With 2020 in full swing, that means tax season is approaching quickly. Though the deadline for filing your tax return isn’t until Wednesday, April 15, 2020, the first quarter of the year is a time for tax preparation. As a small business owner, you have tons of expenses that you’ve incurred over the 2019 calendar year, from buying office equipment and paying salaries to taking clients out to business lunches. Many common business expenses are eligible for small business tax deductions. The key is knowing and understanding how to apply for them to save money.
To learn even more about business taxes, check out our guide to small business taxes.
Small Business Tax Deductions
Read on to find out some of the top small business tax deductions accessible to small business owners, and how to go about claiming them. Here’s a list of tax deductions for small businesses:
1. Car Expenses
Car expenses are something any small business with a vehicle has to deal with. Fortunately, if you have vehicles that are integral to your operations, you can deduct car expenses incurred in the line of business. You can do this as a sole proprietor who uses their personal car, but keep close track of expenses related to personal use versus business use.
Come tax season, when deducting car expenses, you can either choose to deduct your actual expenses — such as gasoline, maintenance, parking and tolls — or deduct expenses based on the IRS standard mileage rate, which is 58 cents per mile for tax year 2019. Deciding which deduction method to use comes down to your business and vehicle. For example, if you drive a ton of miles every year, taking the standard mileage deduction might be more sensible. But, if you’re using an older vehicle that needs repairs often or isn’t great on gas, deducting your actual expenses rather than the IRS mileage rate could result in a bigger tax deduction.
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2. Home Office Deduction
It is very common for self-employed individuals and sole proprietors to work out of a home office or designated space at home for work. The catch here is that it really does need to be an office or resemble an office — casually doing work in the dining room doesn’t cut it as a home office. It must be both exclusively and regularly used for business, as well as being your principal place of business. This is the exclusive use requirement, which is the IRS’s most fundamental requirement for this small business tax deduction.
Determine your home office tax deduction comes down to calculating the amount of space in your home that’s designated as an office; namely, the square footage of your office versus the total square footage of your home. This then allows you to determine the percentage of direct and indirect expenses — such as rent, utilities or insurance — that you can deduct.
It’s important to note a point of confusion about the home office tax deduction. Many people think that the home office deduction is no longer available — which is untrue. The Tax Cuts and Jobs Act (TCJA), effective for tax years 2018 through 2025, made it so you cannot deduct home office expenses if you’re an employee. TCJA did not change the rules for self-employed persons and, if you are self-employed, you can still deduct qualifying home office expenses. The dilemma here is for employees who have side hustles that they used to be able to include in the home office deduction. Now, to qualify, you need to actually be self-employed.
3. Office Supplies Deduction
While on the topic of offices, another basic small business tax deduction is on business supplies and office expenses. This is a nifty tax deduction because you can deduct 100 percent of the cost of office supplies and materials you have used during the year. You may also deduct the cost of stamps and other postage charges.
4. Furniture and Equipment Deduction
Similar to office supplies and expenses, purchases on furniture and equipment for your small business are tax deductible. As with car expenses, you have a choice of how you take your tax deduction for furniture and equipment. One route is that you deduct the entire cost for the tax year in which the furniture or equipment was purchased. The other route for the tax deduction is that you depreciate the purchases over a seven-year period.
5. Machinery and Equipment Rental Deduction
This small business tax deduction is related to the previous one. There is sometimes a benefit to renting equipment for your business instead of outside purchasing it when it comes to taxes. With rental equipment, you can potentially deduct these business expenses in the year you incur them without having to factor in depreciation, as you would with ownership.
6. Salaries and Wages Deduction
If you employ part-time or full-time employees, the wages and salaries you pay them are tax deductible. You can claim further deductions on employee expenses beyond wages too. Payments such as bonuses, meals, lodging, per diem, allowances and similar expenses can be deducted. However, If you’re a sole proprietor or owner of an LLC without employees, you may not be able to deduct income that you take from your business.
7. Employee Benefits Deduction
Benefits are another employee expense that you can claim as a small business tax deduction. The employee benefits your business offers, such as contributions you make to employees’ health plans, life insurance, pensions, education reimbursement programs, all are tax deductible. Keep track of all these contributions to maximize your tax deduction.
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8. Professional Services Deduction
Hiring outside professional services is very common among small business owners. Employing people in-house that aren’t core to your business is often too expensive. When you employ the help of outside professionals, like accountants, attorneys or consultants, you can deduct the expenditures. When reporting payments to legal and professional advisors, you report them using Form 1099-MISC, which is used when you pay people or services that are not your employees.
9. Freelance Contractor Deduction
Like with hiring a lawyer or an account, if you employ independent contractors at some point for your business, you can deduct the cost of paying them. This is again reported using Form 1099-MISC for any freelance or independent contractor who earned $600 or more from you during the tax year.
10. Startup Expenses Deduction
Here’s a small business tax deduction every small business owner can relate to: deducting the costs to start your business. There are some limitations, of course. You can deduct up to $5,000 in startup costs and expenses that you incurred before you opened your business. These types of startup costs can include marketing, advertising, travel and employee pay for training, all of which must occur before your business is officially open and running.
11. Rent or Mortgage Interest Deduction
Paying rent or a mortgage for your business location is certainly a business expense. You can deduct the cost of rent if you’re not the property owner. If you do own the property, then you can deduct all your mortgage interest on your business taxes.
12. Qualified Business Income (QBI) Deduction
This is one of the more interesting small business tax deductions available. However, there are clear limitations on who can qualify for it. According to the IRS, this QBI deduction applies to owners of sole proprietorships, partnerships, S corporations and some trusts and estates. It notably excludes C Corporations and doesn’t mention LLCs. If your small business does qualify in terms of structure, then you may be eligible to deduct up to 20 percent of your qualified business income.
13. Business Insurance Deduction
The business insurance premiums you pay for coverage of your company are all tax deductible. In order to qualify for this tax deduction, your insurance must provide coverage that is “ordinary and necessary.” This kind of coverage usually comprises fundamental things like accidents, theft, vehicles used in your business or malpractice. Take note, however, that not all types of insurance are tax deductible, the most common exclusion being life insurance.
14. Work Opportunity Tax Credit
This isn’t technically a small business tax deduction, but it is a tax benefit. If you have employed military veterans or other long-term unemployed people, then you may be eligible to take advantage of the Work Opportunity Tax Credit. This is a tax credit of 40 percent of your first $6,000 paid in wages.
15. Client and Employee Entertainment Deduction
As a small business owner, you can take small business tax deductions for entertaining clients. To qualify, these entertainment expenses must occur while you actually discuss or conduct business with them. Also, the entertainment needs to occur in a business setting and for business purposes. Some categories of entertainment deductions include the cost of meals and recreational and social events.
16. Travel Expense Deduction
Travel expenses are closely related to entertainment expenses, hence they’re often lumped together and called T&E — travel and entertainment. If you travel to trade shows, for example, as part of your business, you can take small business tax deductions for all your expenses, such as airfare, hotels, meals, car expenses, tolls and parking, cost of phone calls and more.
17. Internet and Utilities Deduction
You can’t run a business without electricity, internet and other utilities. These are all basic business expenses, so there are small business tax deductions available. If you use the home office deduction, these tax-deductible expenses get a bit more complicated. For instance, your landline must be dedicated to your business in order to be deductible in your home office.
18. Computer Software Deduction
This small business tax deduction has undergone a recent, beneficial change. You can now deduct the full cost of business software as a small business tax deduction, instead of having to calculate depreciation on it as in years past. This includes all software you use to run your business.
19. Employee Education and Child Care Assistance Deductions
The IRS in a way rewards you with some small business tax deductions if you provide additional employee benefits beyond insurance or retirement accounts. If you offer education assistance and dependent care assistance, you may be able to take small business tax deductions for these expenditures.
Similarly, if you incur work-related educational expenses, such as fees related to maintaining a professional license, these can be tax-deductible. Keep in mind, the education may be deductible, especially if they’re required to keep up or renew a professional license. Remember, they have to be work related. If you own a bar or cafe, you won’t be able to deduct skiing lessons.
20. Disaster and Theft Losses Deduction
It’s not uncommon for businesses to be impacted by a natural disaster or criminal activity like theft. If this has happened to your small business, then you might be able to turn losses that your insurance company didn’t cover into a small business tax deduction.
21. Advertising and Marketing Deductions
Small businesses need to gain exposure, build a customer-base and retain it. All of this requires advertising and marketing your small business, which can become very expensive quickly. Luckily, these business expenses are are all tax-deductible. One area of advertising and marketing that is not tax-deductible is political advertising.
22. Charitable Deductions
Like with individual tax-payers, your small business can donate to charity and take a tax deduction for it. Your small business can donate supplies, money or property to a recognized charity. However, definitely make sure to check with the IRS before you make a charitable deduction because they have stipulations about what organizations qualify for charitable deductions.
23. Bad Debt Deduction
This is one of the more overlooked small business tax deductions you can claim. Basically, if someone or another business owes you money, and you can’t collect, then your business may have bad debt. You can claim a tax deduction on such bad debt if you follow the IRS’s stipulations. You can find out more about this small business tax deduction by reading Topic No. 453 Bad Debt Deduction.
24. Bank Fees Deduction
All those annoying fees you pay and charges your bank subjects you to can now be used to your advantage. You can deduct the fees your bank charges you for your business accounts, including small charges like ATM fees, which are all tax-deductible.
25. Loan Interest Deduction
Mortgage interest is not the only form of interest you can deduct as a small business. If you take out a business line of credit or business loan, the interest you pay is tax-deductible. This is great news considering how common these forms of business funding are. One thing is that you’ll want to keep your business and personal credit lines from being intertwined. For example, if you use part of a personal loan toward your business, your ability to deduct interest is more complicated.
The Bottom Line
Small business tax deductions can have a major beneficial impact on your company if you go about them correctly and strategically. With the vast range of expenses you incur as a small business owner, knowing and qualifying for as many small business tax deductions as possible is a must. Fortunately, there are plenty of tax deductions available. With the right help, usually from an accountant, you can claim tons of money in small business tax deductions this tax season.
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