Did you know you can reduce your liability at tax time by using standard business tax deductions?
Tax deductions help small business owners reduce the cost of running their enterprise. While most business owners are familiar with some tax write-offs, they aren't taking advantage of all the business deductions.
Working with your accountant or bookkeeper to track your small business tax expenditures and maximize your tax deductions is essential. Still, it’s helpful to know which write-offs to track.
The following are 21 small business tax deductions that are very commonly used. This is not an exhaustive list, but it's a pretty solid place to start. (To fully understand business deductions, you can take a year off work and wade through this IRS breakdown.)
1. Cost of Goods Sold
The cost of goods sold is all the expense for making the product you sell. So if you sell t-shirts, for instance, the COGS would be all the expenses that make that t-shirt ready for sale. Cost of the shirt, the printing, the packaging, etc.
2. Vehicle Expenses
If you use a car, van, or light truck for your company, you can deduct the cost of using it for your business.
You can do this by keeping records of when you use it for business. When you write it off, you can use the standard mileage rate set by the IRS of $0.58 a mile.
3. Wages and Salaries
You can write off taxes on labor, bonuses, commissions, and wages that you pay staff members. Additionally, you can write off certain benefits, such as retirement plan contributions.
4. Independent Contractor Labor
Many small business owners hire freelancers or independent contractors. You must issue Form 1099-MISC if you paid more than $600 to a contractor during the tax year.
You can deduct the cost of office supplies and expenses. For example, you can write off disinfecting supplies if you run a nail salon. You can also write off tangible supplies such as a laptop or vacuum cleaner.
Depreciation is an allowance for the cost of buying property for your company. For 2019, you can take a depreciation tax deduction of up to $1,020,000.
If you rent space to operate your business, it’s tax-deductible. In this instance, you can write off the full cost of renting the space. You may also be able to deduct some of your housing costs if you have a portion of your home dedicated to your business.
Utilities such as gas and electricity are fully deductible. Your mobile phone charges are also deductible utility bills.
Note that you can’t write off your primary landline if you work from home. You can, however, write off a second landline that you use for business.
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Regulatory fees, real estate tax, and licensing fees are tax-deductible. You can also deduct employer taxes, for example, your contribution to FICA and state employment taxes.
If you purchase a business owner’s policy, flood insurance, or malpractice insurance, you can get a tax deduction for this. You can also write off cyber liability coverage and business continuation insurance.
You can write off the cost of standard repairs and maintenance. Anything from broken computers to leaky plumbing may be included.
If you work in a home office and need to repair the heat for your entire home, you can deduct a percentage of the heating repair by using the percentage of square footage your home office occupies in your home.
Additionally, you can recover costs for repairs that increase the value of a property through depreciation. These improvements are considered a capital expense that materially adds to the property's value, prolongs its life, or adapts the property to a different use. For example, the cost to replace a roof would be capitalized and written off over the entire economic life of that investment. In other words, it wouldn't be an immediate deduction of the full amount.
12. Fees and Commissions
You can write off commissions and fees that you report on Form 1099-MISC. However, you cannot write off all fees. For instance, you cannot deduct the commission you pay to a real estate agent.
Travel costs can really eat into your profits. Fortunately, you can deduct business travel expenses.
If you or your staff members travel out of town on business, it’s deductible. But, be aware, your travel must meet the requirements outlined in IRS Publication 463 to qualify for this deduction. Airfare, train ticket, bus ticket, or fuel for your car to get to and from your destination
Here are some deductions included under travel: the cost of using your car, a rental car, taxis, accommodation, and meals.
You can take this deduction if you incur expenses with marketing or advertising your small business. However, it must relate directly to your enterprise. The IRS considers advertising a miscellaneous expense.
15. Home Office
You can take a partial tax deduction if you're working from home. However, you must use the space you plan to write off exclusively for business. You can also write off indirect expenses for that space, for example, painting the walls.
16. Professional and Legal Fees
You can fully deduct legal and professional fees. For instance, you can deduct the cost of having a lawyer review a contract. However, you can’t write off the cost of having a professional close a property sale for your business.
17. Meals & Entertainment
You can deduct the cost of up to 50% of meals. However, you must substantiate the expense according to the guidelines outlined in IRS publication 463. Meals must qualify as a “business-related meal and entertainment.” It does not include your brown-bagged peanut butter sandwich, unfortunately.
18. Machinery and Equipment Rental
You can also deduct the cost of machinery and equipment rental. You could deduct the full expense if you rent equipment for your business.
19. Business Debt Interest
Usually, you can deduct interest on business loans. However, if your business generates more than $26 million in revenue, you must limit how much you write off.
20. Employee Retirement and Benefit Programs
This expense is tax-deductible if you incur expenses for an employee retirement benefit program. If self-employed, you can open a SEP IR or Solo 401k and get fairly significant deductions.
21. Office Expenses
You can also write off office spending. Anything for your office, from printer paper to toilet paper, can be included. For example, you may purchase miscellaneous items such as magazines to make your office look better. You could also write off a very realistic-looking plastic orchid.
Keeping Track of it All
It’s a good practice to stay organized in case you run into trouble at tax time. You'll want to keep receipts and invoices for your deducted expenses, but you really also need to practice ongoing bookkeeping. Not only to more easily prepare for tax season but also to better understand how your business is performing.