Ensure that you take advantage of all the business tax deductions commonly available to small entity owners. We provide an exhaustive list of these plans below and explain them so you don’t miss them. Bookmark the article to be able to easily return and check. At least go through it twice to keep the benefits in mind.
Everyone wants to save money, keep their expenses limited — and small business owners are no different.
Business expenses that are deductible from the taxes, help entrepreneurs cut down on a big portion of the costs of running a business. Company owners know that almost all expenditures can be written off, though there may be some limits and timing. Tax deductions are one way to do exactly that.
Below discussions explains the most common deductions taken on sole proprietorship returns. Other deductions allowed are also listed here. Other types of business structures, partnerships, S-corporations, C-corporations, and limited liability companies (LLCs), can also claim the same deductions — although the rules may be slightly different for some deductions. Check which ones apply to your business entity and keep these in mind at the time of making quarterly estimated tax payments and business planning.
Complete List of Small Business Tax Deductions
- Accounting fees
- Advertising & Marketing
- Bad debts that you cannot collect
- Bank Charges
- Board Meetings
- Building Repairs and Maintenance
- Business Association Membership Dues
- Business Travel
- Cafeteria health-insurance plan
- Car expenses
- Charitable deductions made for a business purpose
- Charity or traveling to perform charitable services
- Cleaning & janitorial services
- Collection expenses
- Commissions to third parties
- Computers and tech supplies
- Consulting fees
- Education fees
- Conventions and trade shows
- Credit card convenience fees
- Discounts to customers
- Meals while traveling for business
- Education and training for your employees
- Employee wages
- Employee benefits
- Entertainment for customers and clients
- Equipment repairs
- Exhibits for publicity
- Family member’s wages
- Franchise fees
- Freight or shipping costs
- Furniture or fixtures
- Gifts for customers or employees
- Group insurance (if qualifying)
- Guard dog
- Gym for employees, located onsite
- Health insurance
- Home office
- Insurance premiums for credit, liability, malpractice, worker’s comp, and other insurance
- Internet hosting and services
- Investment advice and fees
- Legal fees
- License fees
- Management fees
- Medical expenses
- Mortgage interest on business property
- Newspapers and magazines
- Office supplies and expenses
- Outside services
- Payroll processing
- Payroll taxes, including Social Security, Medicare taxes and unemployment taxes, for employees
- Parking and tolls
- Penalties or fines paid for performing low-quality or missing out on projects
- Pension plans
- Permits and fees
- Prizes for contests
- Real estate-related expenses
- Rebates on sales
- Research and development
- Retirement plans
- Safe-deposit box
- Service fees
- Software and online services
- Startup expenses
- Stereo equipment for background music being played at work
- Storage rental
- Taxes incurred in running your business
- Theft and loss
- Tips. Though you don’t get a receipt of these, keeping records helps
- Uniforms for your employees
- Waste removal
- Website design
- Workers’ compensation insurance
Topmost Small Business Tax Deductions
Remember, in order to use any of these deductions, you will need to prove the fees and cost. Implying you have to have original receipts – all of them, and in an organized order.
Also, do consult an expert tax and bookkeeping services, to know when to use these and if you can. Not all of them would apply to your case –– and some of the rules for being able to use the deduction are rather complex. Taking an expert’s advice will make sure you are neither overpaying nor underpaying.
Home office expenses
If you are using home premises for your business, a portion of your housing expenses may be deductible against your business income. There are two ways to claim the deduction of home office expenses.
- Simplified method: Deduct $5 per square foot of your home that is being used for business, up to a maximum of 300 square feet.
- Standard method: Track all actual expenses of maintaining your home, such as rent or mortgage interest, utilities, housekeeping, real estate taxes, repairs & landscaping service, and homeowners association fees. Extract the proportion of your home being used for business purposes out of these expenses. (To use the standard method for calculating your small business home office tax deductions, you’ll need to file Form 8829 along with your Schedule C.)
