To reduce your company’s income tax, claim all the deductions available to you. One of the easiest ways to reduce your company’s income tax is to make sure you claim all the tax deductions available to you.
What is a tax deduction? ( tax deduction or tax write-off )
A tax deduction is an expense that can be deducted from taxable income (the income on which taxes are charged). The deductible expense is subtracted from income, allowing you to pay a lower tax bill. In other words, you are reducing your income by subtracting your expenses. With less income, you pay fewer taxes. All you have to do is make sure the expense meets the criteria for a tax deduction set by the IRS.
Below is a list of commonly available deductions for small businesses (those that are sole proprietors or organized as partnerships or limited liability companies or LLCs). Some of these deductible expenses are related to running a business, and others are more personal expenses that a small business owner should be aware of.
Some of the following deductions may not be available, particularly for your small business. Unique circumstances may vary. That’s why it’s a good idea to check with your tax advisor or CPA before claiming a deduction on your tax return.
One more thing: When claiming these deductions, make sure you have accurate, up-to-date accounting records. The IRS may require an audit and as part of that process, you will need to verify that your deductible expenses were genuine and legitimate.
List of tax deductions for small businesses
These expenses can be deducted from your taxes:
- Automobile (commercial use)
- Bank charges and fees
- Meals for business purposes
- Legal and professional fees
- Taxes and licenses
- Home Office
- Publicity and promotion
- Salaries and benefits
- business insurance
- phone and internet
- Bonus: Personal Deductions
If you rent space or equipment for your business, you can deduct the rental payments as a business expense. The rent you pay for your home should not be deducted as a business expense, even if you have a home office. That rent can be deducted as part of the home office expenses.
AUTOMOBILE (COMMERCIAL USE)
If you use your vehicle solely for business purposes, you can deduct the full cost of operating the vehicle. If you use it for both business and personal travel, you can only deduct costs associated with business-related use.
There are two methods for deducting vehicle expenses and you can choose the one that gives you the greatest tax relief service benefit.
- Standard mileage rate. Multiply the miles driven (for business purposes) during the year by the standard rate of $0.575 per mile (effective January 1, 2020, but may change each year).
- Actual expense method. Record all vehicle operating costs for the year, such as fuel, oil, repairs, tires, insurance, registration fees, and lease payments, if any. Multiply those expenses by the percentage of miles driven for business.
Both methods require you to record miles driven for business purposes during the year. You can keep a manual log in a notebook, use an app on your smartphone, or reconstruct a mileage log using other documents, such as calendars or planners. If you keep a mileage log, document the miles traveled, the time and place, and the business purpose of each trip.
Please note that miles traveled between home and work cannot be counted. These costs are considered personal travel expenses.
BANK CHARGES AND FEES
It’s a good idea for your business to have separate bank accounts and credit cards. If your bank or credit card charges annual or monthly service fees, transfer fees, or overdraft fees, these various charges are deductible. Merchant fees charged by a payment processor such as PayPal may also be deducted.
Fees related to your personal bank accounts or credit cards cannot be deducted.
MEALS FOR BUSINESS PURPOSES
Generally, you can deduct 50% of food and beverage costs that qualify for the deduction:
- The expense must be “ordinary and necessary” to conduct your business
- Food cannot be fancy or extravagant
- The business owner or an employee must be present at the meal
You can also deduct 50% of the cost of meals for employees, for example, buying pizza for those who are working late at the office. Meals for office parties and picnics are 100% deductible.
Be sure to keep receipts. On the back of each write the amount of each expense, the date and place of the meal, as well as the business relationship of the person with whom you ate.
When you buy furniture, equipment, and other business assets, depreciation rules require you to spread the costs of those assets over the years you’ll use instead of deducting the entire cost all at once.
The IRS offers business owners several ways to write off the full cost in one year.
- de minimis safe harbor rule (De minimis safe harbor) Small businesses can choose to depreciate assets that cost less than $2,500 per item in the year they are purchased.
- Section 179 deduction. A business can deduct up to $1 million of property that was placed in service during the tax year. This includes new and used commercial property and software. The Section 179 deduction is limited to the business’s taxable income, so claiming it cannot result in a net loss on your return.
- Depreciation bonus. Businesses can take advantage of additional depreciation to deduct 100% of the cost of machinery, equipment, computers, appliances, and furniture.
Costs for education can be deducted when they add value to your business and increase your level of knowledge. The IRS looks at whether the expense contributes to the skills required in your business to decide if your class or workshop qualifies.
Valid Education Expenses:
- Classes to improve skills in your area
- Seminars and webinars
- Subscriptions to professional publications
- Books about your industry
- Workshops to increase your experience and skills
- Transportation costs to classes
LEGAL AND PROFESSIONAL FEES
Legal and professional fees that are directly needed to run your business are deductible. These include fees charged by attorneys, accountants, tax preparers, and online accounting services.
TAXES AND LICENSES
You can deduct various taxes and licenses related to your business, such as:
- State income taxes
- payroll taxes
- Personal property taxes
- Property taxes paid on commercial property
- sales tax
- Consumption taxes
- fuel taxes
- business licenses
If you take out a loan or use a credit card to cover business expenses, you can deduct the interest paid to your lender or credit card as long as you meet the following requirements:
- Be legally responsible for the debt. For example, if your parents take out a second mortgage on your home to help you start a business, you are not legally responsible for the debt. In that case, interest on the loan is not deductible, regardless of whether you make the mortgage payments yourself.
