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There are a number of tax deductions that small businesses can take advantage of come tax filing season. We have named seven that you won’t want to miss out on.
The best small business tax deductions.
For small businesses and sole proprietors alike, there are many expenses that can be written off to lower the amount that is owed in taxes, known as tax deductions. In most cases, business owners aren’t fully aware of the tax deductions that are available to them and may not be taking the time to keep close records or itemize expenses to take full advantage of these deductions.
All of the tax deductions that we have described below can be claimed by sole proprietorships, small-business owners, C-corps, S-corps, partnerships, and LLCs. Note that there may be different rules for each.
1. Work-related travel expenses.
All expenses related to business travel can be written off during tax filing time. Business travel expenses that can be considered tax deductions include airfare, baggage, hotel, car rental expenses, tips, dry cleaning, meals during business trips, tolls, gas, and more. For more information, you can reference the IRS’s website for a full list of deductible business travel expenses.
To qualify as work-related travel expenses that are tax deductible, your trip must meet the following conditions:
- The trip must be necessary for business purposes.
- The trip must take place away from your tax home, for example, out of the city in which your company conducts its business.
- You must be traveling away from your tax home for longer than a typical work day, and it must require you to sleep or rest en route.
It is highly recommended that you keep all of your travel receipts and keep detailed records of all expenses during the business trip as proof for tax season in the event of an audit.
2. Business meals and dining.
As a small business, you are allowed to deduct up to 50 percent of meal purchases, including food and beverages that qualify. To qualify as a meal tax deduction, the meals need to be related to business purposes — for example, company lunches, client meetings, business trip food expenses, and more.
The following documentation is required in order to qualify:
- Date and location of the business meal.
- The business relationship of the individual/s that you dined with.
- The total cost of the meal.
Like all other business-related expenses, it is important to keep close records of the purpose of the meal and the receipts.
3. Work-related auto usage.
If you have a car that is used for business purposes, you can typically deduct all costs that are associated with operating and maintaining it. If your car is used for work and personal use, you can only deduct business-related costs associated with usage. It is also a good idea to keep track of the mileage that is used during business use.
Referring to the IRS Publication 463 on travel expenses, the standard mileage rate is currently $0.58 per mile.
4 . Home office expenses.
Under the new IRS Simplified Option for Home Office Deduction, home-based small businesses and freelancers can deduct $5 per square foot of their home that is used for business-related purposes and up to a maximum of 300 square feet.
To qualify as a tax deduction, the work area has to be used exclusively for business. For example, you cannot write off your dining room if you do work sitting at the dining room table during the day. There needs to be a designated “home office” space that is separate from your day-to-day living quarters in your home.
Additionally, allowable home-related itemized deductions claimed in full on Schedule A of the IRS guidelines include mortgage interest and real estate taxes.
5. Business insurance expense.
Most businesses will take out some form of business insurance. The cost of the business owner’s insurance, including health insurance, business continuation insurance, and the business owner’s policy, are all 100 percent deductible.
Other types of business insurance expenses that are tax deductible include property insurance, homeowners insurance if you have a home office, liability coverage, malpractice insurance, workers’ compensation costs, auto insurance, business-provided employee life insurance, and business interruption insurance.
Also note that with health insurance, a small business may qualify for up to 50 percent tax credit under the qualified small employer health reimbursement arrangement (QSEHRA).
6. Business education.
Any educational expenses that you incur that bring added value to your business are fully deductible for tax purposes. The requirements of education-related expenses are that the courses, classes, certifications, or workshops must improve your skills and credentials to help to maintain your professional expertise in your business area.
Qualifying educational expenses that are tax deductible include:
- Courses and classes that are related to your field of work.
- Seminars and webinars.
- Trade publication subscriptions.
- Books related to your industry.
- Certifications to enhance your professional expertise.
Like all other business expenses, make sure to maintain documentation with the exact costs and dates of each educational course.
7. Advertising and marketing.
You can claim any money spent on ordinary advertising and marketing purposes as long as you can prove that it was purchased in relation to your business.
Advertising and marketing tax deductions can include things like billboards, business cards, online ads, online advertising and digital marketing, hiring a freelancer to design a company logo, creation of a company website, sending thank you cards to clients, and much more.
What is a tax deduction?
A tax deduction is defined as an item that you can subtract from your taxable income to lower the amount of taxes that you owe.
You can choose between the standard deduction, which is a single deduction at a fixed amount, or an itemized deduction on Schedule A of your income tax return.
If the value of your itemized expenses is greater than the standard deduction for your filing status, it makes more sense to itemize. Some examples of itemized deductions that are allowed by the IRS include, mortgage interest, charitable gifts, unreimbursed medical expenses, and state and local taxes.
How to claim small business tax deductions.
In order to claim small business tax deductions as a sole proprietor, you must fill out a Schedule C tax form. The Schedule C form is used to determine the taxable profit that was earned in your business during the tax year. You then must report this profit on your personal 1040 tax form and have your accountant calculate the taxes due from there.
What is a 100 percent tax deduction?
A 100 percent tax deduction is a business expense in which you can write off 100 percent on your income tax. Some examples of business expenses that are 100 percent tax deductible include:
- Furniture that was purchased entirely for office use in the year that it was purchased.
- Office equipment such as computers, printers, and scanners.
- Business travel and its associated costs like car rentals, hotels, gas, etc.
- Client gifts and employee gifts are deductible up to $25 per.
- Self-employed health premiums.
- Business phone and internet bills.
The bottom line.
Many business owners aren’t fully aware of all of the tax deductions that are available to them on a yearly basis. This does not mean that when it comes to tax preparation season, you should be scrambling to try and remember all of your meal expenses and gas expenses from the previous year.
This also means that your close records of dates, time frames, noted details, expense costs, and receipts are all carefully documented and categorized so that you have a clear picture of all of your tax deductions up front and ready in the event of an audit.
If you do not understand all of the tax benefits that you can maximize, seeking guidance from an accounting service or professional can greatly benefit you and your business.For more information on tax deductions and business guidance, visit us today.