No business wants to pay more taxes than what’s obligated. However, navigating the world of tax write-offs and deductions can be challenging for those who are not experienced tax accounting professionals.
The good news is that most businesses incur countless expenses throughout the year to support daily operations that may qualify as a write-off. With the right knowledge, it will be easier for your team to recognize the deductions you can claim based on the spending activities you’re already engaged in.
As you continue reading through this article, we’ll review the top tax write-offs for small businesses to help you maximize savings this year, including some tips on how to calculate deductions accurately.
Tax deductions, also called write-offs, are qualifying expenses a business incurs that will reduce its taxable income for the year. In turn, this can lead to a lower tax bill, which is why businesses are often interested in maximizing their deductions.
As we’ll discuss below, there are plenty of business expenses that may qualify as write-offs. In fact, there may be some deductions you can take advantage of that you’ve been overlooking. However, business leaders should be aware that not every expense is considered a deduction. Claiming unqualified expenses can lead to underreporting income and additional problems with tax authorities.
Thus, as you prepare your tax return, it’s best to review the list of credits and deductions for businesses prepared by the IRS and work with a tax accounting professional to get tailored advice for your circumstances that ensures compliance with relevant tax guidelines.
The following checklist of common small business tax deductions can help you discover potential areas for savings on your next tax return.
Any amount you spend to promote or advertise your business is tax-deductible. This is a common write-off for businesses, as most engage in some form of marketing to acquire new customers and generate demand for their products or services.
This may include the costs you incur to conduct advertising activities in-house or externally through a contractor or marketing agency, such as:
According to one recent survey, marketing spend takes up 11.7% of overall budgets, on average. So, investing in advertising and promotional activities provides the dual benefit of helping to spread the word about your business while also working to reduce your tax liability.
Any bank fees the business incurs throughout the year, though likely minimal, can be written off.
Interest that is accrued and paid throughout the year on business debts can also be tax deductible. For instance, if you took out a loan to fund the purchase of a new piece of equipment for your business, then you can write off the interest paid on the borrowed funds.
This does not apply to personal loans. However, debt on property that was used for both personal and business use can be split up according to the portion of use. Let’s say you paid a total of $800 of interest on a car note during the year, and you used the vehicle 50% for business and 50% for personal use, then you can only deduct $400 on Schedule C.
Other conditions must be met to qualify for the deduction, like being legally liable for the debt and both you and the creditor intend for the debt to be repaid.
Meals eaten while conducting business or traveling away from home for work purposes may be tax-deductible. Some of the scenarios where this might apply include:
To qualify, the meal must not be extravagant, and an employee or business owner must be present to write off the cost. In other words, having a trusted client use the company card to take themselves out to dinner generally won’t count. Nor does going to get a coffee with a coworker during the work day.
There’s typically a 50% deduction allowed of the total meal cost, though certain instances may qualify for a 100% deduction.
Businesses may secure various insurance policies to offer financial protection during unforseen circumstances. An added financial bonus is that the premiums paid for these policies can be written off, including:
Self-employed individuals may also be able to deduct the premiums paid for medical, dental, and long-term care insurance for themselves and their family members using Form 7206.
An important rule is that you can only deduct premium payments that correspond to coverage in the current year. This means that if you prepay for a policy, like if you pay upfront for four years of coverage for a discount, you can only write off the portion that covers the current year, not the full amount.
Some business owners use their personal vehicles for business-related purposes. Maybe you need to frequently travel between different job sites in the city, make customer deliveries, or attend a business meeting or work event away from your standard place of business.
In the case where the car is used 100% for work, then all costs associated with the car can be tax-deductible. But, if the car is split between personal and professional use, then you’ll only be able to deduct the costs that are related to the business use of the vehicle. A caveat is that the costs you incur while driving your vehicle to and from work to your place of residence do not qualify as write-offs.
There are two ways to calculate deductible vehicle expenses (certain exceptions may apply):
When a business purchases an asset they intend to use for more than one year, they generally cannot deduct the entire purchase price in the year it was bought. Instead, it must depreciate it, or allocate the cost of the item over several years, deducting a portion of the purchase price each year.
The IRS Publication 946 provides much more information about the depreciation process for businesses. The general idea is that companies can depreciate property that meets the following criteria:
There are a few different methods for depreciation that a company can use depending on internal preferences or the type of asset in question, including straight-line, units of production, and double-declining balance.