To qualify for this deduction, you need to measure up in two areas:
- Regular and exclusive use: For this deduction, your home office must be used regularly and exclusively for conducting business activities. A desk that also serves the purpose of a kitchen table won’t be included. Maybe an entire room is not dedicated to your business, but the work area should have clear, identifiable boundaries. You may need to provide photos of your home office workspace with your tax documentation as proof in case the IRS chooses to audit your returns.
- Principal Place of Business: Your home office must be the primary place for your business. This means you spend the most time and conduct important business activities from there.
If you have rented a business location or equipment for your business, you can deduct the rental expenses as a business expense.
Just remember, rent paid on your home should not be deducted as a business expense, even if you are working from home. In such a situation, that rent would be deducted as a part of home office expenses.
Salaries and benefits
Salaries, benefits and other expenses made for the welfare of employees, even vacation time paid to them, are generally tax-deductible, as long as they fulfill certain conditions:
- The “employee” cannot be the sole proprietor, a partner, or an LLC member
- The salary amount is necessary, reasonable, and ordinary
- The services were truly provided
Telephone & Internet
Today, most businesses need telephone and internet services mandatorily to work. And these are very valid deductible business expenses.
Keep in mind, if you use a landline at home, the cost of your first line is not deductible, even if you use it solely for work. However, if you have a second landline dedicated to business operations, then the cost of that line is deductible.
If you use your mobile phone and internet connection for both personal and business purposes, you can only deduct the percentage allocable to business use as an expense. Keep an itemized bill and other records in detail to prove the part of the business and be prepared for an IRS audit.
For any journey to qualify as business travel, it has to be normal, necessary, and away from your tax place. Your tax place is the entire city or location in which you conduct business, regardless of where you live. You must travel away from your tax home for more than one normal day’s journey, requiring you to sleep or rest on the way.
IRS approves below travel expenses as qualifying for business tax deductions:
- Travel to and from the destination by car, bus, train or plane
- Using your own car while at a business location
- Parking and toll charges
- The cost of cabs and other transportation used on a business trip
- Meals and lodging
- Dry cleaning while on a business trip
- Business calls
- Shipping of samples, display materials or baggage to your destination
- Other similar ordinary and unavoidable expenses associated with your business travel
Remember to keep receipts and records that include the amount of each expense, as well as dates of departure & return, details of the trip (whom you dealt with), a mileage log if you drove your own vehicle, and the reason for the business trip.
Generally, 50% of qualifying food and beverage costs can be deducted. To qualify for the deduction:
- The cost must be an ordinary and essential part of carrying on business operations
- It cannot be extravagant or lavish under the circumstances
- One of the owners or an employee must be present at the meal
You can also deduct 50% of the cost of providing meals to employees as welfare, such as getting pizza for dinner if someone is working late. Meals provided at office parties and outings are 100% deductible.
Just ensure that the documentation for the outing includes the amount of each expense, the date & place of the meal, and the business relationship of the person you dined with & the purpose.
Advertising and Promotions
The cost of advertising and marketing is 100% deductible. This can include:
- Employing someone to design a business logo
- The expense involved in printing business cards or brochures
- Buying ad space in print or online media
- Sending cards, brochures, etc. to clients, prospective or existing
- Launching a new website
- Running marketing campaigns
- Sponsoring events
However, amounts paid to influence legislation (i.e., lobbying) or sponsor political campaigns or events are not valid business tax deductions.
Personal Vehicle used for Business
Do you use your car for business? If your vehicle is used only for business purposes, then the entire cost of operating the vehicle can be treated as a business expense. If it is used for both business and personal trips, however, only the costs associated with business-related usage are interpreted as business expenses.
There are two ways to deduct vehicle expenses, and you are free to choose the one that gives you the greatest tax benefit.
- Standard mileage rate: Multiply the miles run for business through the year by a standard mileage rate. Starting January 1, 2020, the standard mileage deduction for the use of a car (van, pickup or panel truck) is $0.575 per mile.
