When you own a business, and especially if it's a startup, you may overlook some potential tax deductions that can save you money at tax time. Many business people and their accountants know about commonly-used tax deductions, but several other lesser-known deductions exist that can trim your company's tax bill even more.
The following list covers seven expenses you may not have even thought were deductible.
Your business may not be eligible for all of the following deductions or a deduction may have restrictions or qualifications that must be met. If you think you may be eligible for one or more of these deductions, check with your tax professional for more information.
Petty cash expenses
Petty cash is money used for the small items you pay cash for, like bagels for the office meeting or parking and tolls. Capturing these small expenses can add up to big tax savings.
If you have a retail business, you may keep cash in a drawer to make change. If you have a non-retail business, you may have cash on hand to pay for small purchases. If you keep cash in the office, keep track of what you spend it on.
In either case, the only way you can use these small expenditures to reduce your taxable income is to keep good records of them. Create a logbook or use petty cash vouchers and make sure everyone notes the time, date, amount, and what you bought. At the end of each month, input these small expense transactions into your accounting system. You'll be surprised at how quickly they add up.
It's also a good idea to have a petty cash policy, including limits payments, who keeps the fund, and how and when it's replenished.
You can deduct expenses for the use of your car for business. This includes business driving:
- From work location to another
- Visiting clients or customers
- Going to business meetings
- Getting from home to temporary workplaces when you have several regular places of work.
There are two ways to deduct business mileage expenses on your tax return: the standard deduction or actual expenses. You'll need to record all the expenses so you can decide which method is best.
But you must keep a contemporaneous (at-the-time) log and include information about the business purpose. The log is necessary for two reasons:
- To record mileage for each trip so you can show how much of your travel is for business (as opposed to personal) purposes
- To keep records on the exact amounts of expenses.
You must be able to prove the cost of car expenses, the date you started using the car for business, mileage for each business use, and total miles for the year. You must also show business destination and purpose for each business trip.
Expenses for Preparing Documents
You may have incurred document preparation costs for a business plan or a loan application. If you want to have the documents printed and bound these costs are also deductible.
If your business needs a loan and you use the services of a consultant, attorney, or accountant to prepare a business plan or financial data, you can deduct these expenses as professional fees, even if you don't get the loan.
Deductible professional fees don't include:
Legal fees paid to buy business assets (these may be able to be depreciated along with the cost of the asset)
Fees for personal work, like drafting a will. If an invoice contains both business and personal matters, you must separate out the personal part and deduct only the business part. A common example of this situation is a fee from a CPA for preparation of your personal tax return that includes Schedule C for your business. The Schedule C preparation cost is deductible, but the personal return preparation is not.
Carrying Charges and other Fees
Carrying charges, from a tax point of view, are taxes you pay to develop real estate or to carry, transport, or install personal property for your business. Carrying charges may also be fees and interest for a loan.
When you buy real estate or other assets for your business, keep track of all the costs for the purchase, including incidental costs, insurance, storage, and setup. Adding these costs to the price of the asset can increase your basis (cost) for the asset, decreasing your gain when it's sold. Adding to costs decreases taxes.
Some carrying charges can be deducted, but most must be capitalized (depreciated over the life of the asset). Don't forget bank fees, (including sales taxes on these transactions) and loan fees There are legitimate business expenses that can reduce the taxable income on your business tax return.
Research and Experimental Costs
You can get a tax write-off for research and experimental costs in two ways:
- Through a tax deduction or by amortizing them (like depreciation), or
- Through a new research tax credit.
The costs of research and experimental are generally capital expenses because research is an activity that increases the general value of the business. Capital expenses must be amortized (spread out) over a defined time period (similar to depreciation).
Research and experimental costs are reasonable costs for activities intended to provide information that would eliminate uncertainty about the development or improvement of a product. (Costs to get a patent aren't considered research costs).
You may be able to elect to deduct these costs in a single year. Get help with this complicated tax subject from your tax professional or see IRS Publication 535, Chapter 7 for more information.
Getting a Tax Credit for Research Activities
If your small business does research, you may be eligible for a tax credit of up to 20% of qualified expenses for these activities. In addition, if your small business qualifies, you may be able to use a portion of this research credit as a payroll tax credit against your company portion of Social Security Tax.
Research activities that count toward this tax credit include experiments using science to improve a product or process.
Read more about the details of this research tax credit, including how you can apply for it, and how you can use it to reduce your tax bill, or see the instructions for IRS Form 6765 Credit for Increasing Research Activities.
Business Startup and Organization Costs
Business start-up and organizational costs are generally capital expenditures. The IRS also separates start-up costs from organizational costs:
Startup costs are used when creating an active trade or business or for investigating the creation or purchase of a trade or business.
Organizational costs are those involved in creating a corporation or partnership (or limited liability company. These costs include legal and professional fees for forming the business legal entity and fees for registering the business.
Even if your attempt to buy or start a business isn't successful, you may be able to recover some of the costs if they were related to a specific business opportunity. See IRS Publication 535, Chapter 8 for more information.
You may be eligible to deduct some of your business start-up costs up to $5,000 and organizational costs up to $5,000 in the first year of your business. The $5,000 deduction is reduced by the amount your total start-up or organization costs exceed $50,000.
Start-up and organization costs over $5,000 each must be amortized (spread out) over a defined number of years.
Tax-cutting Tip: It's definitely worth keeping good records on all costs related to startup, including travel expenses, phone and internet costs, and costs for working with advisors.
Miscellaneous Business Expenses
Miscellaneous expenses are often overlooked, but they are very important, because they can add up to a substantial amount. If you look at Schedule C for small business tax returns, you'll see itemized expenses listed in Part II. At the end of the list (Line 27a) you'll see. "Other expenses." These are the expenses listed on Part V of as Other Expenses. These are ordinary and necessary business expenses not listed elsewhere on Schedule C.
Some common miscellaneous expenses you can deduct (some have limits and exclusions, so check the links to find more information).
- Costs for your business website and other internet-related expenses. (Some may need to be included in start-up costs.)
- Bad debt write-offs
- Bank fees and charges
- Club dues and memberships, but only for business and professional clubs.
- Credit card fees, including late fees.
- Education and training for yourself and employees. There are lots of limits and qualifications on this one.
- Incidental expenses paid through petty cash (see details on this above).
- Subscriptions to trade, professional, and technical journals. (You can't deduct subscriptions to general magazines or "waiting room" magazines.)
The trick is to collect all of these business expenses during the year. Don't worry about categorizing them. Just collect them! Add them all up and include them in your business tax return to save money on business taxes.