Do you need small business tax deduction tips that will help you save money? If YES, here is a checklist of 20 expenses you can write off as a business owner.
The Internal Revenue Service offers business owners a fair number of small business tax deductions to help their businesses along. It is a fact that any business that continues to bleed capital would not last very long, that is the reason why even the government is helping entrepreneurs to sustain their business. Taxes are one thing that can take up a big chunk of your small business’s revenue, so you want to handle them intelligently to minimize your IRS bill. This means that you need to take advantage of all the small business tax deductions that are available to your business.
What are tax deductions? Tax deductions are the items a business can avoid paying tax on, or can only pay a certain percentage of it. This is especially true for small businesses. When running a business, it should be noted that most of the expenses you incur can be tax deductible. Business tax deductions work by lowering your taxable income, thereby lowering the amount of tax you owe to the government. But you should have in mind that the government makes changes frequently on what they allow to be deducted from business taxes, so you should be up to date with the tax laws so you do not end up over paying, or even not paying enough.
Yet another thing you ought to note is that your tax obligations depend on the structure of your business. If you are incorporated, your tax deductions will come out of your business taxes. But even if you’re not incorporated (a sole proprietorship or partnership, for example), you still get to take those deductions, they would just have to come out of your personal taxes instead.
Small Business Tax Deductions – 7 Things You Must Know Before Outlining your Deductible Expenses
- They are rules
Though the government allows businesses to deduct a lot of their monthly expenses from their accrued tax, but they are rules they have to follow before each expense can qualify to be deducted. You must have to know what you can and can’t do before you begin subtracting from your tax obligation.
To get this knowledge, you need to be up to the date n the most recent tax laws. If you are not able to follow up with that, you can hire a tax accountant to help you out with that.
2. They are limits
While you may want to start calculating in advance the amount your business can save through taxes, but you should also know that these expenses have limits or even restrictions. For example, deductions for meals are often limited to 50 percent of each expense. A lot of other expenses have limits too, so you have to take note of that.
3. Your records must be meticulously kept
If you want to take full advantage of your allowed business tax deductibles, you must ensure that you keep your records up to date. Every receipt you get must be filed and every date must be noted. You must equally create an electronic trail for each deduction you claim.
You should write down every date you made an expense, the exact amount and the purpose it served your business in case you have to explain the deduction to the Internal Revenue Service. This can be as easy as saving receipts, bank statements and credit card statements and making notations on them to remind yourself why the expenses were incurred.
4. Business and personal expenses must be kept separate
If you want to take full advantage of your business tax deductions, you must endeavor to keep your business and personal expenses separate. You must not pay personal bills from your business account, and definitely, don’t include personal expenses as business expenses on your business tax return. Doing so would lead to confusion and make your tax filing suspect.
5. Yes, there are expenses that allow 100 tax deductions
Yes, you should know that there are items that allow 100 percent tax deductions. A 100 percent tax deduction is a business expense of which you can claim 100 percent on your income taxes. For small businesses, some of the expenses that are 100 percent deductible include the following:
- Furniture purchased entirely for office use. This item is 100 percent deductible in the year of purchase.
- Office equipment, such as computers, printers and scanners.
- Business travel and its associated costs, like car rentals, hotels, etc.
- Gifts to clients and employees are 100 percent deductible, up to $25 per person per year.
- If you’re self-employed and pay your own health premiums, you can deduct those at 100 percent.
- Your annual business phone bills are 100% deductible.
6. You may need some help
There are definitely things you can do to make the most of your tax deductibles. To find out how to claim the most deductions possible, it’s a good idea to consult a professional, like a CPA. It is the job of an accountant to know what tax deductions are available and how they can apply to your small business.
7. You can write off a previous year’s tax
As a small business, you may be able to write off state and local taxes in the year you paid them, even if the taxes are from a previous year. However, you can’t deduct any federal taxes that you paid for a prior year.
What is an 1099 Form?
When it comes to the issue of taxes, as a new business, there is one particular form you have to take note of, and that is the 1099 form. A 1099 is an IRS tax form that is used to report any income earned through sources other than employment. So independent contractors, freelancers and self-employed workers typically use the 1099 form. You can find out more about the 1099 tax form and its uses on your local IRS site.
Small Business Tax Deductions – 20 Business Expenses You Can Write Off as a Business Owner
- Auto Cost
One of the expenses that a business is allowed to write of from tax are auto costs. Have it in mind that almost any cost associated with your business vehicle can be written off, including your car loan or lease payments, depreciation, fuel and insurance.
If you are also using your car for personal use, you’ll need to determine the portion of time that you’re using your vehicle for business and write off only that percentage of your vehicle costs. Please, do not attempt to write off the times you use the vehicle for personal purposes.