- Actual expenses: Keep a track & record of all the actual costs of operating the vehicle for the year, including gas, oil, tires, repairs, insurance, registration fees, and lease payments. Multiply those expenses by the ratio of miles driven for business.
Both methods require that your business miles are traced for the year. A detailed log of your business miles can be kept. You may use an app to track the journeys or recreate a mileage log using other documents, such as appointment books or calendars. If keeping a mileage log, clearly document time & place, the miles driven, and the purpose of your trip.
The commute between your home and your regular place of business is not to be counted. These are considered personal commuting expenses.
When you buy furniture, equipment, or other business assets, depreciation regulations require you to cover the costs of those assets over the years they’ll be useful rather than deducting the full cost in a single year.
Reducing these items within the first year sounds more attractive because of the quicker tax benefit. Fortunately, there are several ways given by the IRS to write off the full cost in one year for small business tax deductions.
- De minimis safe harbor election: Small businesses can choose to completely depreciate assets that cost less than $2,500 per item within the year they are purchased. The IRS differentiates between tools and equipment. While you may have to capitalize depreciation on equipment rather than deducting it in the first year itself, you can deduct tools that aren’t expensive or that have a life of only a year or less. And for the IRS, “tools” don’t just mean hammers or screwdrivers. The spatulas and cookie sheets are tools as well, for a take-away restaurant.
- Section 179 deduction: The Section 179 deduction lets businesses deduct up to $1 million of property placed in service within the tax year. This includes new and used business property and “readily available” software. This deduction is limited to the business’s taxable income, so claiming it must not create a net loss on your return. Furthermore, the unused part of Section 179 deduction can be carried forward and deducted from next year’s return.
- Bonus depreciation: Businesses can take the benefit of bonus depreciation to deduct 100% of the cost of furniture, computers, machinery, equipment, and appliances.
If you purchased a new passenger vehicle, the IRS limits its write-offs. In the first year, if you don’t claim bonus depreciation, the maximum depreciation deduction allowed is $10,000. If bonus depreciation is being claimed, the maximum write off is $18,000.
Depreciation is quite complex than your average deduction, so taking the help of expert accounting and bookkeeping services is highly recommended to know for sure which assets you can deduct in your business.
The premiums paid by owners for business insurance are viable as tax deductions by IRS.
- Property coverage for furniture, equipment, and buildings
- Liability coverage
- Group health, vision and dental insurance for employees
- Professional liability or malpractice insurance
- Workers compensation coverage
- Vehicle insurance for business vehicles
- Life insurance that covers employees, as long as the business or business owner is not the beneficiary
- Business interruption insurance that covers lost profits if your business is shut down due to fire or another calamity
Interest of Business as Tax Deductions
If you took a loan or used a credit card to cover some business expenses, the interest paid to your lender or credit card company is deductible as long as the following requirements are met with:
- You are legally liable for the debt: For instance, if your parents take another mortgage on their home to help you start a business, you are not legally liable to pay back the loan. In such a situation, interest on the loan is not deductible, even if you make all of the payments on the mortgage.
- Both you and the lender have a clear intention of the debt being repaid: A loan that need not be repaid is a gift.
- You and the lender have a true debtor/creditor relationship: The IRS scrutinizes loans between related parties, such as family members. If the accrual method of accounting is used, the interest owed to a related person cannot be deducted until the payment is actually made.
Keep in mind that if a loan is part business and part personal, the interest needs to be divided between the business and personal parts of the loan.
Having separate bank accounts and credit cards for your business is always a good idea. Whatever your bank or credit card company charges on them, such as annual or monthly service charges, transfer fees, or overdraft fees, their fees are deductible. The merchant or transaction fees paid to a third-party payment processor, such as PayPal or Stripe, are also deductible.
But no fees related to your personal bank accounts or credit cards should be included as an expense in your books.
Education costs are entirely deductible if they add value to your business and improve your expertise. To decide if your class or workshop qualifies, the IRS will look at whether the value supports or improves abilities that are required in your current business.
