Many small business owners may have heard a horror story about someone who got audited, which typically costs a lot of time and money. Because of that fear, small business owners may be understandably hesitant to take deductions due to fear it might subject them to an audit.
However, deductions may help you save a lot of money that you may instead use to grow your business. Let’s talk about some of the most common tax deductions for small businesses that you may want to consider incorporating during your tax planning.
Note: Be sure to check with an accounting professional you trust if you have questions or concerns.
What is a small business tax deduction?
A small business tax deduction is an expense that the IRS allows you to subtract from your total taxable income, which reduces the amount of tax that you owe. These deductions are meant to offset the usual costs associated with owning and operating a business, including supplies, equipment, utilities, and professional services. By lowering your taxable income, deductions can significantly improve your cash flow and help you reinvest more money back into your company.
Is my SBA loan interest tax deductible?
Yes, the interest that you pay on your SBA loan is generally tax-deductible. To ensure compliance and maximize your deduction, you should work with a tax professional who can help apply the rules correctly to your specific situation.
Is sales tax deductible for my small business?
Sales tax can be deductible but only on supplies and products that you purchase for your business. Sales tax that you collect from customers and clients is not tax deductible.
What tax deductions do small business owners miss out on?
Small business owners often miss out on tax deductions because they aren’t aware of just how many expenses can be claimed on their annual taxes. In many cases, they overlook items like home office costs, mileage, software subscriptions, and minor equipment purchases because these expenses feel too small or routine to track. Others miss out because of lackluster recordkeeping and assuming that deductions are only applicable for large corporations.
What are the biggest tax mistakes business owners make?
The biggest tax mistake that small business owners make generally involves recordkeeping. By failing to track seemingly minor expenses, you may be missing out on a sizable deduction each year. Others miss out on deductions because they wait until the last minute to file instead of getting ahead of the game.
Finally, some small business owners fail to separate their personal expenses from those of the business, especially if they’re the lone employee in a sole proprietorship. These mistakes can leave you reeling on Tax Day.
12 small business tax deductions you should consider
You don’t want to miss out on opportunities to reduce your tax bill and keep more of what you have earned. What can you potentially deduct to decrease your tax burden? Here are a few suggestions you may want to consider with your tax professional.
1. Home office
If you use part of your home for your business, you might be able to deduct a portion of certain expenses, whether you’re a homeowner or renter. To calculate how much you may be able to deduct, you need to measure your work area (it needs to be a designated spot for an office) and divide it by your home’s square footage. This percentage is the amount of your rent/mortgage, insurance, electricity, internet, housekeeping, and other home-related expenses you may be able to claim.
Remember that this only works if you have an actual home office area. If you work in the living room on your couch, you generally can’t deduct the cost of your whole living room.
A home office deduction may be kind of complex, which is why small business owners may be wary of it. But if you use it properly, it might save you money.
2. Office supplies
As an entrepreneur, you have expenses that are necessary to run your business. To be deductible, they generally need to be (1) ordinary and (2) necessary. The simplest example of a business expense is office supplies.
Small businesses can deduct things like paper, pens, business cards, ink, paperclips, and binders. Be sure to hang onto these receipts and keep them organized by month. These expenses may further reduce your taxable income.
3. Furniture
Office furniture acquisitions provide a couple of choices. You may deduce 100% of the cost for the year you purchased it, or you may deduct the depreciation. Depreciation is recognized as a portion of the expense over seven years.
4. Business Insurance
Typically, insurance is considered a business expense. This generally includes casualty and theft insurance, professional liability and malpractice insurance, accident and health insurance, and coverage for any business vehicles you use.
However, you cannot deduct life insurance premiums where you’re directly or indirectly the beneficiary.
5. Automobiles
If you use a vehicle purely for business, its operating expenses are generally deductible. If you use it both professionally and personally, you’ll need to divide your expenses based on mileage. You can find a list of the current and prior year’s standard mileage rates on the IRS website.
6. Travel expenses
In order to deduct traveling as an expense, you generally need to meet two conditions.
First, the trip must require you to be away from your regular place of business for longer than an ordinary day’s work. Second, you need sleep/rest to meet the demands of your work while you’re away.
If you meet these conditions, then you may be able to deduct things like parking, transportation, meals, and lodging. You can find more information in IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses.
7. Marketing and advertising
Generally, if these expenses are directly related to your business, you may be able to deduct them. This includes social media ads and print or broadcast advertising. Other things on this list are sponsoring a team, donating branded goods, and participating in special events.
8. Education
In general, all educational expenses are fully tax deductible, including magazines, books, and webinars.
9. Legal and accounting fees
Another tax deduction for small businesses is fees for the professionals you hire, including lawyers and accountants.
10. Inventory
Inventory is one of the highest costs for many small businesses. To calculate this, you’ll have to factor in numbers like the cost of the products themselves, freight, storage, and what you pay the people who produce these products.
11. The people you hire
Did you know that your employees’ wages are generally fully deductible? This includes even their bonuses and commissions. The same may be said for freelancers and independent contractors. Just be sure to issue a MISC-1099 form to any contractor making more than $600 in that tax year. (Sole proprietorships and LLC members do not count.)
12. Interest on your loans
If you’ve taken out a small business loan, you probably already know that you’re paying interest on it. A lot of entrepreneurs don’t know that you may count this as a deduction for a small business, as long as you’re using the loan for business expenses, you (as the owner) are liable for it legally, and you’ve taken it out from a traditional lender. Consult your tax professional for more information.
5 expenses you typically can’t deduct
As you now know, there are plenty of tax deductions for small businesses to help reduce your taxable income. However, there are a few things you generally cannot deduct, including:
- Federal income tax payments
- Political contributions
- Penalties and fines associated with breaking the law
- Lobbying expenses
- Membership dues, even if they’re for your business. (However, the costs associated with entertainment at social occasions, athletic events, luncheons, sporting events, airfare, and hotel clubs are deductible.)
Use tax deductions for your small business strategically to save money
Deductions may help reduce your tax burden, and a lot of expenses fall into this category, including marketing and advertising, employee wages, and your home office. If you’re not sure what you can deduct, check with your accounting professional to make sure your taxes are IRS-friendly.
Don’t wait until the last minute to get your small business taxes in order. Accurate recordkeeping and getting your deductions in order early may help allow you to maximize your small business tax deductions.
