Running your own business requires a lot of hard work, organization, determination — and a decent amount of cash. But did you know that some of your small business expenses might count as a tax write-off? We’re discussing the different types of small business tax deductions and what you need to know about claiming small business deductions for these expenses.
Use the links below to navigate to a specific topic.
- How Do Tax Deductions Work?
- What Qualifies as a Small Business Tax Deduction?
- Personal vs. Business Expenses
- What’s The Best Way To Track Business Write-Offs?
- Tax Deductions For Self-Employed Taxpayers
- Save on Small Business Taxes
How Do Tax Deductions Work?
Before we get into what you can and cannot “write-off” on your taxes this year, let’s first establish a foundation for how tax deductions work in the first place. A tax deduction lowers your taxable income, which can inturn, decrease the amount of taxes you have to pay. This is different from a tax credit which lowers the amount of taxes you pay, dollar-for-dollar. An example of a tax credit would be a child tax credit which allows taxpayers to earn up to $1,000 in tax credit per child that is a relative, under 17, and claimed as a dependent.
When you write-off business expenses, this is considered a tax deduction for your business, meaning you could end up paying less on taxes because your taxable income has been lowered.
What Qualifies as a Small Business Tax Deduction?
There are many different expenses you’ll likely encounter as a small business owner. From laundry and legal fees to small business accounting fees, employee benefit programs, and continued education there are plenty of items that could qualify as a tax deduction for your small business. According to the IRS, business expenses must be both ordinary and necessary to be considered deductible. Depending on the expense and what documentation you have to prove that it is ordinary and necessary, you may be able to partially or fully deduct the item on your taxes.
Let’s go over some of the most common small business tax deductions, and how to claim them.
Most common tax deductible business expenses (and how to claim them)
- Advertising: Advertising and promotional costs are completely tax deductible — these expenses can include items like branded giveaway items and business cards. Use IRS Form 1040 to claim this deduction as a sole proprietorship or single-member LLC. Or, if you’re a multi-member LLC, you can claim this expense on IRS Form 1065. Note that if your marketing dollars increase your profits, you might go up a tax bracket and end up owing more in income taxes.
- Business Insurance: Yep, insurance pays off in more ways than one! You can deduct the cost of your business insurance on Form 1040 Schedule C. Work from your home office? You can also deduct the cost of your renter’s or homeowner’s insurance if this applies to your business operation.
- Business Car: Do you use a vehicle to deliver flowers for your flower shop? Or maybe you commute for client meetings in your personal vehicle — if you use a vehicle to run your business, you may be able to deduct a portion of the cost to run your vehicle when you file your tax return. If you use a vehicle for business use only, you can note these deductions using the IRS standard mileage rates. If you used your vehicle for business and personal use, you’ll only be able to deduct mileage and vehicle operation costs for the business portion of the vehicle’s use.
- Charitable Donations: If your business made a contribution to a qualified organization in the last tax year, you can deduct these monetary or property donations on your taxes.
- Business Meals: Business meals can be deducted for up to 50%. Keep in mind that business meals must be business related. If you plan to claim business meals this tax season, make sure to keep the proper documentation you’ll need — including the receipt with the date and location, the business relationship, and purpose of the business meeting. This deduction can also be claimed using IRS Form 1040 Schedule C.
- Education: Educational costs for your business can be fully deductible if they add value to your business and enhance expertise for your employees and business as a whole. These costs can include workshops, classes, webinars, subscriptions to professional publications, and even transportation to and from these events. The IRS will pay close attention to how these experiences relate to your business. Long story short, a pizza making course won’t be deductible for your marketing agency, since it doesn’t technically improve your skills as a marketer. Additionally, if the course qualifies you for a different career, the IRS will not consider this a write-off since it’s not related to the business operation at hand. You can deduct qualified educational expenses on IRS Form 1040, Schedule C.
- Home Office: If you regularly use a portion of your home for business, you might qualify for this deduction! But before you start counting those savings — make sure your space meets the IRS requirements for home office deduction — which includes a caveat that the home office must be used exclusively for business purposes. This means that the space cannot be multi-functional, like a desk in your bedroom or living room — the space must be clearly defined.
- Phone and Internet: Does your business require a phone and internet service to operate? Keep detailed records of your bills and expenses to claim these on IRS Form 1040, Schedule C.
- Travel: This expense has gotten many a politician, celebrity, and CEO in trouble over the years. That said, the IRS has some strict guidelines for what’s deductible and what’s not when it comes to business travel expenses. To start, the IRS says business travel must be ordinary, necessary, and outside of the home of the business, job, or tax home. A tax home generally covers the entire city where your main workplace is located. What exactly will the deduction cover if you meet the necessary guidelines? Some examples of deductible business expenses include: meals and lodging, travel expenses, dry cleaning, taxi fares, baggage, and gratuities.
These are just a few examples of deductions your small business might be able to claim — and you won’t want to miss a beat. These savings can mean a lot for your small business expenses, so be sure to do your due diligence in your research, or consult a tax preparation specialist for help claiming deductibles!
