The Ultimate Guide of Small Business Tax Deductions

Every entrepreneur wants to claim as many small business tax deductions as the law allows. A small business tax deduction is an expense that subtracts from your revenue and therefore, lowers your taxable income. The more small business tax deductions you claim, the less tax you’ll have to pay.

Small Business Tax Deduction vs. Small Business Tax Credit

Tax deductions should not be confused with tax credits. Tax credits are direct reductions to your tax liability.

For example, if after applying a small business tax deduction, you have a tax liability of $10,000, a tax credit of $2,000 would reduce that to $8,000.

On the flip side, a deduction reduces your taxable income, not tax liability.

For example, if your income for the year was $100,000, you would not pay tax on $100,000. Instead, you subtract your business expenses to reduce that number. Those expenses are called deductions.

To achieve tax efficiency, it is important to maximize all deductions available to you and your business. Unfortunately, if you are not aware of the deductions available, you might be paying more in taxes than necessary. 

Who wants that?!

This guide is here to help navigate through some of the common and uncommon small business tax deductions.

Home Office

Do you ever take your work home with you? Or maybe you run your business 100% out of your house. Either way, if there is a space in your home dedicated to working, you have some expenses to deduct.

It’s important to note, that not everywhere in your home is considered a home office. For example, if you open your laptop while on the couch, this does not mean your living room is a home office. A home office is a dedicated workspace, specifically for work.

To arrive at the actual deduction amount, you need to know the square footage of your home office and home. From that, you are able to derive the percentage of home office use. And you can apply this percentage to the expenses of your home, such as rent, utilities, insurance, and taxes. 

Car and Truck Expenses

It’s really important to keep proper records of your car and truck expenses during the year, especially if your car is also used for personal use.

There are 2 main ways of deducting car and truck expenses:

1. using standard mileage rates, or
2. actual expenses incurred

Although you are not able to deduct mileage for commuting (home to work/work to home), there are other trips you can. Examples are trips to and from client locations, off-site meetings, and trainings. 

For 2017, the standard mileage rates for work use of a car is 53.5 cents per mile. Meaning you are able to deduct 53.5 cents per mile driven for work purposes.

Another option for deducting car and truck expenses, is by deducting actual expenses paid like gas, repairs, or tolls. Sometimes deducting these expenses instead is more tax advantageous than using the standard mileage rates. Either way, these expenses add up quickly and can save you a lot on your taxes.

Bad Debt

Do you have amounts included in your accounts receivable that are bad debts? If you’ve included amounts in income that have proven to be uncollectible, you could take a bad debt deduction.

An amount is considered “bad” only after you have tried to collect for a reasonable amount of time and have put forth reasonable steps to collect but were unable to do so.

The bad debt deduction only applies to accrual based taxpayers who record revenue once they provide a good or service.

Depreciation

If you purchased a piece of equipment or a computer, you may be able to deduct a portion of that as depreciation for the year. This applies to any business asset you purchased that is expected to last more than one year.

There are multiple ways of deducting depreciation. The way you choose to deduct for book purposes may be different than what the IRS allows for tax purposes.

For tax purposes, certain assets are assumed to have a specific useful life. For example, computers are assumed to have a 5 year useful life. It is important to check IRS standards for specific rules for deducting depreciation.

Employee Benefits

All of the benefits you offer to your employees are tax deductible. Things like pension plan contributions, health care plans and life insurance are all deductible. Offering these benefits not only helps you attract and retain the best talent but there are tax benefits too!

Taxes

Who knew paying taxes would save you in taxes! Go figure. Turns out, the majority of taxes your business pays is considered a small business tax deduction. Taxes such as FICA, FUTA and SUTA are deductible, as well as real estate tax, excise tax, sales tax and state and local income taxes.

Meals and Entertainment

Taking a client to dinner or even treating your employees to lunch is deductible. In most instances, only 50% of the total cost is tax deductible for meals provided to clients. There is even an entertainment portion that is 50% deductible. Meals and entertainment costs incurred are only deductible if the purpose of the meal or entertainment was business in nature. 

Starting in the tax year 2018, the Tax Cuts and Job Act, completely eliminates the entertainment deduction and allows a 50% deduction for business meals only. Expenses related to recreation and amusement are no longer recognized.

Client and Employee Gifts

Do you give your clients or employees Christmas cards every year? Or what about birthday cards? The IRS allows these gifts and others as a small business tax deduction. The catch is, these gifts cannot exceed $25 per person per year. So keep it simple.

Start Up Costs

You may be able to deduct costs associated with starting your business. Things like marketing, licenses, training costs, and accounting fees.

You can deduct up to $5,000 of start up costs. If your total start up costs exceed $50,000, the $5,000 deduction is reduced by the excess of $50,000. If your total start up costs are more than $55,000, then you will have to amortize the full amount over 180 months.

Travel Expenses

Your business might require overnight travel to a client’s location or maybe a trade show is coming up that would be beneficial for you to attend. The IRS allows for deductions associated with this type of travel.

Travel expenses include airfare, baggage fees, lodging, meals, transportation (ie cab fares), meals, parking and tolls.

To be considered a travel expense, the following criteria must be met

1. You’re traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day’s work, and
2. You need to get sleep or rest to meet the demands of your work while away.

Disaster and Theft Losses

In the unfortunate event your business is stricken by theft or a natural disaster, you are able to claim the costs (not covered by insurance) as a small business tax deduction. The amount of your adjusted basis and portion of insurance proceeds is taken into account when calculating your disaster and theft loss deduction.

Charitable Contributions

Many people have heard of the charitable contribution deduction on the individual side, however, a small business tax deduction is available on the business as well.

As a business, you can donate assets to a qualified charity of your choice and deduct that amount fully on your business return. Donations do not have to be in the form of money. Donations could be equipment, supplies, but do not include volunteering or time.

Education Expenses

If you cover education expenses as a benefit to your employees this may be 100% deductible as a part of employee benefits. Education expenses incurred on behalf of yourself, the owner , may also be deductible. If you attended any trainings, classes, or any other business related education, those expenses may be deducted. The education received must be related to your current business. You are not able to deduct art classes, if you operate a restaurant.

Bank Charges

Any bank charges, ATM, or transaction fees are fully deductible on your business return.

Intangibles

Intangibles include trademarks, intellectual property, patents or copyrights. These are the “non-physical” assets of your company. Typically, intangible assets can be amortized over its life. The concept of amortization is the same as depreciation: an amount based on the asset’s useful life is deducted each year.

Salaries and Wages

Salaries and wages you pay yourself and your employees is considered a small business tax deduction. Bonuses and employer paid meals are other types of deductible salaries and wages. The employer portion of FUTA, SUTA, and FICA are deductible too.

Contractor Payments

If you hire a contractor, that payment is considered a small business tax deduction. Be sure to issue a 1099-MISC at the end of the year for contractors who you paid $600 or more.

Rent

Whether you rent an office space, warehouse or even equipment, these costs are deductible.

Accounting Fees

Paying someone to prepare your business tax return is deductible. Accounting fees fall under the category “Legal and Professional Fees” and is a small business tax deduction.

What’s Next?

There are hundreds or more small business tax deductions that exist. Take full advantage of these deductions that apply to you and work with your tax professional closely to see what additional deductions may be specific to your business.

No one wants to pay the government, or anyone for that matter, more than what is entitled to them. Consider the tax services LYFE Accounting offers to fully ensure you are claiming the deductions you are entitled to.