A Checklist of Business Deductions
Sara Sugar has created a list of small business deductions as shown below. It is a great list to scan through and see if you have been overlooking any tax deductions. Always fine to call us with any questions or comments you may have.
THE ULTIMATE LIST OF SMALL BUSINESS TAX DEDUCTIONS
Every small business owner wants to save money — and small business tax deductions are one way to do exactly that.
This list of 37 deductions will take you from “Ugh, taxes” to “Taxes? I got this.”
1. Vehicle Expenses.
Keep records during the year to prove the use of your car, truck or van, for business, especially if you also use the vehicle for personal reasons. When it’s time to pay taxes, you can choose to deduct your actual expenses (including gasoline, maintenance, parking, and tolls), or you can take the more straightforward route of using the IRS standard mileage rate — 58 cents per mile in 2019.
Whether you’re running errands in your own car or making deliveries in your bakery van, track the mileage and run some numbers to see which method gives you the higher deduction. If you drive a lot of miles each year, it makes more sense to use the standard mileage deduction when filing taxes. However, if you have an older vehicle that regularly needs maintenance, or isn’t fuel efficient, you might be able to get a larger deduction by using your actual expenses vs. the IRS mileage rate.
Either way, we all know that gas, repairs, parking, and mileage add up, so taking advantage of the standard mileage rate, or deducting your actual expenses, is a no-brainer way to put some of that money back in your pocket. Just make sure you keep records diligently to avoid mixing personal expenses with business ones.
2. Home Office.
Do you run part of your small business out of your home, maybe doing the books in the evenings after you’ve parked your food truck for the night? Or perhaps you run an entirely home-based business. For many self-employed individuals and sole proprietors, it’s pretty standard to have a space at home that’s devoted to your work. The key here is the word devoted. Sometimes doing work on at the kitchen table while your kids do their homework doesn’t count as a home office. You must have a specific room that’s dedicated to being your office in order for it to be tax deductible.
Calculating the size of your deduction is primarily related to the amount of your home that’s used as an office. For example:
Total square footage of your home / divided into square footage used as an office = the percentage of direct and indirect expenses (rent, utilities, insurance, repairs, etc.) that can be deducted.
We highly recommend that you read the IRS’ literature on this particular tax deduction, and/or speak with a tax professional before filing taxes with this deduction. It’s one of the more complicated ones available to small business owners, and there have been numerous court cases and controversies over the years. When dealing with the potential for a costly audit, it pays to be safe by consulting a professional tax preparer rather than sorry.
3. Bonus Depreciation.
If you buy new capital equipment, such as a new oven for your pizzeria, you get a depreciation tax break that lets you deduct 100 percent of your costs upon purchase. Under the Tax Cuts and Jobs Act, 100% bonus depreciation only pertains to equipment purchased and placed in use between September 27, 2017 and January 1, 2023 — something to keep in mind as you plan for new equipment purchases in the next few years.
It’s important to note that according to the IRS, the asset you purchase must meet the following three requirements:
- It must be used in the business or held to produce income during the year of purchase.
- The useful life of the asset must be greater than one year.
- It must be an asset that wears out, gets used up, or loses its value over time.
A few things that don’t count as assets include:
- Air conditioning or heating units.
4. Professional Services.
As a small business, you don’t have in-house accountants or attorneys, but that doesn’t mean you can’t deduct their services. If you hire a consultant to help you grow your gift shop’s outreach, the fees and overall expense you pay for those services are deductible. Make sure the fees you’re paying are reasonable and necessary for the deduction to count by checking with the appropriate IRS publication or a tax professional. But you’d do that anyway, wouldn’t you?
5. Salaries and Wages.
If you’re a sole proprietor or your company is an LLC, you may not be able to deduct draws and income that you take from your business. However, salaries and wages that you pay to those faithful part-time and full-time employees behind the cash register are indeed deductible.
However, this doesn’t just stop at standard salaries and wages. Other payments like bonuses, meals, lodging, per diem, allowances, and some employer-paid taxes are also deductible. You can even deduct the cost of payroll software and systems in many cases.
6. Work Opportunity Tax Credit.
Have you hired military veterans or other long-term unemployed people to work behind your counter? If so, you may be eligible to take advantage of the Work Opportunity Tax Credit of 40 percent of your first $6,000 in wages.
7. Office Supplies and Expenses.
If you’re running a frozen yogurt shop, when you hear the word “supplies,” you probably think of plastic spoons. However, even if your business doesn’t have a traditional office, you can still deduct conventional business supplies and office expenses, as long as they are used within the year they’re purchased, so set up a file for your receipts. Many times, you can also deduct the cost of postage, shipping, and delivery services so if mail-order is a part of your business, be sure to keep track of this cost.
8. Client and Employee Entertainment.
Yes, you can take small business deductions for schmoozing your clients, as long as you do indeed discuss business with them, and as long as the entertainment occurs in a business setting and for business purposes. In some cases, you can’t deduct the full amount of your entertainment expenses, but every bit helps.
