Every year, more than 2 million taxpayers overpay their income taxes. And this isn’t just pocket change. Taxpayers are overpaying by close to $1 BILLION dollars.
This could be due to poor tax planning, or because they’re missing some of the biggest business tax write-offs.
Meanwhile, the top 1% are using the tax law to their advantage to minimize their tax liability, oftentimes leaving us clueless…
As a CPA, I have recognized a common pattern amongst small businesses and self-employed individuals- they are paying way too much in taxes and are missing some of the BIGGEST tax write-offs.
In this post, I’m going to give you BIGGEST tax write-offs for small businesses.
Also, small disclaimer, the information I’m providing in this post is for informational purposes only and is not meant to take the place of legal and accounting advice. If you want specific accounting advice, then please contact your attorney or CPA.
Now, let’s begin.
I was motivated to create today’s post after speaking to one of my clients.
My client is a small business in the construction industry. He had a fairly successful business and is doing about 7-figures in revenue. And, he had contractors that he paid to fulfill the project work he was hired to do.
So eventually, tax time came and it was time to file his business taxes. It was our first time filing his taxes, so we asked to see his financial statements and tax returns from prior years.
And once we reviewed it, I was suddenly shocked. He was leaving so much money on the table. There were so many things wrong.
For one, he reported his total revenue as his income on his tax return in prior years. This means that he had deducted absolutely NOTHING on his tax returns.
For example, if his revenue was $1,000,000.00 and his net income was $500,000.00, he reported the whole $1,000,000.00 as his income for all prior years.
So instead of paying like $100,000.00 in taxes, he paid $200,000.00!
I’m sure you can imagine his face when we explained this to him.
Unfortunately, this was just the beginning of our problem. Remember all of the subcontractors he hired to do the work?
Well, two problems there- not only did he not deduct these expenses, but he paid them in cash and had no receipts of the transactions he made to them.
He had no w-9 forms for his contractors, which meant that they received no 1099 forms to even report the income they received. And because they could not report it, my client obviously could not deduct it.
Anyway, this entire situation taught me that many businesses are overpaying on their taxes without even realizing it. And while your situation may not be as extreme as this one, there may be just one tax write-off you can takeaway to improve your tax situation and put more money in your pockets.
For this reason, I am going to give you the Biggest Tax Write-Offs for you to take advantage of.
So let’s not waste anymore time here. Let’s jump right into it.
What is a Business Tax Write Off?
First and foremost, what is a business tax write-off?
A business tax write-off, also known as tax deductions, are eligible expenses that you can deduct from your income for tax purposes.
Which leads me to my next point, which is, what exactly can businesses write-off?
Almost all business expenses that are incurred to operate a business can be written off. Technically, the IRS allows you to write-off business expenses that are ordinary and necessary to run your business.
- Ordinary means that it is common and accepted in your industry.
- Necessary means that it is helpful and appropriate for your business.
Now of course, the IRS is not going to make it that easy for you. There are rules, exceptions, and exclusions for various types of business write-offs.
For example, if you buy expensive equipment, the IRS may require you to depreciate that equipment over its useful life, instead of writing the full cost off in the year you bought it.
But despite the specific rules and semantics, there are still some HUGE business tax write-offs that you can take advantage of when you file your next tax return.
So let’s jump into it. I’ll start with the simplest tax write-offs and graduate into the more advanced tax write-offs as we go on here.
14 Biggest Tax Write Offs for Small Businesses
1. Startup and Organization Expenses
For the new business owners reading this post, the first tax write-off you should think about is the Business Start-Up tax write-off.
With this tax write-off, you can deduct up to $5,000.00 of business start-up and $5,000.00 of organizational costs.
- Start-up costs include ANY amounts paid in connection with creating your
- Organizational costs include the costs of creating your entity, such as the legal fees associated with creating a corporation or partnership.
2. Office Expenses, Technology, Supplies
All office, tools and technology expenses you incur to operate your business can be written off.
- Office expenses may include things like your computers, paper, pens, notebooks, and so on.
- Your technology expenses may include things like your accounting software, such as QuickBooks, or your merchant account to collect payments from customers.
Anything tool or technology that is ordinary and necessary to operate your business can and should be written off.
3. Home Office Deduction
If you use part of your home for your business, you will likely be able to deduct expenses for the business use of your home.
- home mortgage interest
- and depreciation
…are things that you can deduct for your business as long as you are using your home for business use.
Now, in order to do this, you will need to calculate the portion of your home that is used for business and for personal use. The IRS will only allow you to write-off the portion of your home expenses that are allocated for business use.
For example, if you live in a 1,000 square foot home, and your office occupies 250 square feet, then hypothetically, you can write-off 25% of all of your home costs in your business expenses.
4. Cell Phone and Cell Phone Service
If you use your personal cell phone for business purposes, then you can also use this as a tax write-off.
You can write-off both, the cost of your cell phone and the cost of your cell phone service.
In the same manner I described with the business use of your home, you would also have to compute the portion of your cell phone expenses that is used for business versus personal use.
Then, you can write-off all business-use cell phone related expenses.
5. Costs of Goods Sold
If you sell products, then you can also deduct your costs of goods sold.
You can deduct your:
- selling cost of products or raw materials
- storage costs
- direct labor costs
- and factory overhead costs
For example, if you sell coffee cups, you can deduct the cost of each coffee cup that you sell.
6. All Labor Costs
This is very important for all businesses, especially service-based businesses.
You can and likely should deduct all costs that you incur to pay anyone to deliver a service that is specific to your business.
This includes employees and contractors. Make sure that you have W-4 forms for all of your employees so you can deduct their W-2 wages from your business income.
And also make sure that you have W-9 forms from all contractors that you hire to do anything for your business. Even if it is as simple as hiring a moving contractor to move into new office-space, this is something that you should write-off from your business taxes.
You just need to keep-up with these expenses and issue 1099-forms to your contractors so that they can also recognize the income that you are deducting from your business taxes.
7. Business Mileage
This one is something that many businesses neglect and ultimately leave money on the table for the IRS.
You can deduct money from your taxes for every single mile you drive for business use. For example, in 2020, you could deduct over $0.50 cents for each mile you drove.
Now, the key to deducting business mileage is differentiating this from your personal mileage. Your business mileage can be deducted for things like client meetings, business conferences, and any other business reason.
It does not, however, include mileage used for personal reasons.
Regardless, if you simply track your business mileage, you can write-off more tax dollars that the IRS would otherwise receive from you.
8. Business Travel
You can also deduct all of your business travel expenses.
For example, let’s say you traveled to Grand Cayman island for a 5-day business conference. But, you decided to stay there for 10-days to also mix in some personal vacation time on the island. Well, in this case, you can deduct your full flight expense to get to and from Grand Cayman island, and 5-days of the lodging expenses during the business conference.
You will not, however, be able to write-off any of your expenses during the other 5-days that you used for personal enjoyment.
9. Business Meals
Business meals can also be written off from your business income. You can write-off 50% of your meals from your business income.
However, you also need to understand how the IRS classifies business meals, because you can’t just write-off all of your personal meals and claim them as business write-offs.
You can deduct meals that are deemed ordinary and necessary in the operation of your business. For example, business meals with your clients or employees, can be written off.
10. Business Interest Expense
If your business has any debt, then you can also write-off the business interest expense from that debt.
Now, many people confuse this with the total payment to your debtors. You cannot write-off your entire monthly payment, because some of it is a payment towards your own principal.
However, you can write-off the entire portion that the bank earns from issuing debt to you, which is the interest expense.
Okay now we’re moving into more advanced tax write-offs, that are also things that you should likely plan for in order to take advantage of it. So let’s get into it.
11. Retirement Contributions
You can write-off contributions to qualified retirement accounts, such as traditional IRA’s.
Also, if you have employees and offer 401K plans, you can also write-off any contributions that you make into their retirement accounts as well.
Now, there are many different types of retirement accounts, contribution limits, and income limits that may determine your overall tax approach to this. However, when carefully planned, you can write-off a fair amount from your tax liability, and keep more money in your account.
12. Health Savings Contributions
Health savings accounts are another big tax write-off that can come in handy for your business.
You can establish health savings accounts, which are basically accounts that are used for health-related expenses. The great part about health savings accounts is that your contributions to them qualify as tax write-offs.
And as long as you use the account for health-related expenses, you effectively avoid paying taxes on this amount all together. Since everyone will likely have health-related expenses at some point in their life, setting up a HSA is a win-win for tax purposes.
13. Write-Off Self-Employment Taxes
Now, this is an advanced tax write-off, but since you made it to this part of the post, then you deserve this tip.
As your business income rises, technically you must pay self-employment taxes on those earnings, up to about $130,000.00.
Now, if you earn around this range or more, then you can reduce your self-employment taxes by simply incorporating into an S-Corporation. Shareholders of S-Corporations do not pay self-employment taxes. However, you are required to pay yourself a reasonable salary based on the services you provide to your business, which are subject to taxes.
But if your reasonable salary is lower than $130,000.00, then you will likely save more on self-employment taxes as a result of this switch.
To learn more about this, then watch our video on “LLCs vs. S-Corps”.
14. Pass-Through Tax Deduction
When the Tax Cuts and Jobs Act passed, a new deduction arised called the “Qualified Business Income Deduction”. Basically, it allows small business owners to write-off up to 20% of their business income of their taxes.
So if you made $100,000.00 in business income. You could hypothetically write-off $20,000.00 and save taxes on the lower amount of income that you’d be reporting.
Now, there are some key rules to be aware of if you want to use this write-off. For example, it only applies to specific entity types and there are income limits for who can take advantage of it.
Regardless, if you are eligible for this deduction, then it can save you thousands of dollars in taxes, depending on your income.
So these are my 14 biggest tax write-offs for small businesses.
Now let’s talk about how to implement this.
In order to implement any of this, you need to have a good accounting system in place that tracks these types of expenses and aggregates the totals for each category for you.
If you need any help with this, then our bookkeeping service was designed to help you prepare financial reports like this so you can easily prepare your taxes.
And if you have any questions on this, you can also use our tax planning service to receive a custom tax plan for your business.
Now, let’s recap today’s post.
Today, we discussed a few things:
First, we defined what tax write-offs are in the first place. Tax write-offs are eligible expenses that you can deduct from your business income.
Then, we discussed the general things you can deduct. In general, you can deduct almost all business expenses that are both ordinary and necessary to run your business.
Finally, I provided some of the biggest business tax write-offs that I’ve seen save clients a ton of money.
Remember, to take full advantage of these tax write-offs, you need a strong accounting system in place that tracks this stuff for you on a consistent basis. Talk to one of our experts today and let us help you with your business financial management.