The Ultimate Guide to Small Business Tax Deductions
A small business tax deduction is an expense that subtracts from income and therefore, lowers your taxable income. Every business owner wants to claim as many small business tax deductions as possible. The more small business tax deductions you claim, the less tax you’ll pay.
Small business tax deductions should not be confused with tax credits. Tax credits are direct reductions of your tax liability. For example, if after applying all of your small business tax deductions, you have a tax liability of $10,000, a tax credit of $2,000 would reduce that to $8,000.
On the flip side, what a deduction does is reduce 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 small business tax deductions available. If you are not aware of the many deductions available to you, you may not be claiming them on your tax return. And who wants that! This guide is here to help you navigate through some of the common and uncommon small business tax deductions that will ultimately reduce your tax bill.
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 you 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 will need to know the square footage of your home office and home. From that, you are able to calculate the percentage of home office use. And you can apply this percentage to the expenses of your home, such as rent, utilities, insurance, taxes and more.
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: using standard mileage rates or 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 training.
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 should be fully claimed on your tax return.
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 only record revenue when they provide a good or service.
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 certain 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.
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!
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 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 will no longer be recognized.
Client and Employee Gifts
Do you give your clients or employees Christmas cards every year? Or 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.
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.
Your business might require overnight travel to a client’s location or maybe a trade show. The IRS allows for deductions associated with this type of travel.
Travel expenses include airfare, baggage fees, lodging, meals, transportation (e.g. cab fares), meals, parking, and tolls.
To be considered a travel expense, the following criteria must be met:
- 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
- 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 would be 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.
If your business donates to charity, that is considered a small business tax deduction. 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.
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 may also be deductible. If you attended any pieces of training, classes, or other business-related education, those expenses may be deducted.
The education received must be related to your current business. For example, you would not be able to deduct art classes if you own a restaurant.
Any bank charges, ATM, or transaction fees are fully deductible on your business return.
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 are 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.
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 paid $600 or more.
Whether you rent an office space, warehouse or even equipment, these costs are deductible.
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.
There are hundreds or more small business tax deductions that exist. This list is just some of the major ones that you may or may not be aware of. Take full advantage of these deductions that apply to you and work with your tax professional to see what additional deductions may be specific to your business.
What small business tax deductions will you claim this year?
No one wants to pay the government 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.