When you first start a business, you don’t know what you don’t know. This can be especially true when tax time rolls around.
Many business owners aren’t aware of the abundant number of small business tax deductions out there that can take the sting out of tax season.
What exactly are tax deductions and how do they work?
The IRS defines a business expense as a cost of carrying on a trade or business. And, generally speaking, these expenses are usually deductible if the business operates to make a profit. To be a deductible expense, the expense must be “ordinary and necessary” per the IRS.
When you deduct an expense on your tax return, you’re lowering your taxable income and therefore reducing your tax liability. By doing so, you’re reducing the amount you owe to the IRS each year which means you have more money to invest back into your business.
Before you go to file your taxes, you should have a general understanding of which business expenses are deductible and which are not.
Like most tax laws, the rules around deductions change all the time. So, keeping on top of it all is, at minimum, an annual task. The most recent business tax deduction act, the Tax Cuts and Jobs Act, took effect in 2018 and started impacting tax returns filed in 2019. Use this as your guide as you prepare your 2019 return and always consult the IRS guidelines on small business tax deductions if you’re looking for the latest information. Even when armed with tax deduction know-how, small businesses still miss out on deductions … and it costs them.
Below is a list of 10 deductions that small businesses tend to overlook.
Make sure you have these deductions covered as you plan for next year’s tax season and you’ll be well on your way to getting the deductions your business deserves.
1. Startup Costs
Many entrepreneurs don’t realize they can claim business expenses on a tax return for expenses that hit prior to the business’ launch. There are conditions, of course, but most small businesses can deduct up to $5,000 on your first year’s return. This article, “Tax Deductions for Your Startup,” can help you get started.
2. Taxes, Interest, Fees & Charitable Contributions
If your business pays tax to any state or local jurisdiction, you may be able to deduct those taxes as a business expense on your federal return. If you pay for business expenses with credit cards, you can deduct any interest and late fees you incur. You can also deduct banking fees such as card processing fees, fees when making payments, and any others you incur on your business banking accounts. Just like with startup costs, any money you borrow to start the business can be recorded as a business liability and the interest can be expensed accordingly. And, charitable contributions may be deductible as well.
3. Wages and Payroll Taxes
Being an employee in your own business has a lot of benefits at tax time for your personal tax return. By paying yourself a wage or salary rather than distribution or dividend, you’ll avoid paying a self-employment tax on your personal return. And, that allows you to pass the payroll tax deduction to the business. You should also be claiming all other employee wages and payroll taxes as deductions for the business as well.
4. Retirement Plan Contributions
Retirement planning and tax planning go hand-in-hand. The tax benefits you’ll receive depend on the retirement plan you have – IRA, 401(k), or one of many others. Retirement plan contributions are an opportunity to receive tax benefits now and again in the future. Businesses can establish inexpensive 401(k) plans with higher contributions for owners. Other retirement account options are available for small businesses as well. Overall, contributing to a retirement plan will not only give you a deduction, but it’ll increase your retirement savings as well.
5. Bad Debt
Most small business owners will have to deal with bad debt at some point. Bad debt accrues when your business is owed for amounts that have not been paid. This could include loans to clients or suppliers, goods sold but not paid, or the sale of a mortgaged property just to name a few. The IRS allows businesses to claim bad debt as a deduction if the amount owed is included in your gross income or lent out as cash. And, you’ll need to prove that the debt is worthless. Read more on how to deduct bad debt here to see if your debt qualifies.
6. Home Office
If you run your business out of your home, there’s a long list of home-related expenses that you can consider deducting. These can include, but are certainly not limited to:
- Homeowner’s Insurance
- Property Taxes
- Home Repairs & Maintenance
- The List Goes On…
To deduct home office expenses, you’ll actually need to have a physical office in your home. Working on your laptop from the kitchen table does not count as an office in the eyes of the IRS. Your home office should be a dedicated space for running your business and it needs to be your principal place of operation.
Take a look at the IRS guidelines for what constitutes the Business Use of Your Home for a full breakdown of the rules. If your business meets these criteria, this is one deduction you don’t want to overlook.
7. Health Insurance
Depending on the type of business entity you own, you may be eligible to take advantage of a self-employed health insurance deduction on your personal return. This is usually a pretty significant deduction as it includes the insurance you paid not just to your plan but to your entire family’s insurance costs as well. Of all of the frequently missed deductions on our list, this one tends to stand out as the most often overlooked.
8. Education and Training
Investing in employee education is an important part of many business growth plans and the good news is that these expenses are fully deductible. You can also deduct entry fees or other similar costs like attending workshops, conferences, tradeshows, and other expenses that allow employees to expand on their knowledge of a subject directly related to the business.
Small businesses need to market their products or services. Luckily, marketing, advertising, and other promotional costs that bring in new customers and retain current ones are deductible expenses. Some of the expenses that qualify include:
- Public Relations
- Website Development
- Email Marketing
- Print Materials, including business cards, brochures, etc.
- Hiring a Marketing Consultant
- The List Goes On…
10. Travel and Entertainment
Some business travel and entertaining expenses are deductible and others are not. Recently in 2018, the tax law changed and businesses can no longer claim some of the entertainment expenses they once had. However, there are still several client and employee travel and entertainment expenses that are deductible, so be sure to do your research. Take a look at this article, “What Every Entrepreneur Should Know About Travel & Entertaining Deductions,” to get started.
Taking advantage of business tax deductions needs to be a priority not just at tax time, but throughout the entire year.
The money a business can save by maximizing potential tax deductions to reduce their tax liability can end up saving significant dollars that can be invested back into the business.
One of the best ways to navigate small business tax deductions is with the help of a SCORE mentor. Your mentor can help you identify which deductions you may qualify for and help create a plan so you’re capturing the information you need throughout the year. Contact a SCORE mentor today!
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.