Guide to Small Business Tax Deductions
Tax deductions are business expenses that can be subtracted from a company’s taxable income in order to reduce that business’s total income tax load. When it’s tax time, business owners are able to add up all of their eligible expenses, subtract that number from their taxable income, and use that new number to calculate the size of their income tax bill. So in effect, the more tax deductions your business can claim, the less total income you’ll see on your tax return, and the less you’ll have to pay to Uncle Sam.
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But put your checkbooks away - not every expense is an eligible tax deduction. There are any number of possible deductions depending on your state, time-in-business, and other qualifiers.
- What Qualifies as a Small Business Tax Deduction?
- The Top 25 Common Small Business Tax Deductions
What Qualifies as a Small Business Tax Deduction?
The Internal Revenue Service (IRS) defines a deductible business expense very simply. They state that a qualifying expense, “must be both ordinary and necessary.”
An ordinary expense is just that: it’s a normal expense in your industry. If you run a pizzeria, a pizza oven is a completely ordinary expense, which can be deducted from your company’s taxable income. A Lamborghini Gallardo is not a normal expense for a pizzeria, and would thus not be tax deductible. They define “necessary” as “helpful and appropriate for your trade or business.” That means that a website designer is a deductible expense for a restaurant - it’s not absolutely essential for your operations, but it’s helpful and appropriate.
Not every expense that’s deductible in one situation, state, industry, or company is deductible in another. As you read through and consider your expenses in each category, you may need to do additional research to decide whether your expenses can be deducted.
The Top 25 Common Small Business Tax Deductions
The IRS allows for a wide berth in terms of startup costs which can be deducted from your business income. After all, starting up your business can be the most difficult and expensive phase of business.
- Research. As you begin your business, you’ll need to know that it can survive and thrive in your area. You’ll likely need to perform some sort of customer survey or market research before you open your doors. The software and expertise required for this research can be deducted.
- Insurance. Your company needs business insurance in many different forms. General liability insurance, insurance on any vehicles your business uses for operations, malpractice insurance, professional liability insurance, workers’ compensation insurance, insurance on any physical assets you own... the list goes on. The premiums for all these insurance policies can be deducted.
- Incorporation Fees. If your business is just you, operating as a sole proprietor, this won’t affect you. But for other companies operating as partnerships, LLCs, or corporate entities, the fees paid to government entities are eligible deductions that will be necessary as you get started. If you pay a professional or lawyer to help draw up your articles of incorporation, you can write those fees off as well.
- Licensing. If you run a barber shop or liquor store or any number of businesses that require state or federal oversight, you’ll likely need to acquire a license to open your doors. Those licenses can be difficult to come by in some industries and expensive in others.
Once your business is up and running, you’re going to have to exist in some kind of space to operate. There are many costs associated with your space of operation that can be written off.
- Rent. If you rent a space to operate, that rent is tax-deductible. In addition, any mortgage interest on a space you own outright can be written off.
- Repairs and Upgrades. When your space gets damaged or obsolete, you can write off any repairs or upgrades to your real estate.
- Equipment. This is a huge one. Many industries have massive expenses related to the equipment they need to operate. Small business owners need to buy things like industrial cooking equipment, manufacturing supplies, medical equipment, and more. All of that equipment fits under “necessary and ordinary” and can be deducted.
- Vehicles. If your small business requires travel to a customer’s location (like a landscaping company, food delivery service, or trucking company) you may need to purchase a vehicle for business purposes. You can write off not only the price of the vehicle, but also any tolls paid during the course of business operations, and a particular rate (known as the standard mileage rate) based on how many miles you drive. Car expenses are unavoidable in many industries and can add up quickly.
- Home Office Expenses. Many small businesses are operated entirely out of the proprietor’s home office. In that case, the IRS allows for a tax deduction based on using a home office. That isn’t to say that if you sometimes handle bookkeeping in your comfy chair, you can write off your living room. The home office deduction requires the use of a space specifically and exclusively for business purposes and has a limit of 300 square feet.
- Office Supplies. Regardless of whether your office is located in your home or in an office park, you will likely need to fill that office with the supplies that make it work: paper, toner, computers, pens, softwarel, and even business cards - whatever you use to make your office work.
