Are you a small business owner or entrepreneur? If so, you’re probably always looking for new ways to reduce your taxable income. Well, did you know that there are a number of deductions available to small businesses? In this blog post, we’ll take a look at some of the most common deductions and how they can help slash your tax bill. So read on and learn more about the deductions available to you!
What exactly is a tax deduction?
Tax deductions are an expense that you can deduct from your taxable income. You take the amount of this write-off and subtract it from what would have been reported as a profit, meaning fewer taxes owed!
The following is a list of write-offs commonly available to self-employed businesses that are organized as sole proprietorships or partnerships. Some items on this page will be directly related, while others may not apply at all in your situation – but it’s always good knowledge nonetheless!
This post is meant as an educational and informational read, not tax advice. Always consult your lawyer or accountant before filing anything!
Tax deduction savings
The key to saving on taxes is making the most of all your available deductions. It can save you hundreds of thousands of dollars at tax time.
Staying on top of your deductions
The best way to stay on top of your deductions is by keeping track throughout the year and not waiting until December. Remember that restaurant expense you incurred in January last year? Most people don’t, which means they miss out on tax savings because those expenses were not deducted.
Bookkeeping is the backbone of any successful small business. Without it, you won’t be able to take advantage or claim those deductions that are so important for your bottom line!
Ongoing bookkeeping is critical to help you tally up your deductions. If you don’t have a good DIY setup you’re happy with, check out ME Bookkeeping. We’ll do your bookkeeping for you.
ME Bookkeeping takes care of all the bookkeeping so you don’t have to worry about it. We catch any deductions that might be missed, and then send you your records at year-end to give to your accountant.
The top 12 tax deductions
There are many ways to deduct tax from your business, but this list should help get you started.
Advertising & Promotions
Business Interest & Bank Fees
Business Use of Your Car
Legal & Professional fees
Telephone & Internet Expense
The list of deductions is a great way to reduce what you owe in taxes, but it’s important that we mention some may not apply. Consult with your tax advisor or CPA before claiming any given credit/deduction on this year’s return!
Advertising and promotion
The cost of advertising and promotion is 100 percent deductible. This can include things like:
- Hiring someone to design a business logo
- The cost of printing business cards or brochures
- Purchasing ad space in print or online media
- Sending cards to clients
- Launching a new website
- Running a social media marketing campaign
- Sponsoring an event
Having separate bank accounts and credit cards for your business is always a good idea. You can deduct annual service charges from one account if it’s in excess on another – like an overdraft fee and PayPal or Stripe as the processing fee; but don’t forget about those pesky transfer fees when send funds across platforms (i.e., checking vs savings).
You cannot deduct fees related to your personal bank accounts or credit cards.
You can generally deduct 50% of qualifying food and beverage costs. To be eligible for the deduction:
- The expense must be an ordinary and necessary part of carrying on your business
- The meal cannot be lavish or extravagant under the circumstances
- The business owner or an employee must be present at the meal
The cost of meals during office parties and picnics is 100% deductible. This includes the purchase, delivery or production of food you provide your employees to keep them working late in order for their job duties be completed on time.
It is important to keep documentation for any outings, including what you discussed during the meal and how much each person spent. One way of doing this would be on your receipt by noting down why it was an outing as well as who went out with me?
You can deduct the premiums you pay for business insurance.
This may include:
- Property coverage for your furniture, equipment, and buildings
- Liability coverage
- Group health, dental and vision insurance for employees
- Professional liability or malpractice insurance
- Workers compensation coverage
- Auto insurance for business vehicles
Business use of your car
If you use your vehicle for business, it’s important to keep track of how much time is spent on personal trips versus those that are work-related. The deductible will depend upon what kind or mileage level each trip falls into so make sure there isn’t any confusion before filing!
You can deduct the fees of freelancers or independent contractors who work for you as a business expense.
Just remember, if you pay a contractor $600 or more during the tax year, you’re required to send them a Form 1099-NEC by January 31st of the following year.
Educational expenses are deductible to the extent they add value and increase your expertise. The IRS will look at whether you incurred these costs in order maintain or improve skills required for business purposes, so it’s important that any classes/workshops meet these standards!
The following list contains examples of valid business education expenses:
- Classes to improve skills in your field
- Seminars and webinars
- Subscriptions to trade or professional publications
- Books tailored to your industry
- Workshops to increase your expertise and skills
- Transportation expenses to and from classes
Home office expenses
Nowadays, it is more common than ever for people to use their homes as offices. So if you’re one of those homeowners who has converted your personal space into an income-producing workspace in order to maximize tax benefits and cut down costs like rent or monthly mortgage payments; then good news! You may be able to claim part (or all)of these expenses. There are two ways to deduct home office expenses.
- Simplified Method. You can deduct $5 for every square foot of your home office. However, the deduction is capped at $1,500 per year; so it can only be used for offices up to 300 square feet.
- Standard Method.Track all actual expenses of maintaining your home, such as mortgage interest or rent, utilities, real estate taxes, housekeeping and landscaping service, homeowners association fees, and repairs. Multiply these expenses by the percentage of your home devoted to business use.
To qualify for the home office deduction, you need to measure up in two areas:
- Regular and exclusive use. The space you’re using for business must be used exclusively for conducting business. For example, using a spare bedroom as both your office and a playroom for your children likely makes you ineligible.
There are two exceptions. If you provide day care services for children, elderly (65 or older) or handicapped individuals in that part of the house, you can probably still claim business deductions, as long as you have a license, certification or approval as a day care center under state law, according to the IRS. The other exception is if you use the office for storage of inventory or product samples you sell in your business.
- Principal place of business. Your home office must be your principal place of business. This means you spend the most time and conduct important business activities here.
If you incur business expenses using a loan or credit card, the interest you pay on that debt may be tax deductible. In order to deduct the interest, you must be able to show that the debt was used for business purposes and that you are personally liable for the debt. If you are unsure whether your situation meets these requirements, you should speak with a tax professional. In most cases, the interest paid on loans used to purchase equipment, vehicles, or other property Used in business can be deducted. However, there are some exceptions, so it is important to understand the rules before claiming a deduction.
Interest paid on credit card debt can also be deducted, as long as the charges were made for business purposes. If you have questions about whether your interest payments are deductible, please contact a tax professional. With careful planning, you can maximize your deductions and reduce your overall tax liability.
Legal and professional fees
Legal and professional fees that are necessary and directly related to running your business are deductible. These include fees charged by lawyers, accountants, bookkeepers, tax preparers, and online bookkeeping services
Telephone and internet expenses
If telephone and internet services are integral to your business, they can be deductible business expenses.
Cell phones and the internet have become a necessary tool for both personal uses, as well any type of business. In order to deduct these expenses from your taxes, you must allocate them based on what percentage is allocable towards being used in business.
The only way a trip can qualify as business travel is if it’s ordinary, necessary, and away from your tax home. Your tax home is the city or area in which you conduct business, regardless of where YOU LIVE.
Deductible, IRS approved business travel expenses include:
- Travel to and from your destination by plane, train, bus, or car
- Using your car while at a business location
- Parking and toll fees
- The cost of taxis and other methods of transportation used on a business trip
- Meals and lodging
- Laundry and dry cleaning while on a business trip
- Business calls
- Shipping of baggage and sample or display materials to your destination
- Other similar ordinary and necessary expenses related to your business travel
You should keep records of your expenses and why took the trip. Make sure to include how much each expense was and when it happened so that in case there is an audit or investigation later on down this road (you never know), all information will be at hand!
Keeping good records is essential to maximizing your tax deductions and keeping the IRS away. If you don’t have the time or resources to do it yourself, consider hiring a bookkeeping service to help you stay on top of your finances and keep your business running smoothly. When it comes to taxes, an ounce of prevention is worth a pound of cure! Are you doing everything you can to take advantage of potential tax deductions?