When keeping track of auto costs, business owners usually use the standard mileage rate of 54 cents to deduct the costs of operating a car for business purposes. If your home office is your “base” location, then you have to calculate 54 cents per mile for travel from your home to client meetings, networking events, seminars, or any other business activity.
Another way to take advantage of auto cost deductions is to keep track of your receipts for parking fees or tolls in advance of tax season. Any parking fees or tolls that are associated with a visit to a client or supplier or travel to a tradeshow or conference can be tax deductible. While these individual charges may be small, they can add up over the course of the year to major savings on your tax bill.
2. Start-up Cost Deductions
One other way you can take advantage of business tax deductions is to deduct your startup cost. You can deduct up to $5,000 in start-up and $5,000 in organizational costs for the first year of your business. These deductions apply to expenses paid or incurred after Oct. 22, 2004.
The rules differ for expenses before that date or if your costs exceed $50,000. Expenses that are not deducted can be amortized over a 180-month period, which begins when you open your business. You can write off or amortize market research, advertising, employee training, business-related travel, legal advising and a lot of other costs.
3. Equipment Deductions
The equipment you bought for your business is another area that you can save money from your taxes. Small businesses can take a single deduction of up to $108,000 for equipment purchased in 2006. The deduction falls under Section 179 of the tax code and is reduced if those equipment purchases exceeded $430,000. The deduction in prior years was only about $25,000; in 2007, it rose to $112,000.
The equipment in question doesn’t have to be new, as long as it’s newly purchased and will be used at least half of the time for your business. Some of the equipment that fall into this section include; computers, machines, furniture, cars and a host of other necessities.
Movable equipment generally counts; property does not. You will need to fill out Form 4562 to take this deduction. Businesses that choose not to take the immediate deduction can write off portions of their equipment purchases over several years through depreciation.
4. Charitable Deductions
Another business expense that is tax deductible is charitable donations. Partnerships, S corporations and limited liability companies all require that their members file the company’s taxes on their personal forms, including charitable donations. Donations are “passed through” to members, just like the organization’s income.
Individuals can deduct between 30 percent and 50 percent of their adjusted gross income to qualifying 501(c)(3)charities and foundations. Corporations can deduct up to 10 percent of their taxable income, according to the Better Business Bureau’s Wise Giving Alliance. If you want to contribute $250 or more and receive a deduction, you must have a letter from the organization verifying your donation.
If your business makes a non-cash donation, such as giving a car or a computer, figure out how much you can deduct. The deduction will decrease if you’ve already received a tax break for the donated property or if it has lost significant value.
If your business is set up as a sole proprietorship, LLC or partnership, you can claim these charitable donations on your personal tax forms. If your company is a corporation, you claim charitable donations on your corporate tax return.
5. Legal and Professional Fee Deductions
To lessen your tax burden, your business is allowed to deduct fees that it paid for legal and professional advise. For sure, accountant and attorney fees are deductible as business expenses, but you cannot deduct professional fees for purchasing business assets such as equipment.
Those charges are included as costs of the purchase. Sole proprietors can write off fees from tax professionals on Schedule C or Schedule C-EZ. For sole proprietors, any additional expenses can be deducted on Schedule A of your 1040.
6. Computer hardware, software and reference materials
Yet another cost you can deduct from your taxes are costs of purchasing necessary reference materials, as well as computer hardware and software. It’s no longer necessary to depreciate these items as long the cost isn’t more than $2500.
But you should be aware that only the business use of your computer or iPad is deductible. Computers, iPads, and related hardware and software are not considered listed property, as of the 2018 tax year, but you still should be using these devices for business purposes more than 50 percent of the time.
Another computer-related deduction is backup software or a hard drive for backup to protect your computer files.
7. Business Travel and Meal Expenses
You must also note that expenses for business travel and meals are deductible, and most times, you can get a 100 percent deduction. But keep in mind that entertainment expenses have been eliminated by the 2017 tax law changes.
Meals are sometimes subject to the 50-percent rule, and you must prove these for business purposes. Meals for employees at your work site (like a cafeteria) are no longer deductible expenses for your business, but business meals and meals while traveling are still deductible.
As a small business, you can deduct 50 percent of food and drink purchases that qualify. To qualify, the meal needs to be related to your business and you need to keep the following documentation related to the meal:
- Date and location of the meal
- Business relationship of the person or people you dined with
- The total cost of the meal
The easiest way to track business meal expenses is to keep your receipt and jot down notes on the back of the receipt about the details of the meal.
8. Home Office Expenses
Under new simplified IRS guidelines for home office expenses, home-based small businesses and freelancers can deduct five dollars per square foot of your home that’s used for business purposes, up to a maximum of 300 square feet.
To qualify as a tax deduction, your work area has to be used exclusively for business (i.e. you can’t write off the square footage of your dining room if you do your work at the table during the day) and you need to use the home office regularly as your principal place for conducting business.
