Tax season is right around the corner, and this year small businesses need every advantage they can get—and that means no potential tax deduction can be left on the table.
While every state is different, there are some broad similarities in the top tax deductions for small businesses.
Utilities are tax-deductible, from electricity to trash to water to your phone bill. This applies if you work from home, so long as your home office meets 2 key criteria:
So long as these criteria are met, your utilities are deductible—although, for a home office, it will likely be based on a percentage of how much space the office takes up in your home as a whole.
For those who rent office space, your lease and rental payments can be deducted. If you work from home, a portion of your mortgage interest may be a deductible business expense.
Regardless of where you work, your office supplies (pens, paper, stapler, printer ink, etc.) are a deductible business expense, as are office furniture and any computer software you buy for business purposes.
The insurance you take out—from your personal health coverage to property insurance to workers’ comp—may also be deductible. If you work from home, make sure you run your property and homeowner’s insurance deductions by your accountant first to ensure you don’t overreach.
If your business sells a physical product (as opposed to a service), your inventory can be deductible so long as you valued the inventory at both the beginning and end of the year to determine the cost of goods sold. These costs include everything from the raw materials to storage to labor costs to overhead.
For those businesses that rely on equipment and machinery, depreciation is a significant deduction opportunity. These are costs that are deducted over several years based on how fast a new purchase loses its value.
Depreciation deductions are particularly valuable to industrial businesses, but they also apply to products like copiers and office furniture.
It costs money to market yourself and your product, but you can at least get some of that money back at tax time. Any money spent on what are termed “ordinary advertising and marketing purchases” is usually tax-deductible. This can include large-scale buys like a billboard or small items like business cards. As long as it's purchased for the purpose of keeping your name out there, it’s advertising and it’s deductible.
Many business owners need to entertain clients and prospects sooner or later, and they may have to do at least some business travel. All of these expenses fall under the general umbrella of deductibility, so long as certain criteria are met.
Did you take a prospect out on the golf course and then out to dinner? This is deductible, but only up to 50 percent of the total expenditure.
Did you have several prospects come into your office and provide a meal? That’s 100 percent deductible.
Your business travel expenses—everything from the airfare to hotel to the Uber rides to the meals—are typically tax-deductible as well, so long as you are gone for longer than a normal day’s work. And of course, the purpose of the trip must be business-related.
Even if you don’t travel long distances, your car-related expenses can still be deductible. You have the option of calculating by mileage or by total dollars spent on gas, repairs or insurance. If you choose the latter, make sure you factor in what percentage of time your car was actually used for business (vs. personal errands).
Do you have employees or hire independent contractors?
What you pay them is fully tax-deductible, including any bonuses or commissions. This includes not only their salaries and fees, but also any health insurance benefits, qualified retirement plan contributions, life insurance, child care assistance and education assistance.
One thing to watch for here is salaries paid out to yourself as a sole proprietor, to other LLC members or to partners. None of these qualify as employees, per se. Depending on how your business is structured, you should reach out to legal and tax experts to make sure you’re between the lines. The good news is that those fees the lawyer and the accountant charge are fully deductible, too.
If you borrowed money to start your business, your interest payments are fully tax-deductible, so long as you, the owner, are legally liable for the debt. This deduction only works if you borrowed the money from an official lender and not a friend or family member.
On the flip side, what if you lent money and didn’t get paid back?
Maybe you offered credit to a vendor, gave an advance on salary to an employee who was in trouble or let a customer open up a tab. If you were not paid back, you have what is called “bad debt.” So long as the purpose of the original loan was business and not personal, you can deduct this bad debt.
The bank fees for business-related accounts and transactions are also deductible. And, believe it or not, your taxes themselves are deductible. That’s right, you can use the very amount you’re paying to the government as a way of reducing that amount.
The tax code recognizes that business owners don’t have the luxury of standing still. They have to remain knowledgeable about their industry and continue to develop their own skills. If you do webinars, subscriptions, seminars or anything else that costs money to enhance your expertise, you can use the expense as a tax deduction.
There are significant opportunities for small business owners to save money on their taxes, but that also means a significant opportunity to get into hot water with the IRS if you go it alone with outside assistance.
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