For individual entrepreneurs, claiming genuine deductions is a key tax technique. Your firm may pay less in taxes if you legitimately deduct certain expenses of running it. That’s why the following list of the most frequent small business tax deductions is so vital.
Use this list of small business tax deductions to prepare your taxes. Also, keep this list handy for future reference. A savvy small company owner, for example, may create estimates about possible tax write-offs to figure out how much to pay in estimated quarterly taxes. Projections can also be used to assist you decide whether or not it makes sense to put certain expenses into a following year or spend them in the current year so that you can offset anticipated high earnings.
The IRS data used to create our top 25 list came from Schedule C write-offs reported by sole proprietorships. Other sorts of companies, such as corporations and partnerships, also take similar deductions, although certain entities have slightly different criteria. The following is a list that applies to most small businesses, regardless of structure.
What Are the Most Important Small Business Tax Deductions?
A business cost is deductible if it is common (found in the trade or industry) and required (needed to run the company, such as supplies). Expenses must be for business purposes rather than personal ones. The following expenses are in line. The top small company tax deductions are listed below:
Vehicle Expenses
A vehicle, such as a car, light truck, or van, is used by most firms. If you can show that your company’s use of a vehicle was exclusively for business purposes, deduct the cost of operating the vehicle from your taxable income.
If you use the IRS’s yearly standard mileage rate instead of deducting your actual outlays, you won’t have to keep track of particular expenses (e.g., gasoline, oil changes). Whether you deduct actual expenditures or use the regular mileage rate per mile driven, you must still document how many miles were traveled and for what purpose. See the IRS’s 2020 standard mileage rate.
Salaries and Wages
Salaries, wages, bonuses, commissions, and taxable fringe benefits paid to workers are deductible business expenses for the firm.
Payments to sole proprietors, partnerships, and LLC members are not wages (i.e., they are not deductible business expenses) since these owners aren’t employees. However, in a C corporation or S corporation, the owner might be treated as an employee and paid a wage if he or she performs more than minor services.
Work under contract
Small company owners sometimes hire freelancers or independent contractors to fulfill their labor requirements. Contractor costs are deductible under the rules of Section 179. Make sure to give Form 1099-MISC to any contractor that you pay $600 or more in one year. If payment is made via credit card or PayPal, it’s up to the processor to issue a Form 1099-K for personal reasons; however, you may want to send your 1099-MISC for your own protection.
The 1099-K, however, is only available to independent contractors who gave more than $20 of services this year. A separate Form 1099-MISC is used by employers for nonemployee compensation payments made in 2020 and later.
Supplies
The cost of goods utilized in a small business (such as cleaning chemicals for a cleaning service), as well as postage, are fully deductible business expenses. Furthermore, if you choose to deduct the expense of tangible items rather than depreciating them under a de minimis safe harbor, the items are considered non-incidental materials and supplies. They are treated as deductible business costs whether they are purchased or given to clients, whichever is later.
Depreciation
In certain situations, you may be able to claim the entire cost of a property you buy for business usage in the tax year in which you buy it. The Section 179 deduction, which allows you to deduct the full amount of equipment purchases up to a specified limit ($1,020,000 in 2019; $1,040,000 in 2020), is one example. Other limitations apply to Section 179 deductions.
There’s also a bonus depreciation allowance, which is another form of write-off available in the year Costs are incurred. The bonus depreciation limit for business property acquired and put into service in 2019 (as well as 2020) is 100%.
A write-off for business property may be claimed in a number of ways. Depreciation is one option. Each year, you can deduct a specified amount from your taxes, which will spread out the cost for tax write-off purposes over time. The IRS has approved a method to distribute a certain amount of the cost each year over 10 years, such as depreciation.
Don’t forget to include depreciation allowances that have not been claimed in prior years. Examine old tax returns for depreciation possibilities.
Business Property Rentals
Fully deduct the expenses of renting space for your company. Rent might be an office, boutique, storefront, factory, or another form of facility.
Utilities
You can deduct the full cost of your facility’s electricity. Your mobile phone expenses are another example of utility expenditures. You cannot claim a deduction for the initial landline to your home if you also take a home office deduction and have a landline. Include a second line as a deductible utility expense.
Miscellaneous Taxes
There are certain taxes that may be deducted from federal income tax. Real estate taxes, personal property taxes, and other similar fees are generally deductible. By IRS rules, licenses and regulatory costs are considered to be taxes for this purpose.
Employer taxes, including the employer share of FICA, FUTA, and state unemployment taxes, are also deductible expenses. Self-employed business owners, on the other hand, cannot deduct half of their self employment tax as a business expense. Owners should record it as an adjustment to gross income on their personal 1040 return and use Schedule SE instead.
Owners of pass-through businesses cannot deduct their state and local income taxes as a business expense. These are personal tax deductions for income taxes. Only on Form 1040, Schedule A or 1040-SR, may state and local income taxes be deducted (with a $10,000 limit for all state and local taxes for the next four years).
Insurance
All of your business owner’s insurance premiums, malpractice coverage, flood insurance on office premises, cyber liability coverage, and business continuity insurance are 100% deductible company expenses.
There are two things to know about health insurance coverage. A tax credit of up to 50% of premium payments may be claimed by a small business for its employees (a credit is a better tax break than a deduction). Additionally, the cost of health coverage for self-employed persons and more-than-2% S corporation shareholders is not deductible. Rather, insurance premiums are subtracted from the owner’s personal return.
Repairs
The cost of regular maintenance and repairs on business property is completely deductible. Costs that increase the value of the property, on the other hand, are typically capitalized and depreciated over time. In any case, there are several safe harbor provisions that allow you to deduct your losses right away. Your tax advisor can explain these rules to you in further detail.
Commissions and Fees
Commissions and fees paid are completely tax-deductible. You may be required to disclose them on Form 1099-MISC for 2019 (Form 1099-NEC for payments in 2020) (see item #3). Commissions paid in connection with the purchase of real estate, on the other hand, are not deductible. Realty commissions are added to the property’s basis and are frequently recovered through depreciation.
Travel
Transportation (e.g., airfare) and lodging expenses are usually completely deductible if you or your personnel conduct business travel. To claim any transportation deduction, you must prove a business purpose. Include charges for checked luggage and oversized baggage, as well as tips and other miscellaneous costs. Commuting costs are generally not deductible.
Advertising
You may claim all ordinary marketing expenses on your tax return, regardless of the form of advertising you utilize. That can range from printing business cards to Facebook ad campaigns to and everything in between. Marketing costs are frequently classified as “advertising expenditure.”
Home Office
A home office may be deducted as a business expense in certain cases. Business owners must use their house regularly and exclusively as their primary place of business, a meeting or dealing site with clients or customers, or a separate structure utilized in the company to claim this deduction.
Painting a home office is one example of a direct cost that may be deducted. Indirect costs, such as a percentage of rent or mortgage interest and real estate taxes, which reflect the proportion of business usage of the residence, can also be deducted.
You could be concerned that claiming a home office deduction might raise red flags with auditors. If you meet the requirements, don’t be scared to claim this benefit. Today, more than half of all businesses in the United States operate from their homes. As a result, IRS agents won’t view a home office deduction with the same suspicion as in the past. Read on about how to claim a home office deduction.
Legal and Accounting Fees
Accounting fees are fully deductible. You may also deduct accounting fees you paid for the preparation of your tax return throughout the year, rather than during the tax year they relate to. For example, in March 2018, you run an S corporation that pays expenses for its 2017 tax return. The expenditures are deductible on the S-corporation’s 2018 income tax return.
The costs of a lawyer’s review of a business contract or lease are fully deductible. You may, however, only deduct the expenses associated with the evaluation of a company contract or lease. However, you can’t deduct closing-related fees and then contribute them to the basis of the property.
Meals
You may only deduct 50% of these business costs (although there are some totally deductible meals). This implies that you pay for half of a business lunch and the government picks up the rest. The deduction is only available if you can show that the expenditures were made solely for business purposes.
Rent on Machinery and Equipment
Small company expenses for assets used in the operation are fully deductible.
Interest paid on business debt
The interest paid on company loans is deductible by most businesses. Interest on a loan used in a construction firm, for example, is deductible. Companies with average annual gross receipts of more than $26 million in 2019 (or 2020) must set aside a lower proportion of their interest expenses.
Loans to purchase a company are viewed differently than debts owed by the business to its owners. Make sure you separate business interest from owner investment or passive activity interest, which is not deductible. An individual who takes out a personal loan to invest in shares of an S corporation must allocate the cash to company assets. If you utilize the assets in your firm, your interest will be deductible as business interest.
If some assets contain investments, you might consider a portion of the interest as investment interest. This is a personal deduction that may be taken to the extent of net investment income. If some assets are held in a passive activity such as real estate rentals, the allocable interest is considered passive activity income subject to the passivity loss limitation.
Employee Benefit and Retirement Plans
Employee benefit programs, such as education and dependent care assistance, as well as contributions to employee qualified retirement plan accounts, can all be deducted. Personal deductions of $5 per month ($55 each year) are claimed on Form 1040 or 1040-SR by self-employed persons.
Mortgage Interest
If your business owns real estate, you can deduct mortgage interest. The limit on personal residence interest is limited. However, the amount of money that may be borrowed for a business is unrestricted.
Business Expenses
Do you decorate your workplace with flowers, fish tanks, magazine subscriptions, and other objects? The cost of office supplies is deductible from taxes.
Carryovers
Your tax activities in the past may sometimes result in deductions for you now. You frequently have the ability to utilize previous losses and any amounts you were unable to claim fully last year to lower your tax bill this year. For example, if you had a poor year previously, you could still have a net operating loss carryover that can be utilized to decrease current taxable income.
Check for prior-year returns. Look for any carryover amounts. Net operating losses, capital losses, charity contributions, investment interest, and home office deductions that were previously subject to a taxable income limitation are all examples of carryovers.
Bad Debts
Unpaid receivables or other debts are reported by some firms on the accrual method of accounting. Businesses that use the accrual approach can deduct any amount owed to you that is partially or totally worthless.
If you advanced money to an employee, customer, or supplier and the recipient hasn’t been reimbursed, you may be eligible for a bad debt deduction. You can deduct the amount as an ordinary business expense if it becomes partially or totally worthless because it is a company bad debt.
Is it possible to claim the standard deduction while still deducting business expenses?
Yes, small company owners may take the standard deduction on their personal 1040 tax return and deduct business expenditures on Schedule C.
The increased standard deduction amounts have caused an increase in the number of taxpayers who are not itemizing deductions. The use of the standard deduction on line 9 of your 1040 tax form is becoming more widespread.
However, the standard deduction is a completely different thing from business costs that are itemized on Schedule C.
Consult an Advisor
The information above provides you with a broad answer to the question “what may I deduct as a business expense.” Tax deductions, on the other hand, can be perplexing, so it’s important not to make any costly mistakes. When preparing your tax return, it is recommended that you seek help from a CPA or another qualified tax preparer on what applies.
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