Using these tax deductions for your small business can save you money.
The lower your business’ taxable profit is, the more money will be in your pocket at the end of the year. The IRS rules governing deductions can also provide a personal benefit, such as a nicer car to drive at a lower cost, or a vacation that doubles as a business trip. Therefore, you should pay careful attention to what the IRS considers to be deductible.
What is a 100 Percent Tax Deduction?
A 100 percent tax deduction is a business expense of which you can claim 100 percent on your income taxes. For small businesses, some of the expenses that are 100 percent deductible include the following:
- Furniture purchased entirely for office use is 100 percent deductible in the year of purchase.
- Office equipment, such as computers, printers and scanners are 100 percent deductible.
- Business travel and its associated costs, like car rentals, hotels, etc. is 100 percent deductible.
- Gifts to clients and employees are 100 percent deductible, up to $25 per person per year.
- If you’re self-employed and pay your own health premiums, you can deduct those at 100 percent.
- Your annual business phone bills are 100% deductible.
20 Top Tax Deductions for Small Businesses
Keep in mind these important business tax deductions when you are calculating your business’s expenses at the end of the year.
1. Auto Expenses
If you use your car for business purposes or your business owns its own vehicle, you can deduct some of the costs associated with keeping it on the road. Learning the rules regarding car expense deductions can be difficult but ultimately worthwhile.
The two methods of claiming expenses are:
- Actual expense method. You keep track of and deduct all of your actual business-related expenses and deduct an amount for depreciation each year.
- Standard mileage rate method. You deduct a certain amount (the standard mileage rate) for each mile driven, plus all business-related tolls and parking fees.
You can generally deduct more for your car if you use the actual expense method and keep track of your mileage, as opposed to using the standard mileage rate. However, you must use the standard mileage rate the first year you use the car for business, and after that you can switch to the actual expense method. You cannot switch back to the standard mileage rate if you have used accelerated depreciation deductions, bonus depreciation, or a Section 179 deduction for the vehicle.
This text is saying that if you use your car for both business and pleasure, you can only deduct the business portion on your taxes. You need to keep track of how often you use the car for business purposes so you can add it up at the end of the year. The author is also saying that if you only own one car, the IRS will not let you deduct the entire amount on your taxes because they know that the car is used for other purposes as well. There are apps that you can use to track your driving, or you can use a paper logbook.
2. Expenses of Going Into Business
Advertising, utilities, office supplies and repairs can be deducted as business expenses once the business is up and running. The expenses associated with getting the business started, however, are considered capital expenses. The first year you’re in business, you can deduct $5,000 of these expenses, with any remainder to be deducted in equal amounts over the next 15 years.
If you anticipate that your business will make a profit in the near future, you may be able to get around this rule by postponing payments for some expenses until after your business is up and running, or by conducting a small amount of business activity to officially get started. However, if your business is like many others and will incur losses during its first few years of operation, it may be better off taking the deduction spread out over five years, so that there will be some profits to offset the losses.
3. Books and Legal and Professional Fees
You can deduct the cost of business books from your taxes, including books that teach you how to do without legal and tax professionals.
The fees that you pay to lawyers, tax professionals, or consultants can generally be deducted in the year that they are incurred. However, if the work that is done clearly relates to future years, the fees must be deducted over the life of the benefit that you get from the lawyer or other professional.
4. Insurance
You can deduct the premiums you pay for any insurance you buy for your business as a business operating expense, including:
- medical insurance for your employees
- fire, theft, and flood insurance for business property?
- credit insurance that covers losses from business debt
- liability insurance
- professional malpractice insurance—for example, medical or legal malpractice insurance
- workers’ compensation insurance that state law requires you to provide to your employees
- business interruption insurance
- life insurance covering a corporation’s officers and directors if you’re not a direct beneficiary under the policy, and
- unemployment insurance contributions (either as insurance costs or business taxes, depending on how they’re characterized by your state’s laws).
5. Equipment
The Tax Cuts and Jobs Act (TCJA) brought about changes that allow most small businesses to deduct 100% of the cost of equipment in a single year. This can be done by using 100% bonus depreciation, expanded Section 179 expensing, or the $2,500 de minimis deduction. These deductions can be used for tangible personal property or computer software, but not real property, which must be depreciated over many years.