- Utilities. Power, gas, wifi, phones. All of the utilities your company needs to operate each day are deductible. It’s important to remember that if you’re operating your company out of your home, you can’t just write off all of your internet expenses. You’ll need to calculate how much of that internet bill goes to business expenses.
- Moving Expenses. If you need to move physical locations from one to another, you’re able to deduct the costs of hiring movers, renting vans, and any other expenses that build up during the course of the move.
- Short-Term Damage. Life happens. If your business property is damaged by random acts of nature - a hurricane, a mudslide, vandalism - you can write off the repair costs.
On top of the physical costs associated with business operations, you’re going to have expenses pile up each day. Business deductions can be found in your day-to-day operations.
- Interest. You probably borrowed money at some point in the history of running your company. Nearly every business does. Luckily, the IRS allows small business owners to deduct interest paid on business loans and business credit cards from their taxable income. Bank fees are also deductible.
- Travel. If your business requires travel - to meet with clients, to network, to attend industry meetings - much of those travel expenses can be written off. That includes hotel bookings, rental vehicles, the transportation itself, and even some meals.
- Shipping. If your business involves sending items to your customers, you can write off much of the expenses involved with mailing your product. That means postage, UPS and FedEx costs, envelopes or other forms of packaging, and more can be deducted at tax time.
- Taxes. Some tax expenses are actually eligible for a tax write-off, ironically. Your property taxes, real estate taxes, the sales tax you pay, and even many employment taxes are all possibly deductible.
- Website Expenses. Hosting and designing a website can be expensive. To maximize your website’s visibility and aesthetic appeal you might consider even hiring a designer to give it the best possible leg up. Your domain name will cost money, and if you’re selling items in an online store, you’ll likely have to pay a subscription fee for e-commerce capabilities. All of those expenses are deductible.
- Advertising. Advertising in its many forms is deductible. Print media ads, social media posts, email marketing... all deductible.
- Charitable Donations. If your company makes any charitable contributions, those are all tax-deductible. Making a sizeable donation to charity is a great way to benefit everyone involved: your business can help out those in need while also reducing your tax bill.
Finally, you’ve got the money your company spends on people. IN addition to some of the more obvious deductions here, there are a few ways in which you can make your company a better place for your employees while also creating substantial write-offs.
- Wages. The money you pay to your employees (or to yourself if your company is a sole proprietorship) is deductible from your business’s taxable income.
- Employee Benefits. The benefits you offer your employees are also able to be written off. If you pay into retirement plans, health insurance premiums, life insurance, or other forms of benefits, those payments are all tax deductible.
- Freelancers. If your company hires independent contractors for any reason, from content creation to seasonal staff support, the money paid to those freelancers can be written off just like regular wages to W-2 employees.
- Professional Fees. Money paid to professionals can also be written off. Lawyers, accountants, and other support professionals all qualify for this write-off. Ironically, given the complexity of tax laws, the money you pay to a tax professional to help pay your business taxes is likely deductible as well.
- Education. If you pay for any sort of education for your employees, you can write that off. That means paid certifications, courses, or other ways of educating your staff (or you!) can be written off. Education expenses are one of the best investments you can make in your team - improving their performance and skills while reducing the pain in any tax year.
Keep Track of Your Expenses!
That’s a ton of write-off possibilities. Of course, it’s important to remember that the IRS isn’t going to just take your word for it on all of these expenses. If you’re looking to maximize your write-offs with minimal headache, you need to make sure you’re keeping close track of these expenses.
If you think a business meal is eligible, keep that receipt (and consider making notes about its purpose right on the back of the paper). If your business travel seems eligible, you need to keep every receipt on hand - the flight, the rental car, the hotel... Good bookkeeping is an absolute lifesaver during tax season, simplifying your filing while also ensuring that any questions the IRS has about write-offs can be easily answered. Even if you’re self-employed, it might also behoove you to hire an accountant or tax professional on a part-time or even full-time basis depending on the complexity of your company’s books.
Regardless, keeping track of your business activities and expenses mean that come tax time, you’ll be able to take advantage of your many eligible write-offs in order to keep that tax bill at its most manageable.
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