Almost everyone has heard a horror story about an IRS audit that cost a business or individual lots of time and money. Because of that, small business owners are often reluctant to take deductions to avoid throwing up a red flag. However, taking the right deductions can save your small business lots of money that you can turn around and use to grow.
For example, according to the TurboTax blog, if you are a shareholder or partner in the 25% tax bracket, every dollar of deductions saves 25 cents of taxes. If you are located in a state that imposes an income tax, each write-off is worth even more because it will save you state taxes too.
Here are some of the small business deductions to consider when you’re tax planning. Be sure to check with an accounting professional if you have questions.
According to the IRS, if you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes. Many small business owners are wary of this deduction for good reason. This is a complex deduction that has been the subject of controversy and court cases. But this is a legitimate deduction if you do it right. To calculate how much of the home-related expenses are tax deductible, measure your work area and divide by your home’s square footage. That percentage is the fraction of rent, mortgage, insurance, electricity, housekeeping, and other home related expenses that you can claim. Be sure that your home office is actually used as an office. Writing off your entire living room because you sit on the couch with your laptop wouldn’t cut it with an auditor.
Business expenses are the cost of carrying on a trade or business. To be deductible, a business expense must be both ordinary and necessary. Nothing fits this category better than office supplies. Be sure to have a receipt organization system in place. The expenditures for paper, pens, ink and more will offset your taxable business income.
When your supplies are more than paper and pens, there is another tax-cutting opportunity. Office furniture acquisitions provide a couple of choices. Deduct 100 percent of the cost in the year of the purchase or deduct the depreciation. Depreciation is recognized as a portion of the expense over seven years.
Generally, you can deduct the ordinary and necessary cost of insurance as a business expense. Examples of insurance you can deduct include casualty and theft insurance, professional liability or malpractice insurance, accident and health insurance as well as coverage for vehicles used in your business. The type of insurance you can’t deduct includes life insurance where you are directly or indirectly the beneficiary.
If you use your car for business, it’s a valid deduction. If you use your car for both business and personal, you need to divide your expenses based on mileage. Check with the IRS website to see a list of current and prior year mileage rates.
The “necessary and ordinary” category comes into play again here. You need to meet two conditions to take the travel expense deduction:
1) Your duties must require you to be away from home (your regular place of business, regardless of where you maintain your family home) longer than an ordinary day’s work.
2) You need sleep or rest to meet the demands of your work while you’re away.
If your business trip meets these requirements, you can deduct a wide variety of travel-related expenses, including costs for transportation, tolls and parking, rental cars, meals and lodging. For more information on travel, see IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses.
Advertising and Marketing
These expenses must be directly related to your business. Examples of deductible items include print or broadcast advertising. Does your small business do anything to elevate their profile in the community? Costs for a sports team sponsorship, branded donations or participating in a special event can all count under this deduction category.
Educational materials and events are all 100% tax deductible. Included in this category are magazines, books, webinars and other educational material related to your industry.
This is by no means a comprehensive list. Make sure you’re taking all of the deductions afforded to you by using a tax professional to help you file. It’s also important to be aware of expenses that aren’t deductible.
Expenses you can’t deduct
Here are expenses not deductible under any circumstances:
- Costs associated with entertainment at social, athletic, luncheon, sporting, airline and hotel clubs are deductible. The dues you pay to be a member are not. This holds true even if you membership is for business.
- Federal income tax payments
- Lobbying expenses
- Penalties and fines paid when you break the law
- Political contributions
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