Tax season is in full swing, and small business owners are looking for ways to reduce their income tax burdens.
Calculating small-business taxes can be a complicated task, which is a double-edged sword. After all, while there are a host of variables affecting every small-business tax return – rules that could cost some heavy penalties if not followed – those details open a lot of opportunities to reduce a small business’ taxable income.
Most of these deductions derive from the costs of doing business. It’s important to note, however, that expenses already included in a business’ gross income, such as the cost of inventory that was later sold, cannot be deducted a second time as a business expense.
According to the Internal Revenue Service, business expenses are deductible if they are both ordinary and necessary. Eligible expenses are common and acceptable costs of doing business, for example, rent on a shop or business telephone service. Expenses that are necessary for certain lines of business might not be appropriate deductions for others, however. A photographer, for example, might deduct the cost of new props, while these same purchases would not be considered ordinary and necessary for an electrician.
While the IRS doesn’t provide a master list of its accepted small-business tax deductions, there are common expenses that are available to most small-business owners. Most probably already know they can deduct standard business expenses like rent and employee salaries and benefits, but practically anything can be a business expense in the right circumstance.
What Is a Qualified Business Income Deduction?
The 2019 tax year was the second in which many small businesses became eligible to deduct up to 20 percent of their qualified business income. Created by the 2017 Tax Cuts and Jobs Act, the QBI can offer significant tax relief to independent contractors, sole proprietorships, partnerships, LLCs and S corporations with total taxable income less than $160,700 for single filers or $321,400 on joint returns.
The deduction applies to income the IRS defines as “the net amount of qualified items of income, gain, deduction and loss with respect to any trade or business.” In other words, the QBI deduction is based on a business’ net profit.
The QBI can be claimed by small-business owners even if they don’t itemize their returns. Of course, the IRS has plenty of rules on who uses the QBI deduction and how it is calculated. Any small-business owner or independent contractor who isn’t well versed in these guidelines should consult a tax professional.
Before determining a business’ taxable income, however, any other possible tax deductions must be considered.
Hoping to reduce your small-business tax burden this year? Be sure and take note of the following 16 small-business tax deductions you don’t want to forget according to Sunil Kumar owner of blogging hub:
- Home Office
Independent contractors and home-based small business owners often can take a tax deduction for the costs associated with maintaining a home office. Traditionally, taxpayers calculated the home office deduction by calculating what percentage of their home was used for business, then determining that percentage of their home office expenses, including costs like mortgage interest, insurance, utilities, repairs and depreciation.
Since tax year 2013, however, the IRS has offered taxpayer’s a simpler option. The simplified home office deduction is a standard $5 per square foot of the home used for business, up to a maximum area of 300 square feet.
To qualify for the home office deduction, the work area must exclusively be used for business, so a home office can’t double as a guest room or dining area. It also must regularly be used for business, so you can’t claim it if you never actually do any work out of your home.
- Supplies and Equipment
Supplies used solely for business purposes are tax deductible. Small business owners can deduct the costs for purchasing computers, printers, paper, pens, software and other office supplies, as well as costs for postage and shipping. They also can deduct as much as $1 million for purchases of certain equipment, including items such as vehicles, computers and machinery.
When a business makes a long-term investment by purchasing big-ticket items like vehicles and machinery, it often can deduct that expense over the useful lifetime of the item rather than in a single tax year. Taxpayers calculate depreciation by dividing the total cost of the item by its useful lifetime. If in doubt, small business owners should consult a tax professional.
- Business Travel
Any expenses related to business travel are tax deductible. Business travel costs include expenses such as airfare, hotels, rental cars, meals, dry cleaning and even tips to valets and housekeeping. For travel costs to be tax deductible, the trip must be necessary for business, and the traveler must be away from his or her home of tax record for longer than a normal workday, including during a time of sleep or rest.
Should a business trip need to be moved or cancelled, fees associated with airline rescheduling and lost hotel deposits are also deductible.
- Business Transportation
Small business owners who use a vehicle strictly for work-related purposes can deduct all costs associated with operating and maintaining the vehicle. If the car, truck or van is used for both business and personal transportation, however, the taxpayer can deduct only those costs related to business use of the vehicle. These deductions are typically calculated by tracking the miles traveled for business purposes, then deducting the standard mileage rate, 58 cents per mile for travel during the 2019 tax year.
- Business Insurance
The costs for insurance on a business, its products, its people and its location are tax deductible. For those taxpayers operating a home-based business, a portion of the cost for renter’s insurance can be deducted as part of the home office deduction.
