Common Business Tax Deductions and How They Work
Most small business expenses are tax deductions, which can help you reduce your tax bill. When you are doing your taxes, it’s good to take as many as you possibly can.
How do Tax Deductions for Business work?
As a small business owner, you need to know that you can take deductions for any ordinary/necessary operating expenses. However, different expenses are deducted differently. In this article, we’re going to take a look at 10 tax deductions for small businesses.
Keep in mind that personal expenses are not deductible. Therefore, make sure that your business expenses are separate from your ones.
10 Small Business Tax Deductions
Legal and Account Fees/Tax Prep
If you hire an attorney and pay for legal services or you hire someone to handle your bookkeeping/accounting or prepare tax returns/offer tax advice, you can use these expenses as a deduction.
You cannot deduct fees for these services to help you get started or acquire assets- but they can be included in the cost of your business or the asset. If your accountant or attorney is also doing personal work for you, that cannot be part of the deduction.
No matter what you call it: advertising, promotion, or marketing, you can deduct the expenses associated with bringing in new customers and keeping existing clientele. You can also deduct any costs associated with keeping your name in front of the public, such as advertising that encouraged donations to a non-profit.
If your business uses tech, that is computers, cell phones, and more, you can deduct the cost of the purchase. You are not required to depreciate these, as long as they don’t cost more than $2,500. You can only deduct the business use of your tech pieces.
Use of Vehicle for Business Purposes
You can deduct expenses that are related to the use of a vehicle for business purposes using the standard mileage rate from the IRS or by deducting the actual expenses. It’s important to note the standard mileage rate changes each year. Therefore, you must check the current rate and run numbers both ways to see which is more beneficial. Also, there are some restrictions. For example, if you depreciated the cost of your vehicle in previous years, you cannot use the standard mileage rate.
Insurance premiums for business insurance, equipment insurance, and health insurance for yourself or your employees are tax-deductible. Some of the other types of premiums that can be deducted are:
Workers compensation (check state laws)
Insurance to cover expenses if the owner is disabled
Life insurance for officers/employees (as long as the business is not a beneficiary)
Business interruption insurance
Interest in Business Debts
If you have purchased a building or you have a business loan, you are probably paying interest on them. A small business with an annual average of gross receipts of $25 million or less over the past 3 years can take all interest expense deductions.
Leasing Office Space, Equipment, or Vehicle for Business
Expenses related to leasing office space or equipment are deductible, but only for the expenses incurred in that year. Therefore, you cannot prepay your lease for an additional year to take the deduction for a second year on your current year tax return.
Also, depending on the lease, you can deduct lease expenses on your vehicle. If it is an operating lease under 12 months, you can deduct the cost of the lease each year for the term of the lease. If it is a capital lease, the conditions are similar to those of a purchase. You must depreciate a capital lease.
If you have employees, it’s important to note that you can take deductions for most of the expenses relating to them. For example:
Additionally, costs such as taxes, unemployment tax, workers comp, FICA, and the employer portion of Medicare and Social Security can be deducted.
Business Travel/Meal Expenses
If you must travel away from your primary place of business, you can deduct expenses related to that travel. You may also deduct expenses related to transportation, taxis/ridesharing, lodging, and meal expenses. You may not deduct entertainment expenses and most meals can only be claimed up to 50% and you need to be able to prove that they were for business. You may still deduct meals while traveling at 50%.
Office Supplies/Miscellaneous Expenses
All businesses need office supplies and these can be deducted from your business taxes as long as you use them within the year you claim them in. Any supplies that are included in the making or packaging of materials should be included in the cost of goods sold.
Other expenses related to running an office, such as internet fees, are deductible and you can deduct office equipment such as computers, phones, and more if they are less than $2,500.
If you purchase equipment that is good beyond a year, you must depreciate those over several years.
If you need assistance with your business taxes, contact Master’s Commercial Capital Group to learn more. We will be more than happy to make sure that your business taxes are done right.