For small business owners, tax season can be a less-than-exciting time of the year. However, one incentive can make filing taxes a little more bearable, and that would be tax deductions. Don’t miss out on potential savings by not taking advantage of all of the possible deductions!
What Are Tax Deductions?
Tax deductions are incentives that taxpayers can write off to lower their tax liability by reducing their taxable income. Deductions most commonly come in the form of expenses. Taxpayers can apply them against or subtract them from their gross income.
Small business owners should especially take advantage of itemized tax deductions rather than taking the standard deduction. Check out the following list of common small business tax deductions to find out if you’re missing out on potential savings!
Common Small Business Tax Deductions
If you use your vehicle for business purposes, then you can deduct business-related costs. If you use your vehicle only for your business, you can deduct the entire cost of its operations. However, if you use it for personal and business purposes, you need to calculate the business costs.
Whether you deduct the standard mileage rate or track actual expenses (such as gas, oil, miles, repairs, etc.), your savings could quickly add up.
Do you work from home? You may be able to deduct this expense against your business income. You can calculate your home office deduction through one of two ways:
- Simplified method: Deduct $5 per square foot of your home used for business, up to a maximum of 300 square feet.
- Standard method: Track all actual expenses of maintaining your home (mortgage interest or rent, utilities, repairs, house services, etc.) and multiply the total of these expenses by the percentage of your home used solely for business.
Salaries and Wages
Wages, salaries, and paid time off are all tax-deductible expenses. However, the employee can’t be the sole proprietor, LLC member, or a business partner. Also, the salary or wages need to be reasonable and in line with industry standards.
Whether it’s essential office accessories, tools, shipping materials, or other supplies used for business purposes, you can deduct these expenses from your taxable income. Make sure you file away all of your receipts! You may not think small purchases can make a difference, but over a year, you would be surprised to see how much everything could add up.
Furniture and Equipment
Did you know that new businesses can deduct up to $5,000 worth of furniture? This includes desks, chairs, computers, printers, office decorations, and phones.
You can deduct any advertising, marketing, and promotional costs. Some common advertising deductions include:
- Business cards
- Social media ad campaigns
- Ads, either online or print
- Website design and launch
Depreciation of business assets isn’t something small business owners typically consider when it comes to tax deductions. However, depreciation allows you to reduce the value of an asset over time. This could be a result of age, wear and tear, or decay. You can take a depreciation deduction by filing Form 4562 when you file your tax return every year.
If you have an office or rent a brick-and-mortar space, you can always write off utility bills on your tax return. If you work from a home office, you can also write off a portion of your maintenance costs, including utilities. If your office takes up 10 percent of your home’s square footage, you can deduct 10 percent of your utility bills.
If you need to travel for your business, you can deduct these expenses as well! However, for a trip to qualify as business travel, it has to be ordinary, necessary, and away from your tax home (the city or area where you conduct business).
Keep all travel-related expenses, such as receipts for food, lodging, business activities, parking, and transportation.
If you have an insurance policy that is ordinary, necessary, and for your business, your insurance premium is tax-deductible.
Conventional insurance policies for businesses include:
- Data breach insurance
- Workers’ compensation insurance
- Professional liability insurance
- General liability insurance
- Commercial property insurance
Legal or Professional Fees
Do you have fees stemming from legal services or other professional services? These fees are also tax-deductible! You can write off payments towards lawyers, bookkeepers, accountants, and other professionals when you file your tax returns.
By claiming all the tax deductions that apply to your small business, you will ensure that you reduce your taxable income as much as possible. You can easily track your business expenses by opening up a separate business account, keeping all of your receipts and invoices, and maintaining a spreadsheet of your expenses.
To guarantee you’re writing off all possible deductions, consult with a professional accountant who can guide you through the itemized deduction form.