For small business owners, filing tax returns can seem like an unnecessary burden. But tax season is also an opportunity to understand and take advantage of tax breaks that can help your company's bottom line.
The IRS offers special tax deductions for business owners, including home office expenses, car expenses, and even personal expenses like health insurance premiums. Here are 16 small business tax deductions, some well-known and some less well-known.
16 small business tax credits
To help our small business friends, we've compiled a list of some basic small business tax deductions offered by the IRS to reduce your taxes. We always recommend consulting a tax professional regarding how these deductions apply to your specific business activities.
home office deduction
It all starts at home. If you use part of your home as office space, you may be able to deduct those expenses.
This is true whether the residence is a house, condo, apartment, mobile home, or even a boat. This also includes on-site structures such as non-attached garages, studios, and barns.
The IRS states that to qualify for this deduction, a business owner must meet the following qualifications:
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This space must be used exclusively and regularly for business purposes. This means that if the space is also a guest room or improvised gym, it will not be eligible.
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Your home must be your principal place of business. Even if you run your business out of your home, you can qualify for this as long as your home is your main place of management and management activity.
You are limited to a certain number of square feet and there are two different ways to claim it. Here's a complete guide to claiming.
Office supplies
Of course, you will need to purchase office supplies, but as long as they are for business use only, you can deduct those costs. These may include items such as printers, scanners, staplers, pens, and even office furniture.
The IRS says that for an expense to be eligible, it must be both regular and necessary. It is defined as “common and accepted in the industry.” Necessary expenses are further defined as “those that are beneficial and appropriate to your trade or business.”
These costs can only be deducted within the year of purchase.
startup costs
Start-up costs are the costs associated with research and investigation to start a business, as well as the initial costs themselves.
Examples of deductible expenses include market research and product research, advertising related to opening your business, employee training, travel expenses related to securing clients and customers, and consulting fees.
rent
Rental expenses for commercial real estate are subject to deduction.
However, there is one caveat to this. To qualify, you must not own the property or have a conditional purchase agreement that allows you to build equity in the property.
software
All types of software purchased for business purposes, including subscriptions and leases, can be deducted on your tax return. Examples include Microsoft Word, Quickbooks, Photoshop, and social media software.
The same standards apply to software as office supplies. The software must be “normal” and “necessary” within the industry.
business meals
This has changed over the past few years. If you're not already up to date, make your trade here.
From 2023, entertainment and entertainment expenses will no longer be deductible. Previously, business-related entertainment expenses such as concerts, sporting events and golf allowed him to take a 50% deduction. However, that ship has sailed.
The good news is that many business-related food expenses are still deductible to varying degrees. Company-wide holiday parties, meals included as taxable employee compensation, and food and beverages provided free to the public are all 100% deductible.
Dinners with customers, meals during meetings or business trips, meals at board meetings, and meals provided to employees working overtime are eligible for a 50% deduction.
As always, please save your receipt.
travel expenses
Like meal expenses, business travel is also deductible.
To qualify, you must travel more than your normal work day, away from your central workplace, and sleep to meet the demands of your job. The IRS says business travel cannot be done for luxury, extravagance, or personal reasons.
Examples of deductions are as follows.
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Transportation expenses such as planes, buses, trains, cars, etc.
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Taxi or Uber price
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When using a private car for business purposes
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stay
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meal
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Laundry costs
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chip
Travel to conventions and conferences is also deductible as long as it benefits the business itself.
alarm system
Security systems, such as surveillance systems and burglar alarms, are generally considered necessary business expenses and are deductible.
The IRS says these costs cannot be excessive or unreasonable, and you must be able to justify the costs if necessary. Additionally, if your home is your principal place of business, your home security system can be deducted as a business expense.
Business car
If you have a vehicle that you use only for business purposes, the IRS allows you to deduct all of your vehicle's ownership and operating expenses. If you own a car for both business and personal use, you can only deduct business-related expenses.
You have two options when determining your vehicle deductible.
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Standard mileage rate: This is 65.5 cents per mile for the 2023 tax year.
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Actual expense settlement method: You need to find out how much it actually cost to operate the part of the car that was only for business use. According to the IRS, this includes “gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the business mile portion of the total mileage.”
You can calculate both to determine which option gives you a greater deduction.
expert fees
Professional services you pay in connection with your business, such as attorney's fees and tax preparation by a CPA, are considered normal and necessary expenses and are deductible.
However, the IRS notes that legal fees paid to acquire business assets are generally not deductible.
Employee salaries and contract labor
Payments to full-time and part-time W-2 employees are fully deductible, including commissions and bonuses.
You can also deduct payments to independent contractors and freelancers. For contractors who are paid more than $600 per year, fill out a 1099 form to ensure they are classified as such.
business insurance
Insurance costs related to normal business operations are also deductible. This includes property, liability, workers' compensation, and even auto insurance.
Self-employed individuals can also deduct health insurance premiums for themselves and their family members.
Internet, telephone, utility charges
As with many other deductions, if your principal place of business is not your home, you can fully deduct your utility bills, such as heat, electricity, water, telephone, and sewer. Otherwise, you can only deduct the portion used for business purposes.
If your main office is your home and you create a second phone line solely for business purposes, that expense is fully deductible, just like any Internet expense associated with running your business.
bad debt
If you loan money to a customer, vendor, or employee and don't get it back, you can claim a “bad debt” deduction.
The IRS says you need to be able to prove it's not personal, not a gift, and it's a business loan. They further 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:
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Financing customers, suppliers, distributors, and employees
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Selling on sale to customers
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business loan guarantee
advertising and marketing
The IRS allows you to take a tax deduction if you acquire new customers and retain existing customers through marketing and advertising. Again, costs should be normal and necessary for your particular business.
Common deductions include reasonable advertising expenses associated with the business, goodwill advertising related to maintaining the business name in the public eye, meals, entertainment provided to the public as a way of promoting goodwill in the community, or may include the cost of providing recreation.
retirement contributions
Small business owners can deduct contributions to a retirement plan as long as the plan is tax-qualified. This is true whether you are a sole proprietorship, partnership, or member of an LLC.
Being self-employed rather than working for an employer with a 401(k) or pension plan means going through all the paperwork with the IRS to see if your contributions are tax deductible. It means you have to do it yourself.
How to declare small business tax
How you file small business taxes depends entirely on how you classify your business. The main options are:
Sole proprietorship
If you are a sole proprietor, the business itself is not subject to tax. Instead, business owners report the business' profits and losses on their personal tax returns.
In addition to filling out a typical 1040 individual tax return, sole proprietors also file returns to report profits or losses. As a sole proprietor, the owner must also report and pay Social Security and Medicare taxes if the business generates more than his $400 in revenue.
partnership
Like sole proprietorships, partnerships are taxed at the individual level rather than at the business level. The IRS calls this “pass-through taxation” because the taxes pass through the business to the business owner.
Partnerships must report annual profits, losses, deductions, and tax credits from the partnership's operations using an information return called a . Each partner must also file a standard personal tax return to report their own separate profits and losses related to the business.
Co., Ltd.
Unlike partnerships and sole proprietorships, corporations must pay taxes on their profits, which are also taxed to shareholders when the profits are paid out as dividends.
It is used by businesses to report their income, profit, loss, deductions, and deductions, and to calculate their income taxes.