- Business Meals and Entertainment
Small business owners also can deduct 50 percent of the costs of qualifying food and drink purchases. Qualifying meals must be related to doing business, and the taxpayer must record the date and location of the meal, the diners’ business relationship and the total cost of the meal.
Costs incurred while entertaining clients or employees can also be deducted from a small business’ taxable income. Granted, this doesn’t make a weekend in Vegas with a client friend a valid tax deduction. To qualify, business must be discussed with clients during the meeting where entertainment was provided, and it must take place in a business setting and for business purposes. If the expense qualifies, 50 percent of the entertainment costs can be deducted from the taxable business income.
Employee functions also can be tax deductible. Employers can deduct as much as 100 percent of the cost of employee-focused social events.
- Utilities, Phone and Internet
The amount paid for utilities at a business is also tax deductible. Home-based businesses will include these costs with their home office deduction, but other businesses can deduct the full costs of their utility bills, including services such as electric, gas, water, sewer and trash.
If a business relies on phone or internet service to operate, those costs are fully tax deductible. If, however, the phone and internet are used for both business and personal use, the taxpayer can write off only the percentage of those costs that are equal to the percentage of business use.
Expenses incurred repairing a business’ property can be deducted from its taxable income. Regardless of whether the location is rented or owned, at some point it will need its roof fixed, its toilet repaired, or its walls painted. The costs of these and other maintenance or repair activities are tax deductible.
- Professional and Legal Fees
Fees for professional and legal services that are necessary to a business’s function are tax deductible. Examples of these expenses include fees paid for accounting, bookkeeping and legal advice or representation. Small business owners who rely on accounting or bookkeeping software also can deduct the cost of the software.
- Interest and Bank Fees
When money was borrowed to fund a business and its activities – whether in the form of a business loan or a credit card – the interest that accrues on those loans is tax deductible. Small business owners also can deduct bank fees and additional charges relating to a business loan or credit card.
Likewise, taxpayers can deduct interest paid on a mortgage that was used to buy, construct or improve a home used for business purposes. Interest paid toward a home equity loan also can be deducted.
- Education and Training
When small business owners and their employees receive additional training and education paid for by the business, those costs are fully tax deductible. For expenses to qualify, the course, seminar, webinar or workshop must be designed to improve skills or maintain expertise associated with the business. Business-related books and trade publication subscriptions also are tax deductible.
A small business’ taxable income can be reduced by deducting advertising and promotion costs. Deductible marketing expenses include everything from digital or print advertising to website design and maintenance to brand enhancement strategies. Deductions even can be claimed for something as simple as ordering business cards.
- Startup Expenses
New business owners can take advantage of a one-time deduction opportunity. If a new business was launched in the past tax year, as much as $5,000 in startup expenses are tax deductible. Startup costs can include expenses for acquisition, travel, training, furnishing, marketing, and any other costs connected to creating an active business or investigating the creation or acquisition of an active business.
Another up-to-$5,000 deduction can be claimed for expenses associated with the organizing of a business, including the costs of creating a corporation or partnership.
- Taxes and Licenses
Taxpayers might feel like they are taxed even on their taxes, but small businesses can deduct money paid toward other taxes from their federal taxable income. In many cases, amounts paid to state and local income taxes are federally-deductible in the year they were paid, regardless of when they were accrued.
Likewise, real estate taxes and property taxes paid at the state and local levels can be deducted from federally taxable income, up to a total of $10,000. Other taxes that can be deducted on a federal tax return include payroll taxes, sales taxes, excise taxes and fuel taxes. The costs of purchasing business licenses also are federal tax deductions.
- Bad Business Debt
When amounts owed to a business are unpaid, those debts might entitle a small business to a tax deduction. These bad debts might occur if a business advanced money to an employee, customer, vendor or other associate who defaulted on the repayment agreement. Bad debts also can occur if a business or an independent contractor completes work for which they never were paid by the customer or client.
- Miscellaneous Expenses
Savvy small-business owners keep track of their receipts… and not just the big tickets. Everything from magazines in a waiting area to coffee for customer can be tax deductible – and those expenses can add up over the course of a year. Keep a file of your miscellaneous receipts, noting the pertinent details of each purchase. Use photos and screenshots to record digital purchases or those for which you couldn’t get a physical receipt.
Remember, almost anything purchased for a business can be deductible – provided it served some valid purpose and is supported with a receipt or some other proof of purchase.