Small business owners may perceive filing taxes as an additional burden. However, tax season also presents a chance to learn about and capitalize on tax deductions that can improve the bottom line of your company.
For business owners, the IRS offers special tax write-offs for expenses related to home offices, cars, and even certain personal costs like health insurance premiums. These are 16 small business tax deductions, some of which are more well-known than others.
We compiled this list of some common small business tax deductions the IRS provides to help lower your tax liability to support our small business friends. Recall that it’s wise to speak with a tax expert about how these deductions relate to the specific operations of your business at all times.
Everything begins at home. You might be able to write off the costs associated with renting out a portion of your house for business purposes.
Whether you live in a house, townhouse, apartment, mobile home, or even a boat, this is true. It also includes buildings on the site, such as a barn, studio, and detached garage.
The IRS states that business owners must fulfill the following requirements to be eligible for this deduction:
There are two methods to claim the allotted square footage, and there is a cap on the amount. A detailed guide on claiming the home office deduction can be found here.
It goes without saying that you will need to buy office supplies, and you can write those costs off as long as they are only used for business purposes. Staples, pens, printers, scanners, and even office furniture might be among them.
The IRS states that an expense must be both ordinary and necessary to be eligible. One that is “common and accepted in your industry” is that definition. An additional definition of a necessary expense is “that is helpful and appropriate for your trade or business.”
These costs are only deductible in the year that they were bought.
In addition to the initial costs, startup expenses also include the costs of the research and investigation needed to launch the business.
Deductible costs can include things like consultant fees, market and product research, opening-related ads, staff training, travel for client and customer acquisition, and more.
You can deduct rental payments from your business property.
A word of caution, though: to be eligible, you cannot be the property’s owner or be under any kind of conditional sales agreement that would let you accumulate equity in the asset.
You can write off on your tax return any software purchases you make for business purposes, including subscriptions and leases. Software for social media, Quickbooks, Photoshop, Microsoft Word, and so forth are a few examples.
Office supplies and software are subject to the same standards. Within your industry, the software needs to be “ordinary” and “necessary.”
Over the past few years, this one has evolved. Here’s the deal, if you’re not up to date.
Business entertainment expenses will no longer be deductible as of 2023. Previously, you could deduct 50% of your business-related entertainment costs, which included golf outings, sporting events, concerts, and more. That ship, however, has sailed.
The good news is that a variety of meal expenses related to business are still partially deductible. Holiday celebrations hosted by the entire company, food given to staff as taxable compensation, and free food and beverages for the general public are all 100% deductible.
Meals for a board meeting, client dinners, meals at conferences or while traveling for work, and meals given to staff members who work after hours are all 50% deductible.
Keep those receipts as usual.
Travel incurred for business purposes is deductible, just like meal expenses.
To be eligible, you must be working away from your primary work location for some time greater than a typical workday and require sleep to fulfill work obligations. According to the IRS, business travel cannot be ostentatious, ostentatious, or for private purposes.
Examples of deductibles are as follows:
As long as the convention or conference helps the business, travel expenses are also deductible.
Security systems are deductible because they are regarded as regular and necessary business expenses. This includes surveillance systems and burglar alarms.
According to the IRS, these costs can’t be disproportionate or out of the ordinary, and you should be able to support them if necessary. Additionally, the cost of your home’s security system is deductible as a business expense if it serves as your principal place of business.
Your entire vehicle’s operating and ownership costs can be written off by the IRS if you only use it for business purposes. You can only deduct business-related expenses if you own a vehicle used for both personal and business purposes.
When it comes to choosing the deductible amount for your car, you have two choices:
You can calculate which option results in a larger deduction by doing the math on both.
Professional services you pay for that are associated with your business, like CPA tax preparation or legal fees, are deductible as ordinary and necessary business expenses.
The IRS does point out that, generally speaking, you cannot deduct legal costs incurred in the purchase of business assets.
All of your payments, including commissions and bonuses, to W-2 workers who work full- or part-time are fully deductible.
Payments to freelancers and independent contractors may also be withheld. Simply make sure that any contractor you pay more than $600 to each year is categorized as such by completing the 1099 form.
Any insurance costs incurred in the course of running your company are also deductible. This covers workers’ compensation, property, liability, and even auto insurance.
Owners of independent businesses are also able to write off the cost of their family’s health insurance.
If your primary place of business is not your home, you can deduct the full cost of your utilities, including phone, sewage, electricity, and heating. This is similar to many other deductions. If not, you can only write off the amount that you use for business.
If your primary place of business is your house and you set up a second phone line specifically for business purposes, both that expense and any internet costs incurred in the course of running your business are fully deductible.
You are eligible to deduct “bad debt” expenses if you have lent money to a customer, supplier, or worker and have never received it back.
You must be able to demonstrate that the loan was for business purposes only—personal or gift—according to the IRS. They add that “a debt is closely related to your trade or business if your primary motive for incurring the debt is business related.”
Examples include:
If you use marketing and advertising to attract new customers and retain existing ones, the IRS will let you deduct this expense from your taxes. Once more, the expenses must be customary and required for your specific line of business.
A few examples of common deductions are reasonable business-related advertising costs, goodwill advertising that keeps the company name in the public eye, and feeding, entertaining, or amusing the public to foster community goodwill.
If your retirement plan is tax-qualified, you can deduct your contributions as a small business owner. Regardless of whether you are a member of an LLC, a partnership, or a sole proprietor, this is applicable.
If you work for yourself instead of an employer who offers a 401(k) or pension plan, you will have to complete all the paperwork required by the IRS to ensure that your contributions are tax-deductible.
The way you classify your business will determine how you file your small business taxes. These are the main options.
A sole proprietorship avoids taxing the business itself. Rather, the owner of the business records the profit and loss for the company on their personal tax return.
To report those profits or losses, the sole proprietor files a Schedule C in addition to a standard 1040 personal tax return. In addition, the owner of a sole proprietorship will have to file a Schedule SE to report and pay Social Security and Medicare tax if the business brought in more than $400 in revenue.
Similar to sole proprietorships, partnerships are subject to personal taxes rather than business taxes; this is known by the IRS as “pass-through taxation” because the business owner pays the taxes through the business.
Form 1065 is the information return that partnerships should use to report their annual operating profits, losses, deductions, and tax credits. In addition to their regular personal tax return, each partner should file a Schedule K-1 outlining their personal business profits and losses.
In contrast to partnerships and sole proprietorships, corporations must pay taxes on their profits, and when those profits are distributed as dividends, their shareholders are subject to additional taxation.
Form 1120 is used by corporations to calculate their income tax liability and to report their income, gains, losses, credits, and deductions.
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