In federal taxes you owe $78,435.72.
Look, those were like your tax liabilities from last year.
So I’d say, learn how to use small business tax deductions to lower your liability. Because you definitely don’t want to spend more in taxes for another year
And another day…
So today we’re going to look at how you can start reducing taxes by taking advantage of small business tax deductions. In these times, whether your business is on the ropes or booming, you want to take advantage of deductions.
Because like clockwork, taxes come due every year.
You can’t avoid it. And if you try, you’ll get busted.
So for many people, tax season is a drag.
But what if I told you that it didn’t have to be this way. What if you actually looked forward to tax season every year?
Well, when you take advantage of small business tax deductions, filing can actually be an enjoyable experience.
In 2020, depending on your income, your tax bracket could be as high as 37%. For example, with every $100 that you make, $37 dollars will be given in taxes.
So today, I’m going to go over 20 small business tax deductions that you need to know about.
Alright, let’s get started by defining what a tax deduction is.
What is a Tax Deduction?
According to the IRS, business expenses are the cost of carrying a business. And these expenses are usually deductible, if the business operates to make a profit.
So the next logical question is, “what can you deduct?”
Well to be deductible, a business expense must be both ordinary and necessary.
An ordinary expense is one that is common and accepted business. While a necessary expense is one that is helpful and appropriate for your business.
Also, it’s important to separate your expenses by cost of goods, capital expenses and especially personal expenses.
Well, maybe the IRS won’t show up at your house. But you want to make sure you’re doing things right, so you can avoid an audit.
Let’s go ahead and look at some categories that are 100% tax deductible (meaning they deduct from your revenue, dollar for dollar).
Tax Deductible Categories
1. Professional services
When you’re starting and operating your business, you’re likely going to need some help. You may need some:
- legal advice
- industry consultant
- an accountant
Thankfully, these expenses (and the rest on this list) can be deducted from your revenue- tax free, which again could be saving up to $37 for every $100 dollars that you spend.
So it’s like the IRS is giving exclusive access to discounts because you’re a small business.
But if you don’t use it, you lose it.
So if this is something that you need and can help you in your business then don’t shy away from the expense.
2. Advertising and promotion
When you have everything you need to operate and sell, the next step is to start advertising. Because if no one ever hears about your business, no one will care.
But you get another tax deduction here.
3. Bank fees
This third deduction is also very important because it’s an expense most businesses have, which are bank fees.
Having separate bank accounts and credit cards are always a good idea, so you can properly categorize your business expenses.
And if your bank or credit card company charges fees then these are deductible. You can even deduct transaction fees from payment processors like PayPal and Stripe.
4. Taxes and licensing fees
Moving on, this fourth deduction that you can use is also a common and necessary business expense. These are your taxes and licensing fees.
Depending on your business entity, you may have an annual license fee, which thankfully you can deduct on your taxes.
5. Travel expenses
Ok, this is not for the personal travel expenses.
This deduction must be used for business travel. So if you’re doing a consultation or setting up an event out of town then those are more likely to be qualified.
If you rent a location or equipment, you can deduct those payments as a business expense.
Keep in mind, we’re talking about a business location. Not your actual home even if you have a home office because that’s covered on a personal tax return.
Now if you love food like me, then this next deduction is for you.
7. Business meals
You can deduct food and beverage costs under a few conditions:
- First, like the others, the expense must be ordinary and necessary for business.
- Second, the meal cannot be lavish or extravagant under the circumstances.
- And lastly, the business owner or an employee must be present at the meal.
And as long as those are in place, you can deduct about 50% of expenses for employee meals.
And up to 100% of meals that are for an event such as an office party or picnic.
Now that we’re full from the business meal expense, let’s look at our #8 deduction, and my personal favorite.
8. Telephone and internet expenses
In my opinion, every business should be investing into the internet and look for the most optimal performance.
And as a small business, you can deduct that from your income.
So take advantage of this and get the best internet packages that will allow you to work at top speed.
9. Interest payments
If you’re starting your business on a loan, sometimes the interest payments can be a drag on growth.
Luckily, you also spend less time worrying about the interest and more time focused on growth because you can deduct all interest payments from your loan.
IF you meet these requirements:
- You are legally liable for the loan. That means, the loan must be in your name and you are responsible for it.
- Both you and the lender expect the loan to be repaid. If the lender does not expect to be repaid then it’s considered a gift.
- You have a true lender/creditor relationship. The IRS tends to scrutinize loans who come from family and friends.
10. Business insurance
Being in business, can be risky,
Business insurance is important to protect your company from outrageous claims and time wasting activities.
And this insurance is another deduction for your taxes.
11. Salaries and benefits
This one should be obvious, but you can also deduct 100% of all the salaries and benefits that you may have to your team as an employer.
12. Education costs
Education costs are fully deductible when they add value to your business and increase your expertise. In order to make sure the expenses are qualified, the IRS will look at whether the expense maintains or improves skills that your company needs.
- subscriptions paid to publications
and transportation to these classes
…are all common business education expenses.
Which again, could help you, dominate your industry.
When you purchase business assets such as equipment, deprecation can be deducted from your income.
Depreciation rules require you to spread the costs of those assets over years but in some cases, it can be accelerated.
Depreciation can be more complicated than the other business deduction. So if you have a lot of business assets, I recommend you contact an accountant to help you out with depreciation.
Lastly, I have some bonus deductions for small business owners on their personal tax returns.
The previous deductions mentioned can be claimed using a schedule C or Form 1065, but there are a few other tax breaks for small business owners commonly claimed on their individual returns such as:
- charitable contributions
- retirement contributions
- health care expenses
So those are my major small business tax deductions that you must have. Now, I want to hear from you. Which deduction are you using the most? Tell us in the comments below!
Also, if you need help and expert guidance from reliable tax consultants, tax preparers or tax planners, you can count on LYFE Accounting for that. Simply drop us a call or contact us here.