Are You Maximizing Your Small Business Tax Deductions?
The lifeblood of every business activity is money, and small business owners need to hold on to as much of it as possible to keep their companies afloat.
The IRS gives small business owners some wiggle room in the form of tax deductions. Yet with so many available — from interest deductions, to payroll, to some small purchases — it’s hard to determine how to make the most of them.
To help you do so, let’s take a look at some common (and not so common) deductions that might apply to you.
The IRS allows small business owners to take advantage of tax deductions from the start by making start-up costs deductible. More specifically, expenses that can be deducted may include:
- Start-up Costs: Costs associated with researching, investigating, and setting up your small business may be tax deductible. Possible expenses include travel, meals and entertainment, state filing fees, and franchise fees.
- Rent: Any space rented for your business, such as an office or warehouse, can be deducted in full.
- Co-working Space Fees: Paying rent isn’t always possible, or necessary, at the early stage of business growth. Sometimes working from a co-working space is enough, and you may be able to deduct usage fees just like a home office or rented office space. To see if you qualify, make sure to have a receipt that states the origin of expenses to pass to your accountant or tax attorney.
- Business Debt Interest: Interest on business credit cards or loans is typically tax-deductible. Interest on personal credit cards or loans used to finance your business may also be allowed. Keep in mind that with personal financing you must have proof to show how money was spent. Otherwise, you may face penalties for incorrectly claiming a deduction. If you’re unsure, ask a professional for help defining which debts are eligible for tax deduction.
The IRS allows businesses to fully or partially deduct operations costs from the following activities:
- Vehicles and Mileage: Small businesses that require business vehicles, such as delivery services, can deduct maintenance and purchase expenses in full. Small business owners can also deduct mileage for work-related trips if they use a personal car (2017’s deduction rate is 53.5 cents per mile). Keep in mind mileage deductions apply when driving to and from a specific destination for work, such as a business meeting. Daily commutes from home to your place of work aren’t deductible.
- Payment Processing Fees: Small businesses may use payment processing services like PayPal to send and receive payments. Although these companies charge processing fees that eat into your profits (PayPal’s is up to 2.9% + $0.30 per sale in the U.S., for example), they may be tax-deductible.
- Utilities: Small business owners who use a home office may be able to deduct a percentage of their utility bills. This is done by calculating the percentage of your home office to your total living space, then applying that percentage to your utility bills.
- Phone Use: Similarly, small business owners may be able to deduct a percentage of their personal phone bill if your personal phone is also used for business purposes. Remember, again, that detailed record-keeping is essential if you wish to do this. Keep detailed records of how much phone time was dedicated to your business.
- Depreciation: The IRS allows business owners to deduct the depreciation of equipment purchased for the company with a value of up to $500,000.
The IRS allows small business owners to deduct expenses related to paying workers and incentivizes for providing benefit programs, including:
- Salaries and Wages: Salaries given out to employees are tax-deductible. Remember this does not include salaries paid to business owners such as sole proprietors, partners, and LLC members.
- Contract Labor: The costs associated with paying contracted workers are deductible like hired employees. Just remember to file a Form 1099-MISC for workers who’ve earned more than $600.
- Commissions: Payments made to your sales staff working on commissions are deductible, as are third-party commissions you might pay an affiliate partner for referrals.
- Employee Benefit Programs and Qualified Retirement Plans: The costs associated with providing employee benefits programs, such as continuing education, are fully deductible.
It’s not enjoyable, but most businesses will face non-paying clients or suppliers at some point. Fortunately, businesses can write off the following types of bad debts:
- Loans to clients and suppliers
- Credit sales to customers
- Business loan guarantees
It’s important to note that the ability to deduct bad debts may depend on the type of accounting method you use for your business. Those using a cash accounting method don’t record a sale until payment is received, and therefore don’t have records off of which to base the debt. The IRS doesn’t allow businesses using this method to deduct bad debts. The accrual accounting method counts income once a sale is made, regardless of when you receive payment, so businesses using this method would have records to support a deduction for a bad debt.
Let’s not forget the many other types of deductions available to small business owners that can add up to significant savings when used properly, including:
- Magazine Subscriptions: Yes, even magazines that you leave in your office’s waiting room may be tax-deductible. Remember to only count magazines used solely for your business — magazines brought from home aren’t eligible.
- Meals and Entertainment: Money spent on business-related meals and entertainment may be up to 50% deductible, though the IRS has stipulations on what qualifies. If you aren’t sure, talk to an accountant or tax attorney to ensure you don’t claim incorrect deductions.
- Travel: You or any employee that travels for business can fully deduct lodging and transportation expenses.
- Supplies: Office supplies, cleaning supplies, and other items used for your business are fully deductible.
Getting the Most of Your Tax Deductions
Tax deductions can help small businesses hold onto extra cash to support business growth. It’s wise to be aware of all available small business deductions so you don’t leave hard-earned money on the table; but remember, not all tax deductions apply to every situation. Claiming deductions to which you are not entitled, even by accident, could lead to an audit or other IRS troubles that no small business needs on their hands.
The IRS tax code has many rules and stipulations that may affect your eligibility. Consider turning to a professional to make sure you’re taking the right deductions and amounts. And don’t forget: fees you pay for tax preparation are themselves deductible.