Paying taxes is probably everyone’s least-favorite annual event. What business owners do like is using all the legitimate business tax deductions available to them to reduce what they owe to the IRS. That’s because entrepreneurs want to keep as much of their hard-earned business profits as possible. Before that can happen, you need to be aware of the numerous business tax deductions that the IRS offers to small businesses. It’s possible to reduce taxable income by knowing which business expenses you can list in your tax return and those you can’t.
What is a business tax deduction?
During the course of your business year, you pay expenses related to your business operations. The IRS allows you to report allowable and customary expenses. By tracking specific expenses that qualify to lower your taxable income, you can reduce your total tax liability. Some people assume that a business tax reduction for expenses is deducted directly from what you owe the IRS. In actuality, qualifying expenses are used to reduce reportable income thereby decreasing your business’s tax liability and subsequent tax.
The IRS considers two types of allowable business expenses:
- Ordinary Expense: A common expense normally incurred in your trade or business. For example, carpenters purchase tools they use regularly like levels, hammers, drills, and other construction supplies to complete projects.
- Necessary Expense: This expense is helpful and appropriate for your business. Again using carpenters as an example, they purchase safety work gear such as hard hats, safety boots, and protective eyewear.
It’s a daunting task to keep and organize every receipt for a whole year before you file your taxes. While business owners have gathered slips of paper in folders and boxes for years, an expense tracker app can handle this job more efficiently. You can keep digital records for sales, expenses, and other data on your computer or smartphone to access instantly throughout the year and at tax time.
30 Common Business Tax Deductions
The items below are general expenses most often used by business owners to reduce tax liability. Before you use these expenses to reduce how much tax you owe, make sure it is appropriate for your business type (sole proprietorship, LLC, corporation, etc.). If you are unsure whether a certain expense is allowable, contact an accountant to file your taxes properly. Sole proprietorship and single-member LLCs record expenses on Schedule C (Form 1040), partnerships and multi-member LLCs use Form 1065, and corporations use Form 1120. If you aren’t sure which IRS form to use, don’t hesitate to contact a tax professional.
- Advertising: Typical expenses include business cards, Yellow Pages ads, TV and radio ads and other costs to promote your business.
- Bad Debts: Loans to clients, suppliers, employees and credit sales to customers you can’t collect are legitimate business tax deductions.
- Business Travel: If you stay overnight for a convention or seminar related to your business, you can deduct lodging and transportation costs. Read below about another travel-related expense (meals #17).
- Business Use of Your Home: The IRS requires you to complete Form 8829 using the simplified method which calculates usage based on a percentage of the total square footage of your home.
- Commissions: If you buy or sell a business and pay a broker a commission, it’s deductible as long as you don’t include the expense elsewhere on your return.
- Continuing Education: Business owners must be able to prove that continuing education courses improve skills or are a legal requirement to maintain a professional license. In some instances, it’s possible to deduct continuing education expenses for employees.
- Contract Labor: Payments you make to independent contractors who complete work using their own tools, equipment, and materials can be deducted. They are self-employed and aren’t considered employees.
- Customer Gifts: The IRS stipulates that you can deduct $25 per customer. If you gave a customer a gift valued at $100, you can only deduct the first $25.
- Depreciation and Section 179 Expenses: You can include as deductions equipment and vehicles depreciated from the time you first used them as business property until you took them out of service. It’s also possible to claim the full purchase price of assets you buy, finance, or lease if used exclusively for your business.
- Employee Benefit Programs: Accident and health plans, group term life insurance, and dependent care assistant programs qualify.
- Funded-Deferred Compensation Plans: This business tax deduction includes contributions you make on behalf of an employee’s pension, profit-sharing, or annuity plan.
- Insurance: Payments made for business insurance to cover property, professional liability, and products, among others, are deductible.
- Interest Paid: Normally reported on Form 1098, interest paid on a mortgage for business property is an expense. If you use one credit card for personal and business expenses, you can only deduct business-related charges and applicable interest.
- Legal and Professional Fees: Money you pay to an attorney, accountant, and other consultants relating to operating your business can be deducted. When you pay a tax service to prepare your taxes, don’t forget to include the expense.
- Licenses: These are fees you pay to state and local governments related to your trade or business.
- Materials: Incidental materials and supplies you keep on hand and consume during the tax year are deductible as long as they aren’t inventoried.
- Meals: You can deduct 50% of the value of your business meals when meeting with clients, potential customers, or other business contacts.
- Mileage: You can use the standard mileage rate for business miles driven or deduct actual expenses like gas, repairs, and vehicle insurance. Regardless of how you determine the deduction, you’ll need to keep accurate records for documentation.
- Office Furniture and Fixtures: Deductible items include desks, chairs, bookcases, tables, and partitions. These items are movable and are not permanent building fixtures.
- Office Supplies: Normally supplies include items you buy and use during the year. Some examples include paper, sticky notes, staplers, folders, ink for printers, and postage. Supplies you use to make, ship, and package products are expensed as costs of goods sold.
- Parking and Tolls: If you visit a client and park in a garage or pay tolls en route, these costs are deductible.
- Rent Paid: Deduct rent you pay to rent or lease vehicles, machinery, equipment, or office space in a building.
- Repairs: Ordinary repairs and maintenance are deductible as long as they don’t increase the property’s value.
- Research and Development: In the process of finding and creating new products and services, you can deduct related expenses.
- Safe-Deposit Box: If you use one to store incoming-producing stocks and bonds or investment documents, the cost is a business expense.
- Software and Electronics: Any time you purchase new or upgraded software, laptops, smartphones, and other small gadgets for business use, you can list them as expenses. Your accountant can advise whether pricier purchases should be depreciated over time or expensed fully under Section 179.
- Taxes: Examples include business taxes paid on personal property and real estate. Check with an accountant to determine if state and local taxes you paid as a seller of goods and services can be deducted.
- Theft Losses: If someone steals money or business property, you should be able to take a deduction.
- Utilities: Electricity to power a building used for business purposes is fully deductible. You can deduct all business-related mobile phone charges and business landlines.
- Wages: Payments to employees for salaries, commissions, bonuses, and fringe benefits are considered business expenses.
Expenses You Can’t Deduct
Below are examples of expenses that aren’t considered business tax deductions by the IRS.
- Business Clothes: Of course you want to look your best when working with clients. However, unless you wear a required uniform or protective equipment, clothing and shoes you buy for work aren’t deductible.
- Cell Phone Expenses: It’s better to use a phone dedicated exclusively for business use in order to deduct associated expenses. If you use a phone for both business and personal reasons, you can only write off the business portion of total expenses: supporting this portion is almost impossible.
- Commute to Work: The distance you travel from your home to your office cannot be deducted. You can only deduct mileage from your workplace to a business-related destination.
- Parking Fines: You can’t deduct traffic or parking fines even if you were traveling for business purposes.
- Political Donations: If you make a donation to a political candidate or pay expenses toward government lobbying, you can’t deduct those expenditures.
The IRS is pretty generous with the number of business tax deductions they allow. As long as you know which deductions you can use, you can maximize business profits. If you consciously lie on your tax report, the IRS considers that a form of tax evasion and imposes severe penalties and consequences.
This in-depth article, how to file taxes for your small business, helps you get your documents in order and provides other pertinent tax information. Another important resource for business owners is the Camino Financial newsletter that has tips and includes other informative articles to grow your business. It’s free at your request and arrives in your inbox weekly. In addition to learning about tax strategies like business tax deductions, you can stay up to date on sales and marketing and other trending topics. Why not sign up today and avail yourself to this go-to financial resource.