Top Tax Deductions for Small Business Owners
As a small business owner, you likely know first-hand how managing cash flow can be a struggle, which is why you’ll appreciate any opportunity to save a few dollars and have more cash on hand. That’s why, as we move closer to tax season, you’re probably searching for ways to either lower your tax bill or get more back in a tax refund.
Did you know that there are many tax deductions available to small business owners? To learn more about what a tax deduction is and how your small business can benefit, keep reading for some of the top small business tax deductions.
What is a tax deduction?
According to Investopedia, the definition of a tax deduction is “a deduction that lowers a person’s tax liability by lowering his taxable income.” When it comes to filing taxes, you ideally would rather receive a tax refund than owe any additional money. To lower your chances of owing, or lower the amount you owe, you can submit various deductions.
Top Tax Deductions for Small Business Owners
As a small business owner, there are many ways you can save thanks to the “ordinary and necessary” rule. The IRS allows deductions on items that are considered ordinary for your business, meaning common or expected in your industry or type of business, and necessary in terms of being helpful and appropriate for your business. The IRS website has more information on what qualifies as a business expense and how you can deduct it from taxes. While there are other deductions you can consider and expense, the following are some of the top deductions that are helpful to small business owners.
1. Home Office
Today, many people have a home office that they use for running a business. If this is the case for your small business, you have the opportunity to deduct expenses related to your home office. The simplified criteria set by the IRS for deducting home office expenses is that you can deduct $5 for every square foot of your office, up to a maximum of 300 square feet. That can help offset some of the expenses you have related to mortgage/rent, electricity and internet. It’s important to note that your home office must be used regularly and exclusively for business needs. So, if your home office doubles as a guest room, home gym, or storage space, you won’t qualify for this deduction.
2. Advertising and Marketing
Advertising and marketing are essential to the success of any business. After all, without these efforts, how will anybody know that your business exists? The good news is that while you are out spreading the word on your business, you’re creating opportunities to expense those efforts.
Common examples include business cards, direct mail letters, billboard advertising, and online advertising. Put simply, anything you are using to market your business, including a website and social media, can likely be expensed.
3. Office Supplies
Even if you don’t purchase many supplies throughout the year, keep track of those that you do. Think about things such as:
- Pens and pencils
- Post-it notes
Office supplies can also include bigger purchases, such as computers, smartphones, printers, and software.
4. Vehicle Use
Are you frequently using your personal car to complete business tasks? If you are making frequent trips to the post office to ship packages, or driving to client meetings, or moving merchandise from one location to another, these all count as activities related to your business.
Luckily, if you use your vehicle for business purposes, there are two ways to claim a deduction:
- IRS standard mileage rate
- Keep track of all vehicle-related expenses
Using the standard mileage rate is easiest, as all you have to do is track your miles. You’re then compensated at 57.5 cents per mile driven for business use (for 2020).
Even if you work at home, there may be times when you’ll travel to meet clients and prospects or attend conferences. This positions you to deduct a variety of expenses, such as:
- Rental cars
- Airline tickets
- Entertaining colleagues
Just be sure that you’re deducting expenses related to business trips, not those that you take for personal reasons. Implementing a system for organizing all your receipts will help keep this straight, and will come in handy in the event of an audit.
When operating a business, having insurance is crucial because you want to be protected for any risk that could come your way. The good news is that you can request a deduction for things that keep you, your employees, and business, safe at work. The cost for many insurance premiums are deductible, and even medical insurance for employees can be deductible under certain circumstances.
7. Debt Interest
Have you already taken out a business loan? Debt, in any form, can be challenging to maintain due to the interest that accumulates over time. Keep track of any interest you’re paying, whether it’s a loan, mortgage, or line of credit related to your business, and you may be able to deduct some of it on your taxes.
There are pros and cons to the decision of whether to rent or buy a location for your small business. Many people don’t love the idea of renting because they feel that they are throwing money out the window instead of putting it towards something that you own. However, a positive in the renter's column is that renting expenses are fully deductible. Whether you rent an office or desk in a co-working space or have the full building dedicated to your business, save those receipts and use them to get a tax break.
Broken toilets, leaky faucets, and other damaged items in your business are unpleasant to deal with and can throw a major wrench in your day. The pleasant upside of having to perform or pay for repairs within your small business is that if the repair is ordinary, the expense is fully deductible. If you are repairing something that will enhance the value of the building/property, that would be covered through depreciation.
10. Legal and Professional Fees
Do you work with an accountant or bookkeeper? Fees associated with accounting or legal help may be eligible for deductions, depending on what the fee was for. For example, if you have somebody review a contract or lease for you, the fee is deductible.
Hopefully, this list sheds some light on some areas where you may be able to save yourself a few tax dollars. It’s important to note that this is not an all-inclusive list of the tax deductions available to small business owners. The best way to take advantage of deductions is to stay organized throughout the year and store receipts and other important documents in a safe place so you can be more prepared when tax season approaches. While articles like this one are helpful to get you ready to file taxes, a tax professional, accountant, or bookkeeper are great resources to get answers to your more difficult questions or to get specific advice with your business to help you remain compliant.