17 Deductions for Your Small Business
Small business owners have tons of tax deductions that they can take advantage of to increase their tax returns and fatten their wallets this year. Doublecheck through your records and receipts and consider working with a tax adviser to ensure you’re accounting for every penny you’re owed. Learn more about deductions, what you can claim as an entrepreneur, and how you can optimize your business operations to receive the greatest possible return.
What Are Deductions, and How Do You Claim Them?
All individuals and businesses must pay taxes. However, the rate that the government charges varies based on level of income, business type and other factors. Moreover, the government allows individuals and businesses to claim deductions — valid business expenses — as money that isn’t taxed. Dozens of laws regulate what can be deducted and the total amount that you can claim, and these laws are prone to change.
To claim deductions, you must itemize all the expenses that you want to deduct for your enterprise. It’s common to provide the name of the vendor associated with the expense, the date of the purchase, how much you spent and how you paid for the purchase. Receipts and other evidence, such as parking garage tickets and mileage logs, can help you claim these items.
Small Business Deductions
There are dozens of deductions that every small business owner should check for. Some of these are more common than others, but being aware of all your options can help you save as much as possible on your next filing.
Office Equipment and Supplies
Any office equipment that’s vital to your office’s functioning can be claimed on your tax return. Note, however, that some equipment may be considered a capital asset and fall under different rules for deductions. For expensive equipment, such as new computers or desks, you may choose to file against the depreciation of the equipment, claiming a percent of its value on future tax forms per the IRS’s depreciation schedule, or claim the entire expense once in the current filing year.
You can also deduct office supplies, ranging from expensive ink cartridges to stamps, push pins and paper clips. Small purchases add up, so take care to deduct these.
If you purchase uniforms or protective clothing for your business, the cost can be deducted. However, the clothing must be vital to your operations, inappropriate for streetwear and not worn outside of work. You can claim the cost of cleaning and repairing the clothing too. The IRS is strict about what’s considered inappropriate for streetwear and claiming this deductible can be challenging.
Any furniture that you purchase is tax deductible. This is one type of property that you may claim as either a depreciating asset, enabling you to claim credit over time against the original value of the object, or once in a total expense claim during the same year when you purchased the furniture. Buildings and commercial vehicles are two other examples of property items that you can claim in depreciation or as a total expense.
If you’re issued a fine for something such as not having a proper license or violating zoning laws, you can’t claim the penalty as a business expense on your tax return. However, if you’re found innocent and don’t have to pay the fines, you can deduct whatever you paid to fight the charge if the fine was directly related to your business.
Software and Hardware
Software, such as purchasing Microsoft Word for your business computers, and hardware, such as storage drives and USB drives, are deductible if used exclusively for your company and the items are vital to your operations. You may also claim subscription costs, such as Adobe Photoshop’s licensing fee, required to maintain your software.
If you travel, you can deduct your plane tickets, hotel room, any fees for parking, and all other expenses related to doing business on the road. If you break for a personal drink or to meet up with a friend, you can’t claim the associated costs on your tax return. Also remember to claim any petty cash that you pay in tips — for example, if you leave a tip for your hotel maid, it’s deductible.
You can claim a deductible, capped at $25 per person, for every client and employee you give a gift to this year.
You can deduct pay for employees, including salaried and hourly workers as well as temp hires, freelancers and contractors. If you pay your children to help out around the office, you can deduct that cost as well.
The amount you pay for employee benefits is also deductible. This covers things such as health plans, education assistance and life insurance. If you pay into employee IRAs, 401(k)s, and other types of retirement savings accounts, you can deduct that cost as well.
Water, electricity, trash service and other utilities that you pay to keep your business running are deductible. However, they must be used exclusively for business. If you work from home, for example, you’ll need to calculate what percentage of your monthly utility bills goes to your home office and only claim that amount.
Licenses and Dues
License fees and regulatory fees are deductible, and you can also claim any dues you pay to stay a member of a professional organization if that organization is relevant to your current business. You can also claim the cost of completing licensing tests for qualifications related to your current career.
Advertising and Promotion
Any materials you use to promote or advertise your business are deductible. This includes circulating flyers, renting billboard space, placing an ad on television and running an SEO campaign online. You can claim a deductible for both the cost of creating the content, such paying a designer or agency to create an advertisement, and the cost of actually advertising the material.
This category covers all costs related to creating and maintaining your business website and any promotional or branded items that you may give out at sponsored events or trade shows.
