10 Small Business Tax Deductions You Should Know
September 13, 2019 | Last Updated on: April 3, 2023
September 13, 2019 | Last Updated on: April 3, 2023
Nothing is certain in life but death and taxes, right? Every small business owner looks for ways to write off deductions to get a tax break so that they can have more money to invest in their business. Deductions can help reduce your tax bill, but they require two things: knowing what deductions are available and keeping good records. Always keep receipts so that your end of year and tax season is smooth sailing.
You can deduct any salaries, bonuses, or wages that you pay to employees. You can also deduct the costs of employee benefits like health insurance premiums and per diems, as well as any tools that you use to pay your employees, such as payroll software. If you use contractors or freelancers in your business instead of or in addition to employees, you can deduct the costs of their services. If any contractor makes over $600 per year, be sure to issue them a Form 1099-MISC come tax time.
If you or your employees frequently travel for business purposes, you can deduct these costs. There are some requirements, however. These expenses can include: airfare, train fare, tolls, parking, hotel stays, taxis or Lyft, and mileage (the standard mileage rate is currently 58 cents per mile in 2019). It is important that you meet the IRS requirements before deducting travel expenses. These include: the trip must take you away from your regular responsibilities at your place of business for longer than a regular day’s work; and you require sleep or rest to meet the demands of the business activity while you are traveling. Food is not fully deductible while traveling – only 50% can be deducted. Related Article | What You Need To Know About Filing Your First Small Business Tax Return
If you run your small business out of your home, you may be able to deduct expenses associated with your home office. The space in your home that you use for work must be dedicated space. It can’t be both the kitchen or bedroom AND your office! It must also be your principal place of business, or a place where you regularly meet with clients and customers. Your home expenses can be pro-rated based on the square footage of the area devoted to your business and then deducted. So if your home office is 200 square feet and your home is 2000 square feet, 10% of your home expenses can be deducted. These expenses may include: costs of maintaining the space; rent, mortgage interest, and real estate taxes, utilities; security costs. The IRS has a long and useful document that provides all details on this deduction. Beware: if taken improperly, this deduction can trigger an audit.
If you are paying interest on a business loan or business credit card that was used to purchase legitimate business expenses, the interest is completely deductible. Be careful about deducting interest on any business loans that you may be using for personal expenses – this interest would not be fully deductible. You must keep close records.
Throughout the year, your business likely uses the help of various professionals including lawyers, accountants, or marketing consultants. You can deduct the entire cost of these professionals’ fees as long as the fees are reasonable.
Certain taxes that your business pays are deductible. It’s important to keep close records to make sure that you are deducting the correct amount of taxes and doing so properly. You can deduct real estate property taxes for property owned by your business as well as any licenses or fees. You can also deduct all sales taxes that you have collected from customers. Finally, you can deduct payroll taxes that you have paid on behalf of your employees, including FICA and unemployment taxes.
You can deduct the costs of your business insurance premiums as long as those policies protect the business and are not personal policies. These types of insurance might include: liability insurance, commercial auto insurance, business interruption insurance, cybersecurity insurance, and property insurance, as well as health and life insurance premiums paid for employees.
Your business can take a large tax deduction – also called bonus depreciation – in the first year of owning eligible business property (but not land or buildings) instead of writing it off over time during the life of the property. Eligible property typically includes: machinery, computers, appliances, vehicles, and furniture. Bonus depreciation allows you to accelerate the depreciation of an eligible asset. This applies to new equipment, while used property is eligible under select conditions. If your property is used for personal and business use, it must be used >50% for business use in order to deduct bonus depreciation. Deducting depreciation can be complicated – seek the help of a qualified tax professional to assist you in deducting bonus depreciation.
The new 2017 tax law – the Tax Cuts and Jobs Act – introduced the Qualified Business Income (QBI) deduction for eligible businesses. This deduction allows some business owners to deduct 20% of their business income. The income must be earned through a sole proprietorship, partnership, S corporation, trust, or estate. The deduction is subject to many limitations; your accountant can help you determine if you are eligible to take the deduction.
Many other business expenses are tax deductible including: office supplies, marketing costs, vehicle expenses, equipment rentals, bad debts, any losses from theft, and work-related educational expenses. Review the full IRS guide to business expenses here. Related Article | Explaining LLC Taxes
These deductions are not allowed and should not be taken.