Here are some tips to guide when and what you can deduct:
- For client meals and entertainment, you can typically deduct up to 50% of the cost provided that at least one employee was present and the meal was not lavish.
- Expenses for your office parties and company retreats can be deducted.
- You can also deduct office meals and snacks.
(Please note: the TCJA affected Meals & Entertainment deductions beginning in 2018.)
9. Freelance/Independent Contractor Labor.
If you bring in independent contractors to keep your checkout lines moving during the holidays or to create new marketing materials for your shop, you can deduct your costs. Make sure you issue Form 1099-NEC to anyone who earned $600 or more from you during the tax year.
10. Furniture and Equipment.
Did you buy new chairs for your eat-in bakery or new juicing blenders for your juice bar this year? You have a choice regarding how you take your small business tax deduction for furniture and equipment. You can either deduct the entire cost for the tax year in which it was purchased, or you can depreciate the purchases over a seven-year period. The IRS has specific regulations that govern your choices here, so make sure you’re following the rules and make the right choice between depreciation and full deduction.
11. Employee Benefits.
The benefits that businesses like yours offer to employees do more than attract high-quality talent to your team. They also have tax benefits. Keep track of all contributions you make to your employees’ health plans, life insurance, pensions, profit-sharing, education reimbursement programs, and more. They’re all tax-deductible.
12. Computer Software.
You can now deduct the full cost of business software as a small business tax deduction, rather than depreciating it as in years past. This includes your POS software and all software you use to run your business.
13. Rent on Your Business Location.
You undoubtedly pay rent for your pet store or candy shop. Make sure you deduct it.
14. Startup Expenses.
If you’ve just opened your gift shop or convenience store, you may be able to deduct up to $5,000 in start-up costs and expenses that you incurred before you opened your doors for business. These can include marketing and advertising costs, travel, and employee pay for training.
Don’t miss the small business tax deductions for your electricity, mobile phone, and other utilities. If you use the home office deduction, your landline must be dedicated to your business to be deductible.
16. Travel Expenses.
Most industries offer some form of trade show or professional event where similar businesses can gather to discuss trends, meet with vendors, sell goods and discuss industry news. If you’re traveling to a trade show, you can take a small business deduction for all your expenses, including airfare, hotels, meals on the road, automobile expenses – whether you use the IRS standard mileage rate or actual expenses – and even tipping your cab driver.
There are also deductions for expenses that might not immediately come to mind, like:
- The cost of making telephone calls or using a fax machine.
- Shipping items such as samples or displays (like you would use at a trade show or convention).
- Any tolls and parking you pay.
In order for your trip to qualify for a travel deduction, it must meet the following criteria:
- Your responsibilities during the trip must keep you away from your regular place of business for substantially longer than a regular day’s work.
- You need sleep or rest to meet the demands of your work while away.
As with all deductions, it’s imperative that you keep receipts and records of all business travel expenses you plan to deduct in case of an audit.
Deducting taxes is a little tricky because the small business deduction depends on the type of tax. Deduct all licenses and fees, as well as taxes on any real estate your business owns. You should also deduct all sales taxes that you have collected from the customers at your deli. You can also deduct your share of the FICA, FUTA, and state unemployment taxes that you pay on behalf of your employees.
If you have salespeople working on commission, those payments are tax-deductible. You can also take a small business tax deduction for third-party commissions, such as those you might pay in an affiliate marketing set-up.
19. Machinery and Equipment Rental.
Sometimes renting equipment for your coffee shop or concession stand is beneficial to your bottom line, since you can deduct these business expenses in the year they occur with no depreciation.
20. Interest on Loans.
If you take out a business line of credit, the interest you pay is completely deductible as a small business tax deduction. If you take out a personal loan and funnel some of the proceeds into your business, however, the tax application becomes somewhat more complicated.
21. Inventory for Service-Based Businesses.
Inventory normally isn’t deductible. However, if you’re a service-based business and you use the cash method of accounting (instead of the standard accrual method typically used for businesses with inventory), you can treat some inventory as supplies and deduct them. For instance, if you’re an ice cream shop but you sell your special hot fudge sauce as a product, your inventory may be deductible. Consult a tax professional to see if you qualify.
22. Bad Debts.
Did you advance money to an employee or vendor, and then not receive repayment or the goods or services you thought you were contracting for? If so, you may be able to treat this bad business debt as a small business deduction.
23. Employee Education and Child Care Assistance.
If you go above and beyond with your employee benefits, you may be able to take small business tax deductions for education assistance and dependent care assistance. The IRS is pretty much rewarding you here for being a great employer. So, take a bow, and the deduction.
24. Mortgage Interest.
If your business owns its own building, even if it’s just a hot dog stand, you can deduct all your mortgage interest.
25. Bank Charges.
Don’t forget to deduct the fees your bank charges you for your business accounts. Even any ATM fees are deductible.
26. Disaster and Theft Losses.
If your business is unfortunate enough to suffer theft or to be the victim of a natural disaster during the year, you may be able to turn any losses that your insurance company didn’t reimburse into a small business tax deduction.