You can write off office supplies including printers, paper, pens, computers and work-related software, as long as you use them for business purposes within the year in which they were purchased. You can also deduct work-related postage and shipping costs. Be sure to file all receipts for office supply purchases, for documentation or else you might lose them.
9. Business Interest And Bank Fees
To keep the financial burden in your business light, another business expense you can deduct from your tax bank fees. If you borrow money to fund your business activities, the bank will charge you interest on the loan. Come tax season, you can deduct the interest charged both on business loans and business credit cards.
You can also write off any fees and additional charges on your business bank account and credit card, such as monthly service fees and any annual credit card fees.
While most small businesses may not know this, but depreciation is another thing you can deduct from your tax. When you deduct depreciation, you’re writing off the cost of a big-ticket item like a car or machinery over the useful lifetime of that item, rather than deducting it all in one-go for a single tax year.
Businesses usually deduct depreciation for long-term business investments that are more costly, so they’re reimbursed for the expense over the entire useful lifetime of the item. Here’s how to calculate depreciation:
- Depreciation = Total cost of the asset/Useful lifetime of the asset
11. Salaries And Benefits
You need to equally keep in mind that the salaries you pay to your workers are tax deductible. If you are a small business owner with employees, you can write off their salaries, benefits and even vacation pay on your tax returns. There are a few requirements for writing off salary and benefit expenses and they include:
- The employee is not a sole proprietor, partner or LLC member in the business
- The salary is reasonable and necessary
- The services delegated to the employee were provided
12. Health Insurance Premiums
Health insurance is a big ticket item for most small business owners. Fortunately, the IRS lets you write off all medical or dental expenses that are more than 10% of your adjusted gross income (AGI) for any given year. If you or your spouse are 65 years or older, you can deduct expenses that exceed 7.5% of your AGI. It is that simple.
13. Employee Education and Training
Yet another business expense you can deduct from your tax is the money you spent in training your employees. As long as you can show that the training is necessary for improving or maintaining skills needed for your business, you can deduct the cost of education and training for either yourself or your employees.
Keep this in mind the next time you consider the cost of an industry conference or other networking event; it may be easier to justify these expenses if you know they’ll help to reduce your business taxes.
14. “Solo” 401(k)
You should also know that your retirement benefit is tax deductible. If you worked for a major employer, that company likely wrote off contributions to your employee 401(k). Through a “solo,” or personal, 401(k), you can apply this same principle to your home-based business. By setting up a solo 401(k) account, you can set aside 25% of your net income, up to a $53,000 annual limit.
15. Bad Debt
Bad debts affect businesses negatively, and government seek to help businesses alleviate the sting by ensuring they deduct it from their taxes. Bad debt is a nearly inevitable risk of doing business—a fact acknowledged by the Internal Revenue Service. If the amount a client owed was included in your reported gross income for either the year the deduction is being claimed or for a prior year, you can write off that bad debt on your federal tax return.
16. Business Loan Amortization
Starting a business can be expensive, and rather than deducting large business loans all in one year, it’s possible to amortize costs over a 180-month period. If you’ve ever taken out a business loan, look at the IRS webpage on amortization for a more detailed explanation of the policy, and consult with your certified tax accountant to determine whether this write-off could apply to you, as it does not apply to all businesses.
17. Credit Card Fees
If your business charges customers through credit card processing, you should know that those transactional fees can add up to a steep cut into your sales’ profits. But on the bright side, you can deduct those fees on your business tax return, lessening the load of this necessary business expense.
In addition to transactional fees, you can also write off costs associated with the credit card you use for business—including annual credit card fees or any late payment fees.
18. Loan Interest
Any interest you pay or accrue during the tax year is another available deduction. The interest must be related to a business expense—if it’s for something like a car that you use for both your business and personal life, you can only deduct the percentage of that interest that correlates with the amount of time the car is used for business purposes. This fact has to be properly noted, and details kept.
Though as minor as this sounds, but the government would allow you to deduct from the expenses you accumulate from your business postal needs. Of course those little 49 cent stamps can total a lot of dollars over 12 months. You can write off all postage-related charges, such as stamps and postage created by postage meters.
Costs associated with shipping companies like FedEx and UPS also count, and if you rent a P.O. box for your business, you can include that fee, too. But costs of shipping inventory to customers can only be written off if the customer is not charged for shipping and handling.
20. Mortgage Insurance
Your business mortgage is one heavy expense you are allowed to deduct from your tax. Mortgage insurance is something that a lot of borrowers are required by their lenders to have. When your home office is your primary workspace, you can write off a portion of the insurance fees as your mortgage.
As a homeowner, you are able to deduct mortgage interest on your personal tax filing. Even better, if you use a portion of your home as your office, you can deduct that portion of your mortgage interest on your business filing instead.