10 Common Small Business Tax Deductions
Many small business expenses qualify as tax deductions. The ability of your business to claim these tax deductions changes over time. Most recently, some of the 2017 tax law changes apply to business tax deductions. These changes are discussed in the list below.
Certain rules apply to many of these deductions. Learn what you can and can't do before you begin subtracting from your tax obligation.
- Almost all small business deductions have limits or restrictions. For example, deductions for meals are often limited to 50 percent of each expense.
- Create a paper or electronic trail for each deduction you claim. Include the date of the expense, the exact amount and the purpose it served your business in case you have to explain the deduction to the Internal Revenue Service. This can be as easy as saving receipts, bank statements and credit card statements and making notations on them to remind yourself why the expenses were incurred.
- Keep business and personal expenses separate. Don't pay personal bills from your business account, and definitely, don't include personal expenses as business expenses on your business tax return.
Now that you have the basics down, here are some examples of what you can deduct.
Expenses for Accounting, Bookkeeping, Taxes
You may decide to hire and pay someone to take care of your bookkeeping and accounting, or to prepare tax returns and offer tax advice. These professional services are deductible business expenses.
Don't forget to record your payments to these professionals and report them annually on Form 1099-MISC.
Advertising and Marketing Expenses
Whether you call it advertising, marketing or promotion, you can deduct expenses that help you bring in new customers and keep existing clientele.
One of the biggest mistakes business owners make, though, is trying to deduct the costs of a car for advertising. The cost for the ad itself is deductible, but not the cost of driving the car around.
Reference Materials, Computer Hardware and Software
You can deduct the costs of purchasing necessary reference materials, as well as computer hardware and software. It's no longer necessary to depreciate these items as long the cost isn't more than $2500.
Only the business use of your computer or iPad is deductible. Computers, iPads, and related hardware and software are not considered listed property, as of the 2018 tax year, but you still should be using these devices for business purposes more than 50 percent of the time.
Another computer-related deduction is backup software or a hard drive for backup to protect your computer files.
Use of Your Car/Truck for Business Purposes
You can deduct expenses related to business use of your vehicle using the IRS standard mileage rate or by deducting actual expenses.
The standard mileage rate changes each year, so check the rate for the current tax year. Run the numbers both ways (standard vs actual mileage) to see which is best for your business. Keep in mind that there are some restrictions; for example, you can't use the standard mileage rate if you depreciated the cost of your vehicle in previous years.
You can't deduct expenses for commuting to your business location.
If you have purchased insurance for your business, for your business equipment, or health insurance for yourself and employees, you can deduct these expenses for business tax purposes.
Interest on Business Debts
If you have purchased a building or you have a business loan, you probably have interest expenses. The 2017 tax law has limited the amount of interest expense for larger businesses.
Starting in 2018, the interest rate deduction for larger businesses is limited at 30% of the company's EBITDA (earnings before interest, taxes, depreciation, and amortization). But, smaller companies with annual average gross receipts of $25 million or less for the past three years are exempt from this restriction, meaning they can take all interest expense deductions with no limit.
Legal and Professional Fees
In addition to the fees you paid your CPA or accountant, you can also deduct expenses for attorneys, appraisers and other business advisors.
Business Travel and Meal Expenses
Meals are still deductible, subject to the 50-percent rule, and you must prove these for business purposes. Meals for employees at your work site (like a cafeteria) are no longer deductible expenses for your business, but business meals and meals while traveling are still deductible.
Office Supplies and Materials
Every business needs office supplies and materials such as staplers, paperclips, pens, pencils, etc. These expenses are also deductible for business tax purposes.
Many local and state taxes are deductible on your federal return. For example, if you have a business vehicle, the license registration is deductible.
Yes, the expense of having a tax professional prepare your business taxes is deductible.