The following list contains a few examples of valid business education expenses:
- Lessons to improve skills in your field
- Seminars and webinars
- Subscriptions to industry or professional publications
- Books related to your trade
- Classes to increase your expertise and skills
- Transportation expenses to and from workshops
Keep in mind that any education expenses or other costs that would qualify you for a new career, or for education outside of the realm of your business, do not qualify as business tax deductions.
Be sure to keep sufficient records to prove all costs associated with your business move.
Legal Fees of Business as Tax Deductions
Legal and professional payments that are necessary and directly linked to running your business are deductible. These include fees charged by bookkeepers, accountants, tax preparers, lawyers, and online bookkeeping services.
If the fees include payments for work of a personal nature (for example, preparing mortgage papers), only that part of the fee is deductible that’s related to the business.
Though the Tax Cuts and Jobs Act of 2017 eliminated the deduction for moving expenses for all nonmilitary individuals, businesses, still, are entitled to deduct the cost of moving business equipment, supplies and inventory from one location to another.
Taxes and licenses
Various taxes and licenses related to your business also qualify as tax deductions that small businesses can claim. This may include:
- Calculate Sales tax
- Fuel taxes
- Excise taxes
- Payroll taxes
- Business licenses
- State income taxes
- Personal property taxes
- Real estate taxes paid on business property
If you’ve just opened a gift shop or convenience store, up to $5,000 is deductible in start-up costs and expenses that you incurred before you opened your doors for business. Expenses for marketing and advertising, travel, and employee’s pay & training may also be deductible.
If you have sales personnel working on a commission basis, these payments are tax-deductible too. You can also take a tax deduction for any third-party commissions, such as those paid in an affiliate marketing set-up.
Inventory for Service-Based Businesses
Inventory isn’t deductible, generally. But if your business is in the service sector and you use the cash method of accounting (not the standard accrual method typically used for businesses involved in goods), some inventory can be treated as supplies and deducted. For instance, if you have an ice cream shop but you sell your special cranberry sauce as a product, that inventory may be deductible. Get in touch with a tax professional to advice for qualification.
Bad Debts of Business as Tax Deductions
Did you lend money to an employee or vendor, but not received repayment or the goods/services you thought you’ll receive from that person? If so, you may be able to treat this bad debt as a tax deduction.
Disaster and Theft Losses
If some theft or a natural calamity occurred and ruined, a part of or whole, business during the year, you may be able to turn those losses that your insurance company didn’t reimburse into business tax deductions.
Carryovers From Previous Years
Some small business tax deductions are allowed to be carried over from year to year. For instance, a capital loss from a previous year can be taken into account in the current year. The IRS keeps modifying the regulations concerning this, so make sure you are aware of the latest IRS regulations.
Unpaid Goods of Business as Tax Deductions
If your business produces goods rather than providing a service, you can deduct the cost of any goods that have been sold bu you haven’t been paid for yet.
Cleaning and Janitorial Expenses
You know all too well that the business day is over only when the customers have left and the premises cleaned up in preparation for the next busy day. If any third party cleaners are hired to provide the service, make sure it is included in the small business tax deductions.
Expenses on Intangible Properties
Most of the expenses related to Trademark registration or renewal are deductible. However, the process you take this deduction can differ depending on what you’re trying to reduce. Some costs of acquiring and maintaining Intellectual Properties are supposed to be depreciated over multiple years, while others are allowed to be fully deducted within the year in which they were incurred.
For instance, licensing fees are generally considered capital expenses – to be depreciated. However, sometimes, they can be deducted in the same tax year. If uncertain, consult a tax professional to ensure all the regulations governing your specific situation are fully complied with.
Personal Business Tax Deductions
Other than the above-mentioned deductions that can be claimed on Schedule C or Form 1065, there are a few more tax deductions business owners commonly claim on their individual returns.
Sole proprietorships, partnerships, and LLCs cannot deduct charitable contributions as a business expense, but the business owner is entitled to claim the deduction on Schedule A.
To qualify, the donation must be made to a registered organization. The deduction can be claimed using Schedule A attached to Form 1040.
Child & Dependent Care
If you pay someone to care for a child or another dependent during your work-times, you may be able to claim the Child and Dependent Care Credit. To meet the requirement, the person receiving the care must be a child (under 13-years) or a spouse or other dependent who is physically or mentally incapable of self-care.
The credit is between 20% to 35% of your allowable expenses, depending on your income. Allowable expenses have an upper limit of $3,000 for the care of one dependent and $6,000 for payment made towards the care of two or more dependents. Attach Form 2441 to your Form 1040 to claim the credit. IRS Publication 503 has more information on the Child and Dependent Care Credit.
Contributions towards employee retirement account as a business expense are deductible, but business owners contributing only to their own retirement funds claim the deduction on Schedule 1 attached to their Form 1040.
The maximum amount you can deduct depends on the type of plan you have. Go through the IRS’s tips for calculating your retirement plan, contribution, and deduction for more information.
In addition to insurance premiums, other out-of-pocket medical costs, such as office co-pays and the cost of prescriptions, are also deductible. These costs are included in Schedule A, in its itemized deductions section.
Self-employed business owners can also claim health insurance premiums for themselves, their spouse, and dependents, as tax deductions, as per Schedule 1 attached to their Form 1040. However, if you are eligible to participate in a plan through your spouse’s employer, then you can’t claim its deductions.
11 Business Tax Deductions Not to Take
- A small business loan—but instead deduct whatever you purchase with the loan
- Business attire, non-uniforms, that you can wear outside of work
- Contributing time to charity
- Membership dues, even to a professional organization
- Federal income tax payments
- Your life and disability insurance premiums if you’re a sole proprietor, partnership, or S-Corporation
- Lobbying for political parties
- Penalties and fines paid for breaking the law
- Political contributions
- Professional accreditation fees
- Your own salary if you’re a sole proprietor
Finalizing Business Tax Deductions
No matter what type of small business entity you have, you have to deposit taxes based on estimated income every quarter, if your business owes income taxes of $1,000 or more. Corporations only have to pay quarterly estimated taxes if they expect that the taxes will come to be $500 or more for the year.
Whether you’re filing your taxes quarterly or holding off for the annual deadline, you must keep the records of your expenses ready at all times. Document each of the business tax deductions by maintaining the physical receipts and writing down the business reason for the expense on your receipts as soon as you receive it.
Before you owned a business, filing taxes was done once a year only. But as a small business owner, you’ll have to pay the IRS four times a year. On one hand, that’s three more tax deadlines you have to keep up with. But on the other side, by the time the yearly tax deadline is due, three-quarters of your taxes have already been paid.
What makes matters worse for business, though, is that there is a different deadline to remit federal income tax withheld from employees, federal unemployment taxes, and the social security and Medicare taxes for both the employer and employee. Depositing them may have a semi-weekly or monthly schedule.
It is easy to get boggled by such a long list of legitimate deductions available. And it would be a waste to not take one that your small business is eligible for. Therefore, it’s best to consult a tax expert to ensure compliance with all regulations and avoid any penalties. AutoFilings is one such tax expert, dedicated to ensuring you’re taking advantage of every legitimate deduction.
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Frequently Asked Questions
1. Car and truck expenses (for business use of a vehicle)
2. Salaries and wages
3. Contract labor
6. Rent on business property
8. Even taxes
1. Estimate the expected taxable income this year.
2. Calculate how much will be owed in income and self-employment taxes.
3. Divide the estimated total tax by four to come up with quarterly payments.
4. Submit this amount with the IRS.
Some expenses are explicitly prohibited from belonging to the classification of an ordinary and necessary business expense: These are:
1. Bribes to public officials,
2. Traffic tickets,
3. Home telephone expenses, and
4. Clothing that you wear while on the job (unless the work needs a uniform).
And you must maintain records justifying your business related expenses in case of an IRS audit.
To claim these deductions, you need to have documents showing that entertainment was related to your business.