27. Carryovers From Previous Years.
Some small business tax deductions carry over from year to year. For instance, if you had a capital loss in a previous year, you may be able to take it in the current year. Specifics often change from year to year, so make sure you’re up to date on the latest IRS regulations.
The insurance premiums you pay for coverage on your business is all tax-deductible. To qualify, your insurance must provide coverage that is “ordinary and necessary.”
This could include coverage for:
- Accidents and health.
- Automobiles (for vehicles used in your business).
There are a few insurance types that you can’t deduct, the most common being life insurance. If you’re not sure whether you can deduct a certain type of insurance, and that deduction is an important factor in your decision, please speak with a tax professional first and save yourself any unnecessary expenses.
29. Home Renovations and Insurance.
Did you take a deduction for a home office already? If so, business expenses related to any renovations to that part of your home are also deductible, and so is the percentage of your homeowner’s insurance that covers that part of your home. Remember, all small business deductions related to home offices only apply if you use part of your home exclusively for business.
The IRS distinguishes between tools and equipment. While you may have to capitalize on equipment rather than deducting it in one year, you can deduct tools that aren’t expensive or that have a life of only a year or less. And for the IRS, “tools” doesn’t just refer to hammers or screwdrivers; your spatulas and cookie sheets are tools as well.
31. Unpaid Goods.
If your business produces goods rather than providing a service, you can deduct the cost of any goods that you haven’t been paid for yet.
Did you attend any seminars, workshops or classes in the past year that were designed to help you improve your job skills? Your work-related educational expenses may be deductible, especially if they’re required to keep up or renew a professional license. Remember, they have to be work-related. If you own a bar or cafe, you won’t be able to deduct skiing lessons.
33. Advertising and Marketing.
You already know that providing amazing goods and services isn’t enough to make your business succeed. You also need to advertise so your potential customers can find you. Advertising and marketing dollars can add up fast, but fortunately, they are all tax-deductible.
This is great news since advertising and marketing are often of the biggest business expenses that small businesses need to deal with as they get off the ground. Rest assured, you can deduct everything from flyers to billboards to business cards, and even a new website. Political advertising is the biggest exception to this rule. Those expenses are not deductible.
34. Charitable Deductions.
Yes, your small business can donate to charity and take a deduction for it. It can donate supplies, money, or property to a recognized charity, but pay attention to the rules before you go crazy giving stuff away. Donations of your time don’t count, and you can’t wipe out your business income with donations. Also, check with the IRS before you make a charitable deduction to make sure the organization you want to support qualifies for the deduction.
35. Cleaning and Janitorial Expenses.
You know all too well that the workday isn’t over when you flip the sign on the door to say “Closed.” If you hire any type of cleaning service, make sure you take your small business tax deduction.
36. Moving Expenses.
Did you need to move to start your business? If you’re a sole proprietor or self-employed worker and you had to move more than 50 miles for business, you may be able to deduct some of your moving expenses from your taxes. Specifically, you may be able to deduct packing and transportation costs, utility and service connection fees, and travel costs. However, you can’t deduct the cost of any meals or security deposits you’ve had to pay.
Lastly, to qualify for these deductions, you will need to remain a full-time employee of the business that required you to move for at least 78 weeks out of the following two years.
37. Intangibles like Licenses, Trademarks, and other Intellectual Property.
Most of the time, expenses related to the registering or protection of intellectual property are deductible. However, the process you go about it can differ depending on what you’re trying to deduct. Some costs must be depreciated over multiple years, while others can be fully deducted within the year in which they were incurred. For example, licensing fees are typically considered capital expenses that must be depreciated. However, trademarks can often be deducted in the same tax year. If you’re uncertain, we recommend working with a tax professional to ensure you’re in compliance with the regulations governing your specific situation.
No matter what type of small business entity you have, you have to pay quarterly estimated taxes if the business owes income taxes of $1,000 or more. Corporations only have to pay quarterly estimated taxes if they expect to owe $500 or more in tax for the year.
Before you owned a business, filing taxes was a one-time thing. But as a small business owner, you’ll have to pay the IRS four times per year. On one hand, that’s four more tax deadlines you might miss. But on the bright side, by the time your yearly tax deadline comes around, you’ll have already paid three-quarters of your tax return.
To make things even more complicated, businesses must deposit federal income tax withheld from employees, federal unemployment taxes, and both the employer and employee social security and Medicare taxes. Depositing can be on a semi-weekly or monthly schedule.
Whether you’re filing your taxes quarterly or holding off for the next annual deadline, you should begin preparing for your taxes by keeping records of your expenses as of January of each year. Make sure to document each of these small business tax deductions by keeping physical receipts and writing down the business reason for the expense on your receipts as soon as you receive it.
With this comprehensive list of small business tax deductions, you’ll be well on your way to saving on your taxes this year. However, deductions can be tricky, it’s always best to consult a tax expert for any questions that might arise to ensure you are complying with all regulation and avoid any penalties.
Credit given to Sara Sugar. Published in MONEY & PROFITS on Jan 21, 2020.
Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.