If you sponsor a local event, such as a sports team, to promote your business, that investment is tax deductible. This is considered “goodwill advertising” and covers any type of goodwill contributions that you make in order to improve your business.
Some charitable donations qualify for deductions, though whether you can file a deduction and what you can claim are tightly regulated. First, the business must be a C corporation — one where a company and its owners are taxed separately. Second, the contributions must be made to a qualified charity — one that the IRS has granted tax exempt status to. Finally, calculating the deduction’s value and preparing the necessary documentation is a job best left to a tax specialist.
Note that owners of other types of businesses may claim charitable donations as personal deductions rather than business expenses.
Mileage — The Standard Rate or Actual Costs
If you use vehicles commercially or for travel throughout the year, you’re entitled to some valuable deductions. However, you’ll have to do your homework and find out which option is more viable for you: the IRS’s standard mileage rate or the actual costs method.
Using the IRS’s standard mileage rate, you can deduct 53.5 cents per mile driven for business, 17 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of a charitable organization. You might secure a larger deductible, though, if you go with the actual cost method.
This option lets you add up common expenses for your vehicles, such as fuel, insurance payments, repairs, maintenance and registration. You’ll need documentation, such as mileage logs and receipts, to support your claims, and you’re only allowed to file for expenses related to business operations. If you have a vehicle that you use for work and personal travel, you’ll need to divide these costs and only claim the expenses that apply to your business.
Bad debts — those that can’t be recovered — may also only be claimed in certain circumstances. Namely, you must have experienced an economic loss to claim bad debts. Investments don’t count as business debts, and you can’t claim the time or labor lost to a bad debt. If you loaned money for a business purpose, sold inventory on credit or lost money by guaranteeing business loans, you may claim the cost if:
- You were legally obligated to pay the debt in the course of doing business.
- There’s no chance that you can pay back the debt.
- You experienced an economic loss.
Your Home Office
If you work from home or manage your business from home over the weekend, you can claim your workspace if you use it exclusively for work. This extends to your equipment, software, and utilities in that space as well. You can deduct anything you use at home for work. Even the square footage can be deducted — you’ll just have to calculate how much of your rent or mortgage payment goes to the square footage you use exclusively for work.
You can still deduct some items if there’s an overlap between personal and professional use. For example, if you keep a phone line at home and accept personal and professional calls, you can deduct the part of your bill for those professional calls if you can clearly document them. In this case, it would be helpful if you had two numbers — one for work and one for personal use — that were routed to the same phone but showed up on your bill as two separate numbers.
Special Deductions for New Small Business Owners
You have access to special deductions as a new small business owner. You can deduct any costs related to getting your business up and running — anything associated with creating, opening and organizing your new enterprise. There are just a couple of rules:
- You can only deduct the first $5,000 you spend on creating your new business.
- Anything over that amount is amortized — gradually deducted — over 15 years.
- The amortization rule applies to amounts between $5,000 and $50,000. If you paid more than that, consult with a tax professional about what you can deduct for your small business startup costs.
Resolve to Spend More on Tax-Deductible Expenses This Year
Claiming all possible deductions is a worthwhile investment, but you should also be mindful of ways you can optimize what you can deduct by being mindful about how you schedule meetings, use your airline miles and manage your annual spending to keep taxes in your favor. Here are a few bonus tips to help you line up more deductibles on your next annual tax filing:
- Hold client meetings over lunch: If you have lunch with a client and talk business, you can deduct the cost of the meal.
- Don’t use airline miles for business travel: If you frequently fly for business, you’ll rack up lots of air miles. Save those miles for personal travel so you can deduct what you pay for airline tickets when you fly on business.
- Watch out for large purchases toward the end of the tax year: If you purchase a new vehicle, property or other expensive item toward the end of the tax year, it may bump you up into a higher tax bracket, thus exposing you to a higher rate. Be mindful of making too many large purchases at once or right at the end of a tax year.
Navigating the tax code is borderline exhausting, and with so much information and so many deductions that may or may not apply in your case, it can be hard to know for certain if you’re leaving any money on the table. Start the filing process early, so you have time to investigate all possible areas for deductions, and reach out to a tax adviser for help. This specialist can look over your claims and reports and guarantee that everything is in order before sending off your forms.
If you find that you owe more in taxes after filing, look into working with an online vendor. This is an excellent source for securing loans and other resources at competitive interest rates to get you off the hook with the IRS and back to focusing on what makes your business tick.