Types of Tax Deductions for Small Businesses
Small Business Tax Write-Offs to Utilize This Tax Season
Come tax time, every small business owner is looking for whatever potential deductions to save a bit of money on their tax bill. Running your own business comes with unavoidable expenses but knowing which ones you can legitimately write-off on your taxes can be a bit tricky if you’re not intimately familiar with the ins and outs of the tax code. That’s why we’re offering a primer on some of the most common small business expenses that entrepreneurs deduct on their taxes every year and how you can go about bringing down your taxable income (with help from a tax professional, of course).
How to Write-Off Expenses for Small Businesses
In looking to claim small business expenses on your taxes, it’s first worth noting that the expenses must be “ordinary and necessary” per the IRS. That means the items you’re looking to deduct must fall within the definition of what are common expenses for the particular industry you’re in, and the expenses have to relate to your business and your ability to perform work.
Once you’ve made a determination on what expenses you’re entitled to deduct, you’ll fill out the appropriate form depending on your business entity. For example, if you are a sole proprietor or a single member LLC, Schedule C is the form for reporting your business profits and losses; it’s also where you’ll calculate and itemize your business expenses to be written-off in the categories offered on the form. That figure will be subtracted from your gross profit, and the resulting amount is transferred onto your personal 1040 for your business income. If you are a C corporation, you will file a 1120 with the same revenues and expenses but also be responsible for providing a balance sheet.
Arriving at these numbers can get complicated with more expenses to deduct and in determining what expenses qualify for deduction, and in which category. There’s nothing wrong with seeking help during tax season, and with a LegalShield plan, you can speak with a provider lawyer who can lend their expertise on tax law, all at an affordable price.
Common Business Tax Deductions
Every industry will differ on what expenses are incurred and what can be written off, but most businesses share some common costs that can be deducted—provided that you keep good records and save your receipts.
Some professions, like real estate agents, require some amount of driving as part of the job, and the related expenses can be deducted from your taxes under certain circumstances. By keeping records of your mileage, gas purchased, maintenance, registration fees, and tolls and parking costs, you can deduct part of those car expenses from your taxes. The IRS currently permits a standard mileage rate of 58 cents per mile for business use.
The challenge is separating the personal from professional; if you’re using your personal car for business travel, you must keep detailed records of the miles traveled for work compared to your overall miles driven in order to deduct that proportion of the costs from your business expenses.
Work may require you or your employees to travel out of the area. You may be able to claim deductions on plane tickets, rental car costs, hotel, or Airbnb costs and other expenses related to a business trip provided that the trip is all of the following:
- Necessary for work
- Mostly for the purpose of business activities
- Outside of your “tax home”
- Planned in advance
Business meals are a clichéd example of a business expense that can be written off, but the rules around them are a bit more complicated. If you’re taking a potential client to a meal to discuss business, you should be able to deduct 50% of the cost, provided that the meal was for business purposes of the meal and the costs weren’t extravagant. Likewise, meals purchased on a business trip should be eligible for deduction.
If you’ve just recently started your business, you may be able to deduct up to $5,000 of the startup costs from your taxes. In order to deduct those costs, they need to be related to creating or researching in order to create a business, preparing that business to launch, or creating a business entity for your business. Startups are also eligible for deductions up to $5,000 over three years for the costs related to starting a retirement plan for their employees.
If you’re opening a business, you’ll almost certainly need some kind of business insurance, and fortunately for you, the cost of that insurance can be deducted from your taxes. As with other expenses, the insurance needs to be necessary and ordinary to your industry to qualify as deductible.
While many businesses now operate solely online, others require a physical presence to conduct their work. If you’re renting a space for business use, you may deduct that cost from your taxes, provided that you aren’t receiving equity or the title to the property.
Many small businesses make use of equipment that loses its value over time. Fortunately, you can write off that lost value on your taxes over the life of that piece of equipment based on some rules provided by the IRS. For some assets, you can choose to depreciate the asset at a steady rate over the course of its lifespan or take bigger deductions within the first few years and smaller deductions later.
You can write off any expenses for advertising related to your business for the purposes of gaining or retaining business. However, there is a prohibition against writing off expenses related to lobbying to influence legislation.
If you’re paying for the training and education of your employees or yourself, you can deduct those costs, including necessary travel. Once again, the education in question should be “necessary and ordinary” and with the purpose of maintaining or improving skills related to the business.
Any office is going to go through consumable goods, and most of those goods should be tax deductible provided they haven’t been deducted in a previous year. In order to take that deduction, however, you need to meet certain requirements.
- You can’t keep a record of when the supplies were used
- You don’t make an inventory of the supplies at the beginning and end of the year
- These deductions don’t distort your business income
Your expenses for heat/air conditioning, electricity, telephone service, water and sewage is eligible as a business deduction, provided that they are for business use and not your personal use.
Small Business Health Care Tax Credit
If you’re an employer of fewer than 25 full-time employees, you may be eligible for a tax credit for providing health insurance benefits. The credit is up to 50% of premiums paid, with smaller employers receiving more credit.
Home Business Tax Deductions
More and more people work out of the home as sole proprietors, freelance workers or contractors, which qualifies them for one or more home office deductions on their taxes. But there are certain stipulations to be met in order to claim them.
Self-employment tax deduction
If you’re working for yourself, that means you are responsible for contributions to social security and Medicaid that your employer would have otherwise withheld from your pay. The self-employed tax-rate is 15.3% for income up to $142,800. However, you can deduct the equivalent portion of the tax your employer would otherwise pay from your net income on our income taxes.
If you have a home office, you might be able to claim a tax deduction for the cost of the space. It’s not as simple as writing off the entire cost of your mortgage or rent, however; in order to qualify, the IRS stipulates that the space has to be used “exclusively and regularly for administrative or management activities of your trade or business.” So if you have a spare bedroom that serves as your corner office, you can either measure the space and deduct $5 per square foot, or you can take the total expenditures of your home for your mortgage, repair, utilities and more and calculate what percentage of that you can deduct based upon what percentage of the home is comprised of your work space.
Why Choose LegalShield When Filing Small Business Taxes
No small business wants to worry about the possibility of an IRS audit, which is why working with a professional to make sure every expense you're deducting meets the letter of the law is a great investment of time and money. With a LegalShield plan you can talk with a lawyer about your small business taxes to make sure your filings are correct. And LegalShield plans are affordable for any business, regardless of revenue. Sign up today!
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Talk with an experienced lawyer about your small business taxes this week!