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Small Business Deductions


Small businesses qualify for a variety of income tax deductions. Deductions are costs associated with doing business and they are designed to reduce the amount of income that qualifies as taxable under the IRS tax code.

Some deductions — such as advertising, utilities, and rent — are fairly well-known and are commonly used by small business owners on their returns. Other deductions, however, are either not as well-known or so misunderstood that many business owners fail to take advantage of them.

Here are some expenses that are at least worth considering claiming as deductions:

  1. Home office - Costs associated with a home office space may be deductible, provided they meet certain eligibility requirements. The main requirements are that it is a space that is set aside exclusively for office use — it cannot be used for any other purpose. If your home office meets all the necessary requirements, then you can deduct a percentage of the cost of maintaining your home (utilities, insurance, mortgage payments, real estate taxes, etc.) based on square footage.
  2. Mileage expensesIf you use your vehicle for business-related purposes, you are entitled to an auto deduction on your business income tax return. You can calculate the deductible amount in one of two ways. The first way is to keep a record of the number of business miles you accumulate throughout the year and multiply them by the IRS mileage rate of $.405 per mile. The other way is to keep track of your total vehicle-related expenses and multiply it by your vehicle's percentage of business use. Tip: Most business owners keep it simple and choose to multiply their mileage by the IRS-approved rate.
  3. Office suppliesMany business owners pick up office supplies and discard the receipt. Over time, those expenses accumulate into a tidy sum of deductions that you could be claiming on your tax return. So, the next time you buy "post-it" notes, keep the receipt and file it away for tax time.
  4. Software and Internet subscriptions - Technology has given rise to a whole new set of deductions that can be claimed by small businesses. Among them are the cost of software and Internet-based subscriptions. Don't get too excited. These expenses still need to be business-related. (No, you can't deduct video games!) But even so, the cost of these types of expenses can be significant and they can make a noticeable difference to your bottom line tax liability.
  5. Health insurance premiums - One other deduction that is often overlooked is the cost of health insurance premiums. In 2004, these costs were 100 percent deductible on sole proprietor returns. There are limitations — you can't be eligible for insurance under someone else's plan (e.g. your spouse) and the total cannot exceed your net profit. But given the rising cost of healthcare, this is a deduction that is definitely worth looking into.