Fully deductible expenses vs. partially deductible expenses
Depending on the item you’re claiming a deduction for, and the cost of that expenditure, you may be able to claim a full deduction, or you might only be able to partially deduct the item. For example, gifts for customers or clients are only deductible for up to $25 per person. If your gift is within the $25 limit however, you can deduct the entire expense since it falls within the limit. If the gift is under $4, it may be considered a promotional item rather than a client gift, so you may be able to fully deduct the item — so long as it’s branded with your business’ name and you distribute a large amount of them. Did your business order a few hundred pens or notepads with your company branding on them to pass out at a convention? These items will likely be considered promotional items and you may be able to claim a full deduction when you file.
What do I need to claim tax deductible business expenses?
Each type of claim may require different documentation in order to be considered deductible by the IRS. For example, if you want to deduct transportation costs, you’ll need to follow the IRS guidelines for mileage rates we mention earlier. A good rule of thumb? Keep detailed information on all business expenses you intend to write-off.
Personal vs. Business Expenses
What doesn’t count as a small business deduction?
Just because you run your own business doesn’t mean you get to fuse your personal and business expenses on your tax return. While it can be challenging to keep your expenses separate, dealing with IRS claims against you for business tax fraud isn’t any less painful.
Don’t deduct these personal expenses:
- Business attire that’s not a required uniform
- Parking tickets
- Travel expenses for your companions
- Commuting expenses to and from work
What’s The Best Way To Track Business Write-Offs?
Tax preparation and accounting for your small business is no minor feat! In order to file your small business taxes accurately and strategize for the most savings on your tax refund, you have to be diligent about recording your business write-offs all year long. Here are some tips to help you better manage your business expenses so you have everything you need by the time tax season rolls around.
- Collect Receipts: In order to claim certain business tax write-offs, you’ll need to have the proper documentation when filing your tax return. What does this mean for you? Always get a receipt — and always keep your receipts. This documentation could become very important if the IRS decides to conduct an audit on your business. If you do receive an audit notice from the IRS, consider looking into tax resolution services to hire a representative to help you navigate your way through the audit — and hopefully minimize your debt as much as possible.
- Organize Documentation: To help you stay sane among the chaos of receipts and other financial records for the entire year, it’s helpful to set up a process to keep you organized. Labeling your receipts can help provide a little more context for expenses that you might otherwise forget about. Went out for a business lunch? Include the names of the people in attendance, as well as the purpose of the meeting. Or maybe you purchased some office supplies — make sure the date, amount, and items are clearly labeled and provide any other details you might need. Additionally, organize your tax paperwork into separate years so that you can easily access documents from years back if you need. Keep the paperwork from the current year at hand so you can add as the year goes by, while filing away previous years so they don’t get mixed up with other documents.
- Separate Personal and Business Accounts: When you’re running a small business, it can be hard to keep your personal and business life separate. But if you want to keep your finances and taxes in order, it’s best to keep your bank accounts and credit cards separate. Mixing the two categories together can be a tax nightmare and if number-crunching isn’t your strong suit, you should do your best to avoid this scenario!
- Track Your Travel: Use your vehicle for business travel? Or maybe you have to travel longer distances by plane to do your work? Whatever method you use to get from Point A to Point B, make sure you keep a log of your mileage and expenses on the road as they might qualify as business write-offs come tax season. What does this look like for traveling professionals? Get receipts, track maps, and don’t forget to count gratuity!
- Keep Your Records: The IRS says you should keep your tax records for 3-7 years depending on how you file. If you file a claim for a loss for example, they recommend keeping your records for 7 years.
- Ask For Help: Filing your small business taxes inaccurately, or filing false deductions could end up costing your business a hefty penalty. Many small business owners opt to hire a tax preparation service to ensure that they file correctly — and with a tax saving strategy in mind.
Tax Deductions For Self-Employed Taxpayers
Since self-employed taxpayers don’t have federal or state taxes withheld from their paychecks, they have to account for their taxes at the end of the year. These tax dues can seem to really add up after months and months of not having taxes taken out, but not to fear — there are some tax deductible business expenses that self-employed taxpayers qualify for too. Just like small business owners, self-employed individuals have expenses that they incur in order to operate their business — such as home office use, supplies, travel, and insurance. Self-employed business write-offs can be claimed on IRS Form 1040, Schedule C.
Save on Small Business Taxes
Saving on taxes for your small business doesn’t stop at claiming tax deductions. There are plenty of other ways you can strategize to save your small business some cash when those mandated contributions are due.
Here are some other ways you can keep cash in your pocket this tax season:
- Plan for tax season
- Change your business structure to a more tax-friendly model — like an LLC
- Set up retirement plans for your employees
- Track carryovers
- Make smart tax elections
Want to learn more about how you can refine your tax strategy and small business bookkeeping practices? Talk to one of our financial experts today!