Taxes

Brilliant (Tax) Deductions for Your Small Business

Feb 01, 2021 • 10+ min read
Business manager talking to customers
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      Anyone with an entrepreneurial friend or relative has probably heard them say, at one time or another, that they’re going to “write off” an expense. What does that mean? A write-off, otherwise known as a tax deduction, is a business-related expense that lowers the amount of money you owe for your taxes. As long as the expense qualifies, you can subtract it from your total tax bill when the time comes.

      The IRS provides plenty of resources to help you ascertain whether or not an expense is deductible—but the onus is on you to do the research and figure it out.

      “To be deductible, a business expense must be both ordinary and necessary,” explains IRS.gov. “An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. It is important to separate business expenses from the following expenses: The expenses used to figure the cost of goods sold, Capital Expenses, and Personal Expenses.”

      Some people might read that paragraph and have very different ideas of what “ordinary” and “necessary” mean. Thus, you have small business owners who attempt to deduct all manner of expenