17 Most Common Tax Deductions for Small Businesses
As a small business owner, you’re in business to make money. However, the bigger your company’s bottom line, the higher your tax liability. This is where small business tax deductions come in.
Tax deductions offset the cost of doing business. They also determine how much of your company’s profits will end up in your pocket and how much go to Uncle Sam (aka, The IRS). Which is why it’s essential to know which business expenses can be lawfully deducted and which expenses cannot be deducted.
Unless your small business happens to be an accounting firm, it’s always beneficial to hire an accountant who can advise on federal tax laws, prepare or review your tax return, and assure that your business is not leaving any tax deductions off the table.
The best part about using an accountant for your business? It’s a fully tax-deductible expense. Until you meet with your accountant, it’s best to plan ahead and have a good grasp on what common small business tax deductions can include.
What is a Tax Deduction?
Tax deductions are business expenses that must be both ordinary and necessary. For a better understanding of what the IRS means by that, this is their official definition:
“An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
Rent, advertising, payroll and office supplies are all examples of tax-deductible expenses. However, some business expenses are only partially deductible, such as meals (only allowed a 50% deduction), and gifts (only up $25 per person is allowed as a deduction). The more tax deductions you claim, the less taxable income you’ll have, and less taxable income equals fewer taxes owed.
How to Record Business Expenses?
All business expenses must be well documented with a bill or receipt showing the amount, date, payee, and business purpose. The reason for this is, in the event that your business is audited, the IRS will not accept these expenses as deductions if proof of the transactions can’t be provided.
While keeping hundreds of paper receipts doesn’t sound very practical or convenient, it’s the unfortunate reality. Everlance is the prime solution for keeping track of expense receipts. Just use your phone to take pictures of each receipt and they are securely stored in the cloud forever. You can also manually add expenses and classify them accordingly.
With an Everlance Premium membership, you can even link your bank account or credit cards, and it can automatically grab your expenses. When tax time rolls around, you can export and download the data into a PDF or Excel file and easily hand it off to your tax preparer or import it directly into your tax preparation software.
17 Common Tax Deductions
Below is a list of 17 allowable tax deductions by small business. Note, this is a just a snapshot, as there are about 100 different types of tax-deductible expenses that the IRS permits. Remember, records are required to be kept for each expense.
1. Car and mileage. If a car, van or small truck is used for your business, the cost of operating the vehicle is deductible. The total deduction can be calculated by adding up gasoline, maintenance, repairs and other expenses needed for a vehicle to operate as the standard deduction, or you can use the 2018 IRS standard mileage rate of 54.5 cents per mile.
Everlance makes this process hassle-free. The app automatically tracks your mileage using GPS and allows you to distinguish between business and personal use of your car by simply swiping right or left. You can also enter in your trips manually. Everlance does all the recording and reporting for you, so you can keep your eyes safely the road, instead of your mileage.
2. Payroll. This includes all payments made to employees, including salaries, bonuses, commissions, and taxable fringe benefits. Payments made to freelancers and independent contractors are also deductible under contract labor, which is a separate expense from payroll.
3. Rent. The cost of renting space to conduct your business, whether it is an office, studio, storefront or factory, is a tax deduction.
4. Insurance. Insurance premium costs for are fully deductible. Different types of policies that small businesses might have include liability, malpractice or workers comp insurance. Healthcare benefits for employees are subject to other limitations.
5. Home Office. If your home is used regularly and exclusively as the primary place of business, a place to meet or deal with clients or customers, or as a separate structure used in the business, a percentage of your personal home expenses are deductible as a business expense. The deduction includes both direct costs and indirect costs. A direct cost would be painting the room used as your office; and indirect costs would include the percentage of rent or mortgage interest and real estate taxes that corresponded with the percentage of home space used exclusively for business, based on square footage. For instance, if you rent a 2,000-sq ft. home and a 200-sq ft. room is used as your office, 10% of your total rent can be deducted.
6. Travel. If you or your employees travel out of town for business, transportation and lodging costs are fully deductible. Regular commuting from your home to your workplace is not deductible.
7. Meals. The total cost of each meal which has a business purpose, is 50% deductible. That includes tax and gratuities. The 50% deduction applies to meals while traveling for business, as well.
8. Advertising. All advertising costs for your business are fully deductible.
9. Interest on Business Loans. Any interest paid on a business loan or line of credit can be fully deducted, as long as the loan proceeds were used solely for business assets. However, starting in 2018, interest tax write-offs will be capped at 30% of adjusted taxable income. However, any disallowed interest can be carried forward to the following year’s tax return.
10. Legal and Other Professional Fees. All legal fees paid on behalf of your business, as well as accounting fees, are fully deductible.
11. Bad Debts. If the income from an unpaid bill is declared, then it is deductible. For instance, if you sent a client a bill in December 2017 and claimed that invoice as part of your total income for 2017, but realized by the end of 2018 that your client never paid that bill, you can claim that amount as a deduction on your 2018 tax return.
12. Internet. Internet service which is needed to conduct your business, as well as internet hosting fees for your company’s own website, are both tax-deductible expenses. If you have a home office, only a portion of your internet service can be deducted, assuming that you also use the internet for personal use.
13. Continuing Education and Certification. You may deduct the costs of continuing education and certification for the line of business you are currently in. However, paying for courses relating to a new type of business you may be looking to get into, are not deductible.
14. Charity. Charitable contributions, whether you are making a monetary donation or donating inventory, are both deductibles. Just be sure to keep records of all donations.
15. Telephone. If you use your personal cell phone for business purposes too, a portion of your cell phone bill is deductible. A landline for your business is fully deductible if the office is outside of your personal residence. If using a home office, only a second landline obtained specifically for your business would be deductible.
16. Equipment. Whether you rent or purchase equipment needed for your business, both costs are fully deductible. Repairs needed on this equipment are expenses that can also be deducted.
17. State Taxes. The state and local taxes you pay on behalf of your business are fully deductible on your federal tax return. However, federal and state income tax paid cannot be deducted as a business expense.
While this isn’t a full list of small business tax deductions, it should provide you with a good idea of some common expenses, which can assist you with your business and expense planning for the year ahead.
2018 Small Business Tax Reform
It’s important to note that starting in 2018, there have been tax changes for small businesses. This change reflects a 20% reduction of taxable income. While this can certainly be considered a positive change for small business owners, keep in mind that tax laws are complicated and there are exclusions and thresholds which need to be considered before assuming that you might benefit from this tax advantage. Discuss with your tax advisor to see if and how you can use this tax change to your advantage.
There are many wonderful benefits of being a small business owner, especially the fact that you are your own boss. However, when tax time comes around, you still need to answer to someone else, and his name is Uncle Sam.
Remember that the best way to prepare for taxes is to keep track of all your taxable expenses with records of each and every one. No other service available makes tracking company mileage & expenses as simple as Everlance, which captures all of your receipts, car mileage and business expenses, and provides all the data and reports when you need it on a convenient and easy-to-use Dashboard.
If your small business has two or more employees, Everlance Teams offers mileage tracking, expense recording, and data reports for your entire staff. This automated process can save your employees and finance department hundreds of hours of time, taking away the huge burden of having to do it manually on their own. Taxes are never pleasant, but Everlance can certainly make it less tedious.