For used or new personal business property placed in service from September 27, 2017 through December 31, 2022, 100% of the cost may be deducted in a single year through bonus depreciation. In later years, the first-year bonus depreciation deduction amount goes down, as follows:
- 80% for property placed in service during 2023
- 60% for property placed in service during 2024
- 40% for property placed in service during 2025
- 20% for property placed in service during 2026
- 0% for property placed in service 2027 or later.
This means that you can deduct the cost of certain business assets that you purchase and use for your business. The limit for this deduction is $1,080,000 for 2022.
Once a business purchases more than $2.7 million in business property in a year, the amount they can deduct under Section 179 is reduced by the amount their purchases exceed the limit.
You can deduct in one year any personal property costing $2500 or less, as long as you file an election with your tax return.
6. Office Supplies
You can deduct the cost of office supplies including printers, paper, pens, computers and work-related software, as long as you use them for business purposes within the year in which they were purchased. You can also deduct work-related postage and shipping costs. Be sure to file all receipts for office supply purchases, for documentation.
7. Phone and Internet Expenses
If your business requires that you use the phone and internet, you can deduct these expenses. However, if you use them for a mix of work and personal reasons, you can only write off the percentage of their cost that goes toward your business use. For example, if your internet usage is split evenly between business and personal use, you can write off 50% of your internet expenses for the year.
8. Business Interest and Bank Fees
If you lend money to fund your business activities, you can charge interest on the loan. Come tax season, you can deduct the interest charged both on business loans and business credit cards. You can also write off any fees and additional charges on your business bank account and credit card, such as monthly service fees and any annual credit card fees.
9. Depreciation
Deducting depreciation allows you to spread the cost of a large item over its useful lifetime, rather than deducting the entire cost in one year. Here’s how to calculate depreciation:
Depreciation is calculated by taking the total cost of an asset and dividing it by the useful lifetime of the asset.
10. Salaries and Benefits
If you’re a small business owner with employees, you can write off their salaries, benefits and even vacation pay on your tax returns. There are a few requirements for writing off salary and benefit expenses:
- The employee is not a sole proprietor, partner or LLC member in the business
- The salary is reasonable and necessary
- The services delegated to the employee were provided
11. Charitable Contributions
You can write off charitable donations you make to qualifying organizations on your personal tax forms if you have a sole proprietorship, LLC, or partnership. If you have a corporation, you would claim these expenses on your corporate tax return.
12. Education
You can deduct any expenses you incur for education that will improve your business skills. Educational expenses that qualify for deductions include:
- Courses and classes related to your field of work
- Seminars and webinars
- Trade publication subscriptions
- Books related to your industry
13. Child and Dependent Care
If your own children are twelve years old or younger, you can write off the costs associated with their care. Adult dependents including spouses and some other related adults who are unable to care for themselves because of physical or mental disabilityqualify for deductions.
14. Energy Efficiency Expenses
The text states that if you make certain upgrades to your home in order to make it more energy efficient, you may be eligible for tax credits. Specifically, you can claim 30% of the cost of alternative energy equipment, such as solar panels, solar water heaters, and wind turbines. More information on this can be found on the IRS website.
15. Real Estate Taxes
You may deduct state and local real estate taxes paid, including property taxes, on your income tax return. The maximum deduction is $10,000 for married taxpayers filing a joint return, $5,000 for married taxpayers filing a separate return, and $5,000 for all other taxpayers.
16. Mortgage Interest
You can deduct interest payments you make on loans for your home if you use your home for business purposes. You can also deduct the interest on loans you take out against your home equity.
17. Moving Expenses
If you’re moving for work-related reasons, you might be able to deduct the moving expenses. This is determined by the “distance test”: your new job location must be at least 50 miles further from your old home than your old job was from your previous home.
18. Retirement Contributions
If you contribute to an IRA, it can reduce your taxable income for the year. Your total IRA contributions can’t exceed the total income you earned that year or the maximum contribution for the year, whichever one is less.
19. Advertising and Promotion
You can deduct the cost of promoting your business, including digital and print advertising, website design and maintenance, and the cost of printing business cards.
20. Client and Employee Entertainment
If you entertain business clients, you can deduct 50 percent of the cost as long as you discuss business during the meeting and the entertainment takes place in a business setting. You can also deduct 100 percent of the cost of social events held for your employees.
Related posts:
