Most Common Small Business Tax Deductions

Every individual and all types of businesses- irrespective of size and nature of the business wants to save money. Tax deductions can help you save money for your business. We all know, taxes are complicated for small businesses. As a small business, we are already figuring out ways to improve product or service, improve customer experience, increase revenue and cut on costs. Focusing on small business tax deductions are equally important to save yourself money. 

What is a tax deduction?

A tax deduction or tax write-off is an expense that you can deduct from your taxable income. A tax deduction allows you to pay smaller tax bills. By deducting an expense on your tax return, you’re lowering your business taxable income and thus tax liability. You can invest more money to grow your small business that you owe to the IRS every year. 

Following are the most common tax deductions for small business:

• Car and truck expenses:

Most small businesses use a car, van or a small truck for business purposes. Cars can be used to drive for meetings with the clients or using a light truck to transport equipment. If you can prove that you use a vehicle for business purposes, you can deduct expenses from your income. You can deduct these expenses in two ways:

A.  Use the standard mileage rate:

You can add up the miles used for business purpose and then multiply the standard mileage rate which is 58 percent cents per mile. So lets. Take an instance, if you drove 5,000 miles you will be able to deduct $2900 off your taxes. 

B.  Add up your actual car related expenses:

For this claim, you need to keep all detailed records throughout the year. This will require a little more work. You can add up how much your car is depreciated and how much money you have spent on gas, repairs, car insurance and registration fees. This will be your deduction. 

The option you choose depends upon what is economical and how much it costs throughout the year. 

• Home office:

You will be able to deduct expenses for the business use of your home, which include mortgage interest or rent, real estate taxes, housekeeping or landscaping service, homeowners association fees, insurance, utilities, repairs and depreciation. The small business owner can deduct $5 for every square foot of your home office and the limit is up to 300 square feet. But this deduction is only allowed if the home office space is regularly used for business purposes only.  

• Mortgage interest:

 You can deduct mortgage interest in your business own realty. 

• Contract labor:

Many small businesses hire freelancers or contract laborers to meet the needs of your business. The cost of this is deductible.  Remember to Issue Form 1099-MISC to such contractors receiving $600 or more during the year. 

• Qualified Business Income:

According to the new tax law, small businesses including S corporation, partnership, sole proprietorship, LLCs will be able to deduct 20% of their income on their taxes. The Tax Cuts and Jobs Act of 2017 made significant changes to the tax code. For small businesses it was the creation of qualified business income deduction. For example you have earned $1,00,000 in profit, so now you can deduct $20,000 before ordinary income tax rates apply to you. 

• Rent:

The good news is that the rent for your office space that goes up every year is also deductible. It can include a bakery shop, boutique, factory, an office space for a small business such as a salon, travel company etc.

• Advertising and Marketing:

You are eligible to deduct the cost of printing business cards on your tax return. So, basically anything you use to promote your business to bring in new customers from social media ads to billboards, all is 100% deductible. 

• Office supplies and expenses:

Every business requires stocking up on traditional office supplies such as printer inks, pens, post-it notes. These office supplies are totally deductible. You can also write off any newly purchased Smartphone, laptop or software for your small business. 

• Utilities:

You’re in luck! Everything you spend on utility bills (electricity, phone, internet, water, heat and sewage) for your business is fully deductible. 

• Repairs:

If you require repairing your office property or it just requires regular maintenance to keep running efficiently, you can write off these costs on your taxes too. 

• Travel:

Many small business owners have to travel for business purposes. But of course! These expenses of travelling and staying comes with a price. But there is some good news here! You can deduct those expenses for you and for your employees if the trip is taken for a business purpose. For this you need to meet some substantial requirements to claim any travel deduction. However, local commute costs remain not deductible. 

• Meals:

A business meeting taken out at a restaurant with your client  is 50% deductible provided the expense is a necessary part of your business, the owner or the employee must be present at the time of meal and lastly the meal has to fall under certain circumstances. 

• Salaries and Employee benefits:

The wages, salaries, bonuses, commissions, vacation time paid are all tax deductible business expenses for your employees. You can also deduct contributions to their retirement plans, education assistance and most other employee benefit program costs. Payments made to sole proprietorship, partnership and LLC members are not included as wages because they aren’t employees of the business. 

• Taxes:

You can write off many taxes of state and local income taxes, estate tax, sales tax and personal property taxes of $10,000. You may deduct Audit Support and payroll taxes, fuel taxes, excise taxes, occupational taxes, business licenses etc. 

• Insurance:

The cost for insurance premiums like property coverage for your furniture, equipment and buildings,liability insurance, fire and flood insurance, malpractice insurance, workers compensation coverage, auto insurance for business vehicles, business owner’s policy are all fully deductible. 

• Legal and professional fees:

 You are at an advantage to deduct legal and professional fees charged by lawyers, bookkeepers and accountants related to your business operations. 

• Telephone and Internet expenses:

 If telephone and internet are integral to your business, they can be deductible as well. Keep in mind, if you have a landline at home , you cannot deduct the cost of your first line even if it’s used for business purposes. 

• Commission and fees:

 Commission and fees are fully deductible and may require form 1099-NEC for 2020. But, commissions paid in connection with buying realty are not deductible. These are usually recovered through depreciation and added to the basis of property. 

• Rent on machinery and equipment:

Fees paid on rented equipment or lease used in your business are fully deductible. 

• Miscellaneous business deductions:

Even if any expense doesn’t fit in any of the categories listed above, you can find it as a deductible as long as it's ordinary or necessary for the business. 

Conclusion:

To save money for your business, you need to claim all tax deductions possible. It is advisable to consult with your accountant before claiming a tax deduction for your Small Business Accounting Services.