Many small business owners dread tax time. Updating invoices and calculating how much money goes to the government isn’t very fun. Fortunately, though, there are several tax deductions you can take if you properly account for and document these expenses throughout the year.
Whether you’re looking for savings on this year’s taxes or are preparing for increased spending next year, let’s look at some of the most important business tax deductions you should be taking to save money.
18 Business Tax Deductions
- Payments to Employees and Contractors
- Office Supplies
- Rent and Utilities
- Vehicle Expenses
- New Equipment or Fixtures
- Advertising and Marketing
- Home Office
- Professional Services
- Work Opportunity Credit
- Inventory for Service Businesses
- Employee Benefits
- Bank Charges
- Insurance Premiums
Payments to Employees and Contractors
Salaries, wages, commissions, and contracting fees you pay to other people are all deductible (not including yourself if you are a sole proprietor or LLC). In addition to the standard wages and fees you pay to the people who help run your business, you can also deduct the following if it has been documented:
- Lodging and Meals
- Allowances and Per Diems
- Software Related to Management
Additional documents will need to be produced in many cases if you pay these individuals directly by check or ACH transfer. For contractor laborers, this includes issuing a 1099-MISC for anyone to whom you pay more than $600 during the year.
You can deduct all of the supplies and related expenses associated with the administration of your business, as long as they are used within the year they are purchased. This includes any supplies utilized in the course of normal operations, shipping fees and postage for mailing goods, service and software fees for managing your business, and other supplies.
The best rule of thumb is to keep your receipts for all expenses and have an accountant review them at the end of the year to ensure they can all be included as deductions.
Rent and Utilities
If you pay rent for a physical location, it is deductible on your taxes. As are any utilities related to operating that physical location.
Utilities for dedicated business locations are easy to calculate, however, they can be tricky if you operate out of a home office or a shared space where utilities are already included. This is another area in which an accountant can be helpful to determine the percentage of utility bills that you pay can be deducted.
If you use a vehicle for business purposes, you can deduct the gas purchased, maintenance required on the miles used, parking fees and tolls incurred while using it. This can be somewhat tricky to measure if the vehicle is not strictly for business purposes. The IRS offers a standard mileage rate of $0.58/mile for 2019.
It’s important that you carefully track mileage and document your business use of the vehicle to avoid future issues, especially if your vehicle incurs personal use throughout the year.
New Equipment or Fixtures
If you purchase new equipment needed to run your business, or fixtures for outfitting your brick and mortar location, they are likely deductible. The IRS offers two options for this. The first is to deduct the entire cost in the tax year they were purchased. The second is to depreciate the purchase over the course of seven years. Which you choose may be dependent on the nature of the purchase. This is an area in which an accountant can be helpful due to the complexity of the rules.
Advertising and Marketing
The fees you pay to promote your business and generate new revenue are generally deductible. Almost all fees related to promoting your business are deductible. There are some small exceptions, such as political advertising, but generally speaking – whether running ads on Google or printing flyers, you can deduct your promotional efforts.
Tricky Tax Deductions
There are several deductions that can get tricky and serve as frequent red flags for the IRS. These are deductions that you should be very sure you are eligible for and possibly still consult an accountant on to be sure. They tend to trigger additional inquiries due to how often they are incorrectly claimed:
- Home Office Deduction – Millions of Americans have a home office that they use on a regular basis. Some people work entirely from home. For a home office to be deductible, it must be exclusively used for business purposes, and it is calculated based on the percentage of the total square footage of the home in which it resides.
- Entertainment – You can deduct up to 50% on client meals and entertainment, up to 100% on activities for employees, and some meals for your team. There are several qualifiers on who is there and the lavishness of the meal, and this needs to be well-documented.
- Travel – You can deduct the entirety of a business trip and all related expenses as long as it required you to be away from your regular place of business for more than a workday, and you were required to sleepover to meet your work obligations in that time. Receipts are once again vital to take this deduction.
- Taxes – You pay several other forms of tax each year including licenses, real estate, sales tax collected and remitted, and payroll taxes. These can all be deducted.
Additional Tax Deductions Many Forget
Finally, here are several deductions that often fall under the radar and aren’t included in business tax returns.
- Professional Services – If you hire a consultant, accountant, lawyer or other professional service providers, their service fees are likely deductible as long as the fee is considered reasonable and necessary.
- Work Opportunity Credit – Businesses that hire military veterans or those who have been unemployed for a long period of time may be eligible for a 40% tax credit on the first $6000 in their wages.
- Software – Every software subscription or license you purchase is deductible. These are no longer considered depreciable so are always one time deductions in the tax year they are purchased. With most software coming in a monthly subscription, it’s easy to forget to deduct it.
- Inventory for Service Businesses – In certain cases, service-businesses that use a cash accounting method can deduct inventory for certain products sold. This can be highly specific, so it’s important to check with an accountant before claiming it.
- Employee Benefits – Most of the employee benefits you offer are tax-deductible, including in some cases continuing education you offer employees and childcare support.
- Bank Charges – Any fees charged by your bank, credit card company or other financial institutions are deductible, including ATM fees.
- Insurance Premiums – Your insurance premiums are deductible if they are considered ordinary and necessary by the IRS. This includes employee health insurance, theft and damage insurance, auto insurance, malpractice, and several other unique types depending on the business structure. There are some types of insurance you cannot deduct, so be sure to check with your accountant first.
- The Intangibles – It’s a tricky one, but if you acquire a new trademark for your business, or pay fees to protect intellectual property, those expenses are deductible. How you deduct them will depend largely on the nature of the expense, so an accountant is recommended in these situations.
Getting Your Taxes Just Right
If you’re a new small business owner, the sheer number of considerations on your taxes can be overwhelming. There are dozens of questions you’ll need to answer and a large amount of paperwork to keep on hand. But if you pay close attention to the potential deductions you can take, you’ll be able to maximize your tax savings and better prepare for next year.
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