How do Business Tax Deductions Work?
For small businesses, you can tax deductions for all expenses that are necessary for the operation of your business to make a profit. Different types of expenses can be deducted in different ways.
These are the types of business expenses:
- Long-term capital expenses such as a company car, equipment, or startup costs.
- The cost of goods sold and the costs for manufacturing, selling, shipping products
- All the usual costs associated with running a business such as the cost of leasing, paying employees, non-employees and office expenses, utilities, and supplies
- This article will discuss common expenses that you can deduct from your tax bill to reduce your tax bill.
10 Tax Deductions for Small Businesses
1. Legal and Accounting Fees, and Tax Preparation
An attorney may be hired to provide legal services. These professional services can be deducted as business expenses.
Legal or accounting fees paid for business startup services or for acquiring business assets cannot be deducted. However, you can include them in your asset or business cost.
Also read: 10 Ideas To Help Reduce Small Business Cost
2. Advertising and Marketing Expenses
You can deduct expenses to bring new clients and maintain existing customers, regardless of whether you call them advertising or marketing. It is possible to deduct expenses for maintaining your name in the public eye, such as advertising encouraging people to donate to charities.
The biggest mistake business owners make is to try and deduct the cost of driving around with an advertisement for their business on it. The cost of the ad is deductible, but not the cost to drive the car with the ad.
3. Computers, Tablets, and Cell Phones
The cost of buying reference materials, as well as software and hardware, can be deducted. It is not necessary to depreciate these items so long as the cost is less than $2,500
Only business use of your iPad or computer is eligible for deduction. As of 2018, computers, tablets, and associated hardware and software are not listed properties. However, you should still use these devices for business purposes at least 50% of the time.
4. Use of A Car or Truck for Business Purposes
You can deduct business expenses incurred by your vehicle through the IRS standard mileage rate, or actual expenses.
The standard mile rate changes each year. Make sure to check the rate for your current tax year. To determine which method is most effective for your business, compare standard mileage with actual mileage. You should keep in mind that the standard mileage rate is subject to some limitations. For example, you cannot use it if your vehicle has been depreciated in the past.
You cannot deduct expenses for driving to your business location, or personal driving. To calculate the deduction, you will need to separate personal driving miles from business mileage.
5. Insurance Expenses
You can deduct the premium cost of insurance if you purchased it for your company, your equipment, or for employees. You can also deduct premium costs for other types of insurance:
Workers’ compensation insurance under state laws
- Indemnity insurance to pay for business expenses in the event of a disabled owner
- If the business isn’t a beneficiary, life insurance for employees and officers
- Business interruption insurance in case your business is closed due to fire or other causes.
6. Interest on Business Debt
Interest expenses are likely if you’ve purchased a building or a loan for your business. All interest expense deductions are allowed for small businesses that have an annual average gross receipt of less than $25 million in the last three years.
Beginning in 2018, the interest rate deductions for larger businesses are limited to:
- Indirect business income
- 30% of the adjusted taxable income
- Floor plan financing interest6
- Lease an office, equipment, or business vehicle
7. Leasing an Office, Equipment, or Business Vehicle
Each year, you can deduct lease expenses for office space and equipment. However, only the cost for that year is eligible. This means that you cannot prepay for office space or equipment leases and claim the deduction for the current tax year.
The cost of leased vehicles can be deducted from your business depending on the type. The cost of an operating lease that lasts less than 12 months can be deducted annually. Another type of lease is the capital lease. It has similar terms as a purchase and is longer-term. Capital leases are subject to depreciation.
8. Employee Expenses
Employers allow you to deduct most of the expenses related to them. You can take deductions for employee-related expenses
- Salary and wages
- Tools and equipment
You can deduct the costs of unemployment taxes, workers’ compensation, and FICA taxes for the employer portion of Social Security or Medicare taxes.
Your business tax return will show two places where employee benefit costs can be deducted. 8
9. Business Travel and Meal Expenses
If you travel from your primary place of business or work, expenses for business travel can be deducted. You must also use the deduction for business travel. You can deduct expenses for lodging, transportation, taxis, ride-sharing, and miscellaneous costs like tips and laundry.
You can still deduct entertainment expenses, but they are no longer deductible. You can only deduct 50% of meals, but you will need to prove this for business purposes. Travel meals are still deductible at 50%.
10. Office Supplies and Office Expenses
Every business requires office supplies, including materials like staplers and paperclips, pens, and pencils. For business tax purposes, these expenses can be deducted as long as they were used within the year. You should be careful to separate supplies needed for manufacturing and shipping products and include them in the cost of goods sold.
Other expenses such as internet hosting fees are deductible for office operations. If they cost less than $2,500, you can deduct the costs of office equipment such as desktop computers and phones.
You must depreciate office equipment purchased after one year. This includes professional instruments, books, and equipment.
The Bottom Line
Many business deductions have limitations, restrictions, or qualifications. When you are ready to file your yearly taxes, get help from a licensed tax professional. If you have a simple tax return, business tax software may be an option.
For each deduction, you claim, keep a record on paper or electronically. In case you need to explain to the IRS the deduction, include the date, exact amount, and the purpose of the expense. It is as simple as saving receipts, bank statements, or credit card statements to make notes on the expense.