Published: Jan 30, 2022 by Joshua Sophy In Taxes 0 As a small businessowner, you are probably always looking for ways to save money on your taxes. Well, look no further! This article will discuss the Top 25 Small Business Tax Deductions that you can take advantage of. In addition, we will also provide some helpful tips on how to keep track of your expenses and deductions throughout the year. So, whether you are just starting out as a small business owner or you have been in business for a while, be sure to read this article. What are Tax Deductions? Besides being something we can’t get enough of, tax deductions are expenses that self-employed business owners can deduct from their taxable income. This act reduces the amount of tax you have to pay, which saves you money.
What Deductions Can Small Business Owners Claim on Taxes? There are a number of different types of deductions that you can claim from your taxable income, including business expenses, charitable donations and home office deductions. One thing’s for sure, you’ll want to take advantage of every deduction that you’re entitled to, as they can add up quickly!
Top Small Business Tax Deductions Now that you know a little bit about standard deductions for small business and what types of deductions small business owners can claim on their taxes, let’s look at the Top Small Business Tax Deductions. Note that these deductions are valid for the 2021 taxable income you will be filing in 2022.
1. Mortgage Interest Mortgage interest is a standard tax deduction that many small business owners claim. Here’s how it works: if you own a home and have a mortgage, you can deduct the interest you pay on your business loan to purchase, build, or maintain your home from a taxable income standpoint. What’s more? The mortgage interest deduction can also be used to get loans for a second home or a vacation residence, although there are certain limitations that may apply.
2. Business Meals If you are out of town on business and have to eat at a restaurant, or if you take clients out for drinks or dinner, you can deduct 50% of the cost as a business expense from your income. However, to qualify for this deduction, the meal must be business purpose-related, and you must provide documentation proving that it was. Buying pizza for when your team is working late qualifies as a valid tax deduction too.
3. Home Office Deduction If you work from home, you can deduct a portion of your rent or mortgage, as well as the cost of utilities and repairs as home office expenses. The home office expense deduction must be used regularly and exclusively for business purposes to qualify for this deduction.
4. Legal and Professional Fees If you have to hire a lawyer or accountant to help you with your business, you can deduct those fees from your income. Remember that the fees must be related to your company, not personal matters. So, again, they must be ordinary and necessary to be written off as business expenses.
5. Business Insurance Premiums If you have a business insurance policy that’s necessary and ordinary, the premiums that you pay for it can be fully deducted from your income. This deduction also applies to other types of insurance policies, such as life and disability insurance policies.
6. Real Estate Taxes If you own business property, the real estate taxes that you pay on it can be a tax deductible business expense. That being said, to qualify for this deduction, you must use the property for business purposes and not for personal use.
7. Valid Business Education Expenses Small businesses providing their workforce educational benefits can deduct the entire costs involved if it increases their workers’ skills or adds value to the business. Tax-deductible business expenses for education costs include anything from continuing education to books related to your industry to courses designed to earn professional licenses.
8. Business Travel Expenses Business travel tax deductions for work is 100%-deductible if it’s ordinary, necessary, and is to a location away from the state where the taxpayer resides. Example travel expenses include plane tickets, parking & toll fees and Uber and hotel costs.
9. Business Equipment Section 179 of the IRS tax code allows the full purchase price of qualifying new or used equipment to be deducted from your gross income. This deduction includes off-the-shelf software and short-term and long-term assets, as long as they are only for business use.
10. Business Vehicle Expenses If you use your car, SUV or pickup truck for business purposes, you can deduct a portion of the cost of operating it. Vehicle expenses you can claim include IRS mileage reimbursement, licenses & registration fees, gas, repairs, and depreciation costs associated with the vehicle. To qualify for this deduction, you must keep detailed records of all business miles driven and the purpose of each trip.
11. Internet Expenses If you power your business with internet &phone services for business purposes, you can deduct a portion of your monthly bill from your income. This exclusion includes both the cost of the internet service and any related equipment, such as modems and routers.
12. Health Insurance Premiums
Small businesses may be able to deduct some of their workforce’s health insurance premiums from their income. Expenses that might qualify for these deductions include contributions to a health savings account (HSA), monthly premiums or tax- advantaged dollars. Also, self-employed taxpayers may be eligible to deduct premiums paid for their and their family’s medical, dental and long-term care insurance coverage.
13. Entertainment Expenses If you entertain clients or potential customers in an effort to drum up business, the cost of those meals and activities can be deducted from your business income. However, these deductions are limited to 50% of the amount spent and only apply if the entertainment is considered ordinary and necessary for conducting business.
14. Office Supplies If you purchase officesupplies for your business, such as printerink, paper, or Post- it Notes, you can claim them as office expense deduction from your business income. This exclusion also includes the cost of furniture and equipment used in the office. 15. Retirement Contributions Both employers and employees can deduct retirement plan contributions from their business income, although there are set limits. Retirement plans that qualify for the deduction include 401(k)s, 403(b)s, SEP IRAs, and SIMPLE IRAs.
16. Charitable Contributions Small businesses can deduct charitable contributions made in the course of doing business. These deductions cover cash donations, as well as the value of any goods or services donated to a charity.
17. Foreign Earned Income Exclusion The internal revenue service defines foreign earned income as income received from sourcesoutside of the United States.For instance, independent contractors working abroad could be paid foreign earned income. If you qualify for this deduction, you can exclude foreign earned income up to a certain amount from your taxable pay.
18. Advertising & Marketing Costs If you spend money marketing your small business, you can deduct those expenses. These expenses may include businesscards, website designand printing costs, and local newspapers or magazines advertising. 19. Employee Compensation Expenses related to business operations, such as salary,wages and benefit payments, are all tax- deductible. Nonetheless, the compensation must be reasonable for the services rendered and paid or accrued in the tax year.
20. Professional Service Fees If you hire a professional to help you with your small business, such as an accountant, tax advisor, lawyer or consultant, you can deduct the cost of those from yourself-employment income. This also includes membership dues for professional organizations.
21. Union Dues & Fees
If you are part of a union and self-employed, the cost of your dues and fees can be deducted from your business’s taxable income. These deductions also include any expenses incurred as a result of being in the union, such as travel costs and training materials.
22. Startup Costs
If you ’restarting a new business, you can deduct the organizational costs related to getting your business up and running from your self-employed income. This deduction includes items such as the cost of setting up a website, hiring an accountant and purchasing office furniture.
23. Business Property Rental
There are two possible tax write offs included here. Firstly, if you rent property as part of your business, the rent payments can be deducted from your income. This exclusion includes the cost of renting office space, warehouse space and land.
24. Bank Fees
Another small business tax deduction you can take to reduce your tax bill is the bank or credit card fees your company is charged. Applicable costs you can claim are transactions like monthly account service charges, credit card interest on business-related purchases, or transfers and overdraft fees. Additionally, you can deduct merchant or transaction fees paid to 3rd-party payment processors like Stripe or PayPal.
25. Bad Business Debt
If you are unable to collect on a debt related to your small business, you can deduct the amount of that debt from your income. This deduction includes any interest or fees associated with the debt.
Now that you know about some of the most common small business tax deductions, you can use our checklist to ensure you’re taking advantage of all these potential deductions this tax season. Also, there are more business deductions out there if you do your research, and it’s always a good idea to consult with a professional for tax advice (especially since it’s tax-deductible!). Similarly, you should also make a list of non-deductible business expenses so you are fully aware what you can’t deduct.
Non-Deductible Business Expenses
· Additional Medicare taxes. You pay 0.9% additional Medicare tax on net earnings from self-employment or employee wages (if your income is high enough.) You also pay the 3.8% net investment income tax on income from investments. That includes income from a business in which you don’t participate on a day-to-day basis. Again, you pay these if your income is high enough. They remain personal taxes that are nondeductible.
· Clothing for work. While many people in business want to dress for success, the government doesn’t help to underwrite the cost by permitting a deduction. Only clothing not suitable to street use (e.g., uniforms, hardhats, etc.) can be deducted.
· Commuting to and from work. No matter how lengthy or difficult it is to get to your business and home again or what mode of transportation you use, you can’t write off the cost.
· Dues to a country club. Even though golf or tennis may be a great way to meet and network with clients and customers, the dues aren’t deductible. The same is true for social clubs and fitness centers. But if you have a business lunch at your club, half the cost of the meal can be deducted.
· Exploratory costs. The money you spend to research business opportunities you might go into isn’t deductible. Once you actually start a business, expenses treated as start-up costs can be deducted in the first year within certain limits.
· Fines and penalties. Government-imposed fines and penalties are usually nondeductible, regardless of the amount.
· Gifts to business associates, customers, vendors, etc. The deduction is capped at $25 even though it makes good business sense to give a more expensive gift in certain situations.
· Half of meals. Only 50% is deductible in most cases. There are some exceptions, such as company picnics or break room snacks, when a deduction for the full cost is permissible.
· Entertainment costs. No portion of the cost of tickets to the theater or sporting events to entertain clients, customers, vendors, or other business associates is deductible.
· Interest on tax underpayments for noncorporate taxpayers. Sole proprietors and owners of pass-through entities that pay interest on tax underpayments cannot deduct them. The interest is viewed as personal interest even if it relates to business income.
· Legal fees to buy property. These fees are added to the cost basis of the property. A portion of the fees (the part allocated to the cost of the building and not the land) may be recovered through depreciation.
· Interest expense payments. Part of your interest expenses on borrowing if your average annual gross receipts for the three prior years exceeds $26 million.
· Payments of certain employee expenses. Reimbursements of employees’ commuting costs (e.g., free parking; monthly transit passes) and reimbursements of employees’ moving expenses are not deductible.
· Net operating loss carrybacks. Only carryforwards are allowed (other than for farmers), and they can only be used to offset 80% of taxable income.
· Excess business losses for noncorporate taxpayers. You must treat these excess business losses as a net operating loss carryover.
· Hobby losses. Engage in a business without the intention of making a profit? You must then report all income but can’t deduct expenses.
Impact of Non-Deductible Business Expenses
Your “book income,” makes up the net amount on your books and records. It may not match up with your taxable income. You use this number for tax reporting purposes. In other words, your net profits from a financial standpoint may not equal the net profits on your tax return.
Reconcile the discrepancy on Schedule M-1 of Form 1120 for C corporations, Form 1120S for S corporations, and Form 1065 for partnerships. Do total gross receipts equal less than $250,000? Do total assets at the end of the year make up less than $250,000 (for an S corporation) or $1 million for a partnership? Then you don’t need to complete the M-1 for the 1120S or 1065. However, you still may wish to do so. Because it may answer questions that could be on an IRS examiner’s mind. Large entities — those with $50 million or more in assets — must use Schedule M-3 for this purpose. Those with $10 million to $50 million may use Schedule M-1 instead of Schedule M-3.
Sole proprietors and independent contractors file Schedule C of Form 1040 or 1040-SR. This happens regardless of the amount of gross receipts or assets. So they need not have to do any reconciliation. But they should recognize that their financial statement is not necessarily identical to their tax return.
Work with a CPA or other tax advisor to optimize your deductions and to understand how nondeductible items impact your taxes and financial statements.