Did you know that there are over 27.9 small businesses in the United States? Whether you’re just starting your business or you’ve been at it for years, you’re going to want to be prepared for when tax season inevitably hits.
While nobody loves paying taxes, they are a necessary part of being a respectable, law-abiding citizen.
Fortunately, the IRS lists several amazing small business tax deductions (some that you may know and others that you may have missed).
Let’s get into the top ones, and let’s get you saving today!
Your Home Office
It may seem obvious that you can write off your home office for your small business tax deductions, but many entrepreneurs misunderstand how this rule works.
Let’s break it down. In order to claim your home office on your taxes, the IRS mandates that this space is devoted to your business and nothing else. It needs to also be your principal place of business.
Typically, this means that your home office will just be part of a room, rather than the whole room. You’ll want to measure your work area and divide it by the total square footage of your home.
You can claim any home-related business expenses related to that space- your rent, mortgage, insurance, and electricity.
Finally, don’t forget that you can also write off associated fees with maintaining your office. This means office supplies, such as paper, ink, staples, pens, etc. It also means relevant furniture, such as your desk, chair, bookshelf, or filing cabinet.
In general, if it’s exclusively used for your business, you’re able to claim it in your small business tax deductions.
Another one of those misunderstood small business tax deductions, gas mileage can quickly add up for those who drive for their companies.
In order to receive your money back, you’ll need to keep detailed documentation. This means you should keep a notebook in your car to record the mileage, tolls, parking costs, purpose of trip, and dates.
At the end of the year, you’ll have two choices:
- Measure your business usage to your personal usage and deduct that portion of your auto-related expenses.
- Total the mileage, add in the tolls and parking and calculate your deduction. Multiply that number to 53.5 cents (as of 2017).
You can also include leasing payments if you are leasing the car.
If your business is not in your home, the mileage begins at your first business-related location and ends at your last. That means you can’t just include the ride to and from home.
If your office is at home, you can deduct any business-related drives from pulling out of your driveway until your return home.
If you’re self-employed and cover the costs of your own health insurance premium, then your costs are completely deductible- so long as they don’t exceed your total business’ net profit.
You can’t write off insurance premiums if you received health coverage through a secondary employer.
But, if your spouse worked for you last year, you can get the full medical premium deductions on your tax returns. Your spouse and children will also be 100% deductible.
Employee Benefits Programs and Plans
As a small business owner, you can deduct the cost of employee benefit programs, such as dependent care assistant, wellness assistance programs, and education assistance.
Furthermore, you can also use employees’ retirement plan accounts, such as a sponsored 401(k) for your small business tax deductions.
Are you self-employed without any additional employees? If you make contributions to your own qualified retirement plan, you can also be eligible for personal deductions.
If you have a lot of employees or complex plans, make sure to consult any potential write-offs with a Certified Public Accountant.
If you’re dealing with your own personal retirement accounts, it’s also wise to consult with a professional before making any serious moves. It’s always a good rule of thumb to cross-reference before making large decisions for write-offs.
Did you know that you can deduct the cost of books, classes, or training manuals designed to improve your work ethic or expertise?
It’s important to note that you’re only eligible for these small business tax deductions if you’re purchasing products directly related to your current career. If you’re thinking about a future career or switching careers, the expenses are not deductible.
Just know that if you’re taking specific fees or professional certifications related to your job, you can write those off. Want to attend a special conference or training related to your line of work? It’s also deductible.
Finally, most education costs are also considered small business tax deductions. Like with other self-improvement costs, the education must be related to your direct line of work.
That means that any associated education costs must be used to further develop your skills and run your business more productively.
In general? The IRS appreciates you wanting to further your education. That’s why they’re generous in providing you with deductions for advancing your skills.
Education isn’t just in the form of traditional classes. Don’t forget the costs of any seminars, webinars, subscriptions, books, or workshops that you may attend.
Initial Start-Up Costs
Is it your first year of business? If so, it may be costing you more than just a bunch of headaches and sleepless nights.
The first year of business is undoubtedly stressful, confusing, and usually expensive for entrepreneurs. However, it’s a necessary milestone. After all, everyone needs to start somewhere, right?
Fortunately, the IRS knows this and does offer somewhat of a break for fresh-minded business owners (even if you haven’t opened your doors yet).
You can typically write off any costs associated with creating your trade or business. This may mean analyzing products or labor, providing surveying and field work, visiting potential office locations, and any other related costs with investigating or researching the business opportunity.
You can also write off expenses related to preparing your business to actually open. This may refer to employee training programs, initial wages, travel costs to distributors or suppliers, advertising fees, and consulting fees with accountants and attorneys.
Finally, you can also deduct organizational costs. If you legally set up your business as a corporation or partnership before the end of your first business year, you are qualified for these small business tax deductions.
They typically include state funding fees, salaries for temporary staff, meetings, legal expenses, and filing and accounting costs.
You should note that the IRS allows maximum small business tax deductions of $5,000 for startup costs and $5,000 for organizational costs.
The days of writing off fancy corporate dinners with reckless abandon are definitely over. Too many entrepreneurs found the loopholes and abused those small business tax deductions.
Today, the IRS has some relatively strict rules on these types of write-offs. You can’t just deduct the cost of any meal somehow related to your line of work. In fact, entertainment expenses are no longer deductible and meals are only 50% deductible.
In general, any qualified expense must be directly related or associated with your business. You need to genuinely ask yourself if the purpose of this meal or entertainment venture was to increase the value of your business.
With that said, the costs must obviously be reasonable. If your business is pulling in $20,000 per year and you’re attempting to write off $15,000 in business meals, you’re going to raise some serious red flags with the IRS.
Ah, one of the best small business tax deductions. It’s also one of the most confusing.
For a trip to qualify as business travel, it must be away from your tax home, ordinary, and necessary. You need to be traveling for more than a normal day’s worth of work.
In general, the IRS approves the following small business tax deductions related to travel:
- Meals and lodging
- Dry cleaning
- Taxis, Ubers, car rentals
- Plane, train, or bus fare
- Business calls
- Luggage or baggage shipping
- Ordinary expenses related to business travel
- Parking and toll fees
Like with most tax write-offs, it’s important for you to keep meticulous records. You want to be able to prove the amount of each expense, dates, and details. If you’re using your own car, make sure that you have an accurate mileage log as well.
Final Thoughts on Small Business Tax Deductions
Taxes are confusing for most everyone, but the right planning and strategizing can save you tens and thousands once tax season rolls around.
Looking to step up your business’ financial health and accounting services? Check out our bookkeeping services today! We can accommodate any of your small business needs.