- Both you and the lender intend for the debt to be paid. A loan that doesn’t have to be repaid…is a gift.
- You and the lender have a true debtor/creditor relationship. The IRS tends to examine loans between related people, such as family members.
If a loan is part business and part personal, the interest is divided between the business and personal parts of the loan.
The Tax Cuts and Jobs Act of 2017 eliminated the deduction for moving expenses for all non-military individuals, but businesses can still deduct the cost of moving equipment, supplies, and inventory from one business location to another.
In the event of an audit, be sure to keep good records to verify all costs associated with moving your business.
If you use a home office for your business, you may be able to deduct a portion of your living expenses from your business income. There are two ways to deduct home office expenses.
- Simplified method. You can deduct $5 for each square foot of your home that is used for business, up to a maximum of 300 square feet.
- Standard method. List all of your home’s maintenance expenses, such as mortgage interest or rent, utilities, real estate taxes, cleaning and yard service, homeowners association fees, and repairs. Multiply these expenses by the percentage of your home devoted to business use.
To qualify for the home office deduction, you must meet these requirements:
- Regular and exclusive use. To qualify, you must use your home office exclusively for business. If your desk is also the kitchen table, you won’t qualify. It is not necessary to dedicate an entire room to your business, but the work area should have clearly identifiable boundaries. Take photos of your home office work area in case you are audited by the IRS.
- Main place of business. His home office should be his main place of work, where he spends most of his time doing business.
PUBLICITY AND PROMOTION
The cost of advertising and promotion is 100% deductible and may include:
- Hire a graphic designer to design a logo for your company
- Printing costs for business cards or brochures.
- Purchase of advertising space in print media or on the Internet
- Sending publications to clients
- Create and launch a website
- Running an advertising campaign on social networks
- Sponsor a promotional event
There are exceptions, for example, you can’t sponsor political campaigns or events and you can’t do advertising that influences the legislative process.
SALARIES AND BENEFITS
Salaries, benefits, and even paid vacations for employees are tax-deductible, as long as they meet a few criteria:
- The “employee” is not the owner, a partner, or a member of an LLC
- Salary is reasonable, ordinary, and necessary
- really got the job done
The premiums you pay for business insurance can be deducted.
This may include:
- Coverage for business furniture, equipment, and buildings
- Liability coverage
- Health, dental and vision insurance for your employees
- Workers compensation coverage
- Auto insurance for commercial vehicles
- Employee life insurance (business or business owner cannot be a beneficiary of the policy)
- Business interruption insurance that covers loss of income if your business closes due to fire, flood, etc.
TELEPHONE AND INTERNET
If phone and Internet services are an integral part of your business, they can be deducted as business expenses.
If you use a landline phone at home, you can’t deduct the cost of your first line, even if it’s used only for work. However, if you have a second fixed-line dedicated to business, the cost of that line is deductible.
If you use your cell phone and Internet connection for both personal and business reasons, you can only deduct the percentage dedicated to business use. Keep itemized invoices to prove business use in case of an audit.
For a trip to qualify as a business trip, it has to be ordinary, necessary, and away from your tax domicile (the city or area where you do business). You must travel away from your tax domicile for more than a normal work day, requiring you to sleep or rest along the way.
IRS-approved deductible business travel expenses include:
- Travel by plane, train, bus, or car
- Using your car for a business purpose
- Parking fees and highway fees
- taxi cost
- Meals and lodging
- Laundry (dry cleaning)
- Business phone calls
- Shipment of luggage and materials such as samples or exhibits
- Other ordinary and necessary expenses related to your business trip
Keep records with the amount of each expense, departure and return dates, trip details, mileage log (if driving your own vehicle), and the business reason for the trip.
Personal Tax Deductions for Business Owners
The above deductions can be claimed on Schedule C or IRS Form 1065, but there are a few other tax exemptions that small business owners often claim on their individual returns.
Sole proprietorships, LLCs, and partnerships cannot deduct charitable contributions as business expenses, but the business owner can claim the deduction on IRS Schedule A. The donation must be made to a qualified organization.
CHILD AND DEPENDENT CARE EXPENSES
If you hire someone to care for a child or other dependent while you work, you may be able to claim the Child and Dependent Care Credit. To qualify, the person receiving the card must be a child (under the age of 13) or a spouse or other dependent who is physically or mentally incapable of self-care.
The credit is between 20% and 35% of your allowable expenses, depending on your income. Allowable expenses are limited to $3,000 for the care of one dependent and $6,000 for two or more. IRS Publication 503 provides more information about the Child and Dependent Care Credit. You will need to attach Form 2441 to your Form 1040 to claim the credit.
You can deduct contributions to employee retirement accounts as a business expense. Business owners who contribute only to their own retirement funds claim the deduction on Schedule 1 attached to their Form 1040.
HEALTH CARE EXPENSES
In addition to insurance premiums, other medical expenses such as office copays and the cost of medications can be deducted. These costs are included in the deductions itemized on Schedule A.
Self-employed business owners can also deduct health insurance premiums for themselves, their spouse, and their dependents on Schedule 1 attached to their Form 1040. However, if you are eligible to participate in a health plan through your spouse’s employer, you cannot deduct those premiums.
Keep track of all expenses related to running your business and review them with your accountant at the end of the year to make sure you’re taking advantage of every deduction. Tax deductions are an essential and legal way to minimize the amount of tax you owe.