Running a small business comes with its fair share of financial responsibilities. One crucial aspect of managing your business finances is understanding and maximizing tax deductions. By identifying and properly categorizing your expenses, you can significantly reduce your taxable income. We can also help you tackle those tasks now—our expertise includes implementing frameworks into your business to get it into the best shape for the new year and beyond.
What is a small business tax deduction?
In general, business tax deductions are eligible business expenses that can be deducted from your taxable income, often referred to as write-offs. If the expense fits the IRS’ definition of a qualifying business expense, you can subtract it from your gross revenue for the year, thereby reducing your year-end tax bill. Businesses incur many qualifying deductions on a daily, weekly, and monthly basis. Additionally, one-time investments (such as purchasing real estate, heavy equipment, technology, etc.) can also have an impact.
Here are some essential small business expense categories:
Advertising and marketing
Investing in marketing and advertising is essential for growing your small business. Expenses in this category cover a wide range of activities, including website development, social media advertising, print materials, and even business cards. These costs are considered necessary for generating revenue, making them fully deductible.
Business meals and entertainment expenses
Winning over clients or strengthening team morale often involves sharing a meal or engaging in activities. You can deduct a portion of meals and entertainment expenses as long as they are directly related to your business and documented appropriately. This one gets a little complicated as there are many sub-categories with differing tax treatments. As you’re learning how to categorize these expenses, it can be helpful to get input from your business CPA.
Communication
Keeping your business connected and operational is vital. This category includes phone bills, internet charges, and other utility expenses. These are essential for day-to-day operations and are fully deductible.
Education
Investing in your own education or that of your employees can lead to improved business performance. As long as what you’re learning is related to your business and its current industry, expenses related to workshops, seminars, or courses that enhance professional skills are deductible.
Financial fees and interest
If you have loans or lines of credit for your business, the interest on those loans is deductible. Keep in mind that the way you deduct loan payments will depend upon what you purchased with the funds. Additionally, fees associated with financial transactions, such as credit card processing fees, can be included in this category.
Insurance
Protecting your business with insurance is a smart move, and you can deduct the premiums you pay, including policies like general liability, property, and even health insurance for your employees. If you’re unsure what type of insurance your business requires, consult with an agent to learn what’s standard in your industry.
Office supplies and equipment
From pens and paper to computers and desks, the costs associated with maintaining your workspace are 100% deductible, provided they fall under the $2,500 threshold and do not need to be depreciated. Keep detailed records of these expenses, as they can add up quickly and are typically fully deductible.
Personnel
Salaries, wages, bonuses, benefits, and other payroll items for your employees are fully deductible. This category also includes payments to freelancers, subcontractors, and fees for professional services.
Taxes and professional license fees
Businesses have various tax obligations, including income tax, property tax, and sales tax. Additionally, fees for licenses and permits needed to operate your business are deductible, provided 100% of the work is related to your business.
Shipping costs and packaging materials
If your business involves shipping products to customers, the costs associated with packaging and sending those items are deductible. This includes postage, packaging materials, and shipping software.
Travel
Travel expenses include airfare, lodging, meals, and even transportation while at your destination. Just remember to keep accurate records, such as receipts and mileage logs, to substantiate your claims. In order to qualify, the travel must be ordinary, necessary for the business, and away from the city in which the business is located for longer than normal working hours.
Vehicle
If you use a vehicle for business purposes, you can deduct expenses related to its operation, including fuel, maintenance, insurance, along with depreciation. If you use your vehicle for both personal and business use, you will only be able to deduct the costs associated with business use.
Website
In today’s digital age, investing in your online presence is necessary to keep your business competitive. Expenses related to website development, hosting, and maintenance are fully deductible.
Workplace
Whether you rent a space, own a property, or operate from a home office, the costs associated with your workplace are deductible—rent or lease payments, utilities, and even home office expenses, if you meet specific IRS criteria.
Personal tax deductions for business owners
As a business owner, you may also be eligible for personal tax deductions that can further reduce your taxable income:
How to maximize your small business tax deductions
The key to maximizing your small business tax deductions is staying on top of record keeping. By diligently categorizing and keeping track of your expenses, you can leverage your deductions and ultimately reduce your tax liability. Maintaining accurate records also means you’re able to substantiate your claims in case of an audit.
It’s advisable to consult with a tax professional or accountant who is well-versed in small business taxation to ensure you’re taking full advantage of all available deductions. Working with a bookkeeper or using cloud-based accounting software can ensure you can take the biggest tax deduction possible. With careful planning and attention to detail, you can keep more of your hard-earned money in your business and achieve greater financial success.
Our experienced team of CFOs, CPAs, tax accountants, bookkeepers, and cloud accountants are dedicated to helping small businesses succeed and offer assistance navigating bookkeeping, financial decisions, and tax planning. Contact us to schedule a consultation.
Small business tax deductions – free download!
We have put together a comprehensive guide of the top small business tax deductions that will leave you feeling relieved this tax season.
In this guide, you will find small business tax tips, detailed examples, and strategies for tracking expenses, giving you a better understanding of how to take advantage of these tax savings.