion of your home that is used for business and meets the requirements discussed above can be deducted as a home office expense.
This would include such items as mortgage interest, rent, utilities, homeowners insurance, and depreciation. If you use your home for both business and personal use, the expenses need to be allocated.
Only direct costs that are fully allocated to the home office, such as painting or repairs solely in the home office area, can be deducted in full. Indirect costs that benefit the entire home, such as utilities and homeowners insurance, do not need to be allocated.
2. Business Vehicle Expenses
Using vehicles costs money. The costs of operating a vehicle for business purposes are the day-to-day expenses, which are deductible. There are two methods for determining deductible vehicle expenses:
- Standard mileage rate.
- Actual expense.
It is essential that, if you intend to claim a deduction for any form of vehicle expense, you have a good understanding of the rules and accurately maintain relevant records.
Records would include diaries, log books, fuel and oil receipts, vehicle expenses, insurance, interest statements, third-party insurance, details of days when vehicles are unavailable as evidence of not being used, etc.
3. Office Supplies
You can deduct any expense that you use to buy supplies and make them available in an office or working room. This includes pencils, pens, paper, folders, clips, and documents.
It also covers larger items such as desks, lamps, cabinets, and fax machines. You can also write off computers, tablets, mobile phones, and software as essential office supplies.
Some specific supplies may have to be depreciated over a few years instead of being deducted in the year of purchase.
This applies if the property has a useful life of more than one year and should usually be added to the company's depreciated assets on IRS Form 4562.
4. Advertising and Marketing Costs
All businesses need to advertise, and advertising costs are generally deductible in the year that they are incurred.
So anything ordinary and necessary to promote your business, including business cards, sponsorship fees, promotional materials, and donations to organizations or teams, is deductible.
Keep in mind that things that you do in order to increase goodwill for your business will be considered advertising expenses.
A good rule of thumb is that the costs you pay for print, radio, and other forms of advertising are tax-deductible. This also includes digital ads such as Google and Facebook.
The costs related to marketing activities to attract new customers or to market new products or services are not only necessary for attracting and retaining clients but also an important part of a business's annual budget. They are considered, through IRS standards, to be business expenses and are tax-deductible.
5. Business Travel Expenses
If you travel overnight on business, your hotel, tips, dry cleaning, phone calls, faxes, computer rental fees, and 50% of meals are 100% deductible. You only get to deduct 50% of meal expenses while you are traveling out of town; this includes 50% of tips.
If you take an overseas business trip, you must allocate your airfare and car rental expenses between business and private activities. Only the business part of the airfare and car rental expenses is deductible.
You can also deduct your lodging and 50% of your meals for the overseas trip. You can deduct non-50% meals along the way, but not when you reach your destination or return home.
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| 15 Tax Deductions Every Small Business Owner Should Know About |
6. Education and Training Expenses
Whether you are attending college to pursue a degree, taking a few classes to stay up-to-date in your field, or enrolling in a training workshop, your education and training expenses are not only an investment in yourself, but they are tax deductible as well.
The IRS classifies certain education and training expenses as business expenses; understanding these tax guidelines can help people save thousands of dollars on the cost of education.
For example, now more than ever, the hybrid schedule of the course can help individuals save money on travel, hotel, and food expenses. Learning Tree even offers discounts for students who enroll in multiple classes, which can also provide potential savings on tax deductions.
7. Utilities and Phone Bills
As long as you use the phone or utilities for business operations, those can be included in your write-offs. You do not have to have a landline, though, in order to write off cell phone expenses.
Perhaps you use your cell phone for personal calls, but you also take a lot of business and customer calls. You can write off business-related calls, and if you are savvy enough, you can allocate the time during which you're on client phone calls and the time between to determine which portion of the expense can and can't be written off.
If the bulk of your work occurs while you're tethered to WiFi through your cell, this time, too, should be considered billable work time, and the portion of your cell phone bill at that time could be written off.
8. Website and Software Costs
Nowadays, almost every business, regardless of its specific niche, has a website, which is why the costs associated with its creation and support are also tax-deductible.
These costs may include domain and hosting expenses, licenses, and fees for website development or its redesign. The amount is still divided over a 3-year period.
Other related costs include expenses for software, cloud storage services, CMS plugins, website security, testing and maintenance services, and migration of the website from one CMS to another.
If a small business owner has separate staff who are responsible for website maintenance and development, their salaries are also tax deductible.
9. Business Loan Interest
Generally, you may deduct interest on any business loan if it is assessed on the outstanding principal or on the amount drawn down by the borrower, even though it may not have been received by the borrower in cash.
A business loan implies the existence of a business. The borrower must be engaged in business at the time the interest was incurred and must intend to deduct the interest from income.
The loan must be used for business purposes (in some available form of investment). However, it does not have to be a commercial or profit-making business.
As an example, the following identifiably business purposes or uses of the proceeds of a family investment loan will satisfy the purpose requirement:
- as qualified small business capital;
- as materials necessary to carry on business operations;
- in the making of income-producing investments.
10. Professional Services Fees
A business might pay attorneys, accountants, and other professionals to provide it with services.
If the service is something that is likely to be a fee the standard consumer pays, like legal fees in the course of being audited, then the cost is deductible. However, legal and consultation costs are deductible, subject to several limitations.
For example, although a "purely personal" expense typically would not be deductible, certain expenses that may seem like personal expenses could be deductible if they're sufficiently related to your business as well.
You can deduct amounts paid to your attorney for matters not related to your business (for instance, you can deduct personal legal fees you pay your attorney to defend a suit for libel filed against you).
11. Insurance Premiums
Business insurance is often an important type of overhead expense that all small business owners need to account for. Deducting your business insurance premiums from your taxable income is a good way to reduce your total tax debt.
There are several different types of business insurance that companies usually carry, with common types including property insurance, general liability insurance, vehicle insurance, and worker's compensation insurance.
While most business insurance expenses can be written off, life insurance is one exception. You can deduct life insurance paid on behalf of the employee that does not share options.
Key person insurance purchased by the company, including others in which the business is the beneficiary, is also considered a write-off.
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| 15 Tax Deductions Every Small Business Owner Should Know About |
12. Bad Debts
If a customer owes you money and you cannot collect it, you may have a bad debt. Bad debts usually arise from credit sales to customers.
Bad debt can be deducted on Schedule C or as a business bad debt if the amount due is from sales or services that were included in gross income. Do not deduct it as a capital loss.
In the year you write off the bad debt, you must reduce your business income by the amount of the bad debt.
If you sell business property on the installment plan and the buyer later defaults, the portion of the sales price due to a bad debt is deductible in the year it becomes useless.
13. Research and Development Expenses
The costs your business incurs in developing and testing new products or processes (as long as these are intended to advance a new business component) and the costs for developing a patent, invention, formula, process, design, or similar property may be amortized over time.
This allows you to recover these costs over time by taking a deduction for part of the cost each year over the useful life of the property. In certain circumstances, a portion of these costs may be deducted in the first year they are incurred.
If you pay for or incur research and experimental expenditures in your trade or business, you may be able to take credit for these expenses.
14. Retirement Contributions
Small business owners contribute to retirement savings plans for different reasons. They may want an effective way to save and fund investments, or just an attractive benefit for them and their employees.
For small business owners, the most appropriate retirement contribution options are likely to be the SEP-IRA, Individual 401(k), or Profit Sharing plans, because these plans can provide large tax deductions that are not limited by business income (unlike traditional or Roth-IRAs).
A business owner can simultaneously take a deduction for contributing to a 401(k) and a profit-sharing plan (with the two plans designed as a "combo-k") if an employer has no other common-law employees.
15. Licenses and Permits
As a business owner, you’re entitled to all the licenses and permits that the law requires. The costs of these documents are tax deductions.
Although monthly parking fees are usually personal expenses, the garages you might rent in a location that has "parking problems" can be trade or business expenses that provide you with tax deductions.
So do the parking fees and meters you can use when you have to go to different customer locations. These are usually trade or business expenses that are deductible for tax purposes.
Tips for Maximizing Tax Deductions
Here are three important ways to maximize your tax deductions:
1. Keeping Accurate Records
Small business owners may come across many tax deductions directly related to their type of business, such as maintaining a vehicle, promoting the business, and providing employees with certain benefits.
In order to qualify for most tax deductions, however, the IRS requires business owners to keep accurate records of where and how business funds are utilized.
Keeping accurate records, therefore, is the guiding principle of using tax deductions in a small business. Besides, in the event of an audit, you should keep your records up-to-date in order to prove the legitimacy of each tax deduction.
2. Working with a Tax Professional
Once your business has a few employees, an established location, and you're offering a service that another person can reasonably do with similar results, you can hire a tax consultant to your list of trusted advisors.
A tax professional may not only be able to help you take advantage of new tax breaks; they can also potentially inform you of unknown industries to look into or competitors that are thriving.
3. Staying Updated with Tax Laws and Regulations
As a small business owner, you don’t want to be bogged down with confusing tax deductions and regulations that can make filing difficult. New tax rules come out every year, some of them without a lot of warning.
A dedicated tax advisor can help. Which means that staying updated on the latest tax news and taking advantage of the various tax deduction opportunities can seem daunting.
Conclusion: Tax Deductions Every Small Business Owner Should Know
As a small business owner, the more tax deductions you can take, the lower your small business tax bill will be. It’s worth noting that business tax deductions aren’t just for corporations. As long as you’re a small business owner, you can take them.
Beyond that, you should also make sure you record and request any deductions on your tax return. This list of small business tax deductions will help you evaluate every dollar you spend to start, operate, and succeed in business.