Some businesses may pay for employee training, education, or professional development to add more value to the company. The costs the business incurs to offer this education and training can be fully deductible, such as:
To qualify, the IRS requires that the education program maintains or improves the employees’ skills related to their current work or covers training that is required by law. If a construction company pays for its workers to complete OSHA safety training, the expense would be deductible because it’s legally required to comply with workplace safety laws.
There is a clear distinction here, and any fees for education that prepares employees for a new career or helps them meet the minimum requirements for their current position do not qualify.
If you’re still running your business from home, you may be able to deduct certain housing expenses from your business’s taxable income under IRS Publication 587. However, this is not a one-for-one deduction like many of the other examples we’ve discussed thus far.
You may be able to deduct certain housing expenses that are related to your business if you meet these requirements (though certain exclusions may apply):
Once you’ve determined if you qualify, you can calculate the actual deduction amount using one of two methods:
If you plan to use this deduction, you must prepare Form 8829 along with your Schedule C.
Businesses may lease a space to conduct business, whether it be an office space, a retail location, a warehouse, or other facility. Or, they might rent certain equipment to run daily operations.
Either way, the rent payments made to the property’s owner can be deducted from the company’s income for tax purposes. This also applies to a person who runs their business from a home that they rent, in which case, the above guidelines come into play.
There are certain exceptions, like if the business is renting to own the property. In this case, the rent payments would not be tax deductible. And, as with insurance payments, any rent payments that are prepaid must only be deducted in the tax year they correspond to.
The fees paid for professional services like legal consulting, bookkeeping, tax preparation, or accounting services, like from Bob’s Bookkeepers, can be tax-deductible. Like many of the other expenses we’ve discussed, these fees must be considered ordinary and necessary to support business operations.
If these professionals are hired for business and personal purposes, only the portion of the fees related to the business can be deducted on Schedule C. Maybe you hire an accounting firm to prepare the tax return for both yourself and your business. You cannot deduct the entire fee paid to the firm, only the amount that covers the preparation of your business return.
Moving expenses that individual taxpayers incur while relocating to accept a new position are typically not tax-deductible unless they are military personnel.
However, businesses that need to move equipment, inventory, or other supplies between different job sites, storage facilities, or office locations may deduct the costs they incur during the process.
Some of these expenses might include:
This might not be a common category that businesses experience each year, though it may be relevant in certain situations. For instance, if the company is moving locations or opening a new office on the other side of town and needs to move some of its existing furniture and equipment to the new space, this deduction would apply.
The standard office supplies and equipment that a business purchases to support daily operations typically qualify for full deductions. These are items that the business uses in the short-term and cannot be depreciated, such as:
Depending on the nature of the business, a company may need to purchase specialized items necessary for its unique operations. For example, a fashion brand might need certain supplies that are not applicable in other industries, like mannequins or high-end drawing tools for sketching.
There are also certain purchases that fall outside of the scope of deductible office supplies, which typically cannot be written off, like decorative items for the office.
Employee wages and benefits are also qualifying expenses. In fact, this expense category typically makes for a significant tax write-off for small businesses. Importantly, this only counts for employees who are not business owners, and it does not apply to the amount sole proprietors, LLC members, or partners pay themselves.
The IRS Publication 334 lays out what type of employee pay can generally be deducted from the business’s income:
Of note, the pay can either be in the form of cash, property, or services and may consist of the following forms of compensation:
Businesses aren’t just able to deduct the wages paid to W-2 employees. They can also write off any payments made to independent contractors, freelancers, and other outsourced support.
Companies may rely on contract workers to support them on a temporary or ad hoc basis, especially when they are just getting started. They just need to remember to issue a Form 1099-NEC to contractors they pay more than $600 to during the tax year to comply with tax regulations.
Some businesses can also deduct costs for telephone and internet if they are necessary for daily operations. If you’re traveling for business and you need to purchase Wi-Fi while on a plane or at your hotel accommodation for work purposes, it’s also a deductible expense.
It can be tricky if the cellphone you use for business purposes is also your personal device. As with the other types of expenses we’ve discussed, you are only able to deduct the portion that’s used for work.
With a landline, the first line in your home is always considered a nondeductible personal expense. But, if you have a second line that is exclusively for conducting business, the costs associated with maintaining it can be written off.
Travel expenses are an enticing area for potential deductions, though there are certain criteria that must be met in order to write off these costs. The main requirements are that the travel must be considered ordinary and necessary for traveling away from your home to conduct business.
Some examples of travel expenses that might qualify include:
On the other hand, here are some examples that are generally not applicable:
No matter if a company operates out of the owner’s primary residence, a leased office space, or a property it owns, it likely incurs utility expenses in some form.
Of course, the tracking and calculation of the write-off will differ depending on if the space is used solely for business purposes or a mix between work and personal use. The portion of the utilities payments that support business operations can be written off, which may include:
Keep in mind, if you run your business from home and you use the simplified home office deduction as discussed above, you’ll be unable to itemize individual utilities expenses.
The average small business uses around 36 applications to support operations, including cybersecurity solutions, messaging and communication tools, HR and recruiting software, project management platforms, and many more.
The monthly fees for these software subscriptions can really add up over time as the business needs to add new seats and implement new tools to support growth. However, the good news is that the cost to install these solutions and ongoing subscription payments are tax deductible, which can make a big difference in your tax liability at the end of the year.
Businesses may feel compelled to donate to charitable cause for philanthropic purposes. While this is plenty enough reason to donate, there’s an additional benefit of a potential tax deduction, as long as the IRS has qualified the organization you’re donating to.
Interestingly, cash donations aren’t the only form of charitable giving that the IRS recognizes. You may also donate inventory or equipment, allow your intellectual property to be used at fair market value, or sponsor an event.
In general, C Corporations can deduct the full amount of cash donations, up to 25% of their taxable income. For S Corporations, partnerships, or sole proprietorships, the limit is usually 60% of their adjusted gross income.
The employers’ contribution to employe benefits programs can be written off the company’s taxes. The IRS considers a long list of fringe benefits that are a form of employee compensation, including:
Offering these benefits to employees helps to attract the right talent and fairly compensate existing team members, though they can be expensive. However, since they can typically be deducted from the company’s income, there is an additional incentive to offer good employee benefits.
Approaching the tax season with a solid understanding of the possible small business tax write-offs you might qualify for can help you maximize savings and lower your tax liability. But, there are some additional pointers to keep in mind to ensure you’re figuring them accurately and preparing Schedule C in compliance with tax guidelines.
Take a look at the following tips to take advantage of the small business tax deductions you’re entitled to.
The key to maximizing your deductions is to maintain thorough financial records throughout the year. Otherwise, it might be difficult to identify exactly the categories and amounts of expenses you can deduct. This may cause you to overlook potential write-offs and end up paying more taxes than you should have.
At the same time, you should not guess or estimate the value of qualifying expenses, which can lead to inaccurate reporting. Though it takes a bit more time each day and week to keep your transaction records and books up to date, it will be worth it come tax season when all expenses are properly reported and easy to identify. Plus, you’ll need to have the proper documentation and receipts to back up the deductions you claim in case of an audit.
Many businesses are eager to maximize their tax deductions, though it can also be daunting to take full advantage without worrying about raising red flags with the IRS.
Even if you’ve prepared your personal income tax return on your own, doing so for a business comes with plenty of additional considerations. You can navigate through the process on your own with the help of IRS Publication 334, the Tax Guide for Small Businesses.
However, consulting with a tax professional, like the team at Bob’s Bookkeepers, can give you the peace of mind that you’re in compliance with IRS rules, and adhering to all relevant tax regulations. In addition, it will help you save valuable time in your busy schedule rather than researching possible deductions and the rules associated with each category.
The specific forms that a business will need to prepare will vary depending on the types of expenses they have incurred and plan to deduct. These are some of the most common forms that may be needed:
This is not an exhaustive list of the only forms you may need. Make sure to consult with a tax professional to understand the specific forms you’ll need to complete and submit.
This checklist of tax write offs for small businesses can help companies see that their everyday expenses may qualify for a deduction on their next tax return. As long as you’re reporting your income correctly and not over-stating your expenses, you’ll be in good standing with the IRS.
If you’re still unsure exactly what expenses you can claim as a write-off or how to prepare this with your tax return, reach out to an expert team, like Bob’s Bookkeepers. We understand the ins and outs of your industry, and can help you maximize deductions.
Contact us today to get started!
