The Deductions Small Business Owners Should Know
Whether you're an established business owner or just in the beginning stages of running your business, saving every penny matters. Tax season is synonymous with owing money. However, if you're a business owner, one of the perks is that you have a lot of tax deductions at your fingertips that will help you save.
Below, we list and explain important tax deductions you should keep in mind.
Small Business Deductions
The following tax deductions are for established small business owners
Professional Service Deductions
When you're running a business, you rely on a lot of professional services outside the office. Well guess what? Those services are tax deductible!
Contractor and freelancer fees can be deducted as a business expense. In addition, professional fees for accountants, consultants, and lawyers are all deductible – just as long as you follow a few guidelines:
- Professional service fees are typical and necessary
- Service fees are acquired when carrying on a trade or business
- Fees are reasonable in amount
- Fees are paid or acquired during the taxable year
Schmoozing Client Deductions
Believe it or not, you can deduct expenses for client entertainment – as long as it passes the directly-related test. The rules for this test are as follows:
- Entertainment took place in a business setting
- Purpose of the entertainment was in fact business, and business was discussed
When it comes to employer or client gifts, you’re only allowed to deduct $25 for a gift you gave to each person during your tax year. For example, if you bought a $100 gift for two clients ($200 total), you would only be able to deduct $50.
Employee benefits such as health plans and life insurance are tax deductible. In addition, any contributions you make to employees' profit-sharing and pension plans are tax deductible as well.
Car and Truck Expenses
Whether you're using your car or a company truck, you can deduct the cost of operating the vehicle, as long as you have the records to prove the vehicle was used for business. There’s also a tax deduction for auto maintenance, parking, and tolls.
Other Small Business Deductions
The following deductions can be tax deductible for the entire cost in the year of the purchase or depreciated over several years.
- Office equipment
- Internet hosting and services
- Telephone charges
Startup expenses can be deducted once the business starts. Just remember, a startup expense only counts if it's an expense made during the development and planning phase of your business. Once your business doors are open and business transactions are happening, all expenses would be considered traditional operating expenses.
You can choose to deduct up to $5,000 for the first year and the rest amortized over 15 years. The most important thing to note is that there must be sufficient records and receipts.
A startup cost is amortizable if it meets the following terms:
- It's a cost you paid in order to operate an existing business.
- An expense you made before the day your active business began.
The startup costs include amounts paid for the following:
- Travel expenses
- Marketing and advertisements for starting the business
- Employee pay for those who are being trained
- Salaries and fees for executives and consultants
Home Office Deductions
Professionals who work from home are eligible for numerous tax deductions. If your home office is your regular place of business, you could be eligible to deduct the following home-related expenses:
- Property taxes
- Homeowners insurance
- Moving machinery
- Repairs that keep your property in efficient operating condition
- Supplies and materials
In addition, if you use your personal vehicle for business travel or pay for meals and hotel accommodations out of your own pocket, these expenses might quality for a tax deduction – only if your employer isn't reimbursing you.
- Publication 587 Business Use of Your Home | IRS
- Business Expenses You Can Deduct | IRS
- 75 Items You May Be Able to Deduct from Your Taxes | Entrepreneur
- Top Ten Most Often Missed Business Tax Deductions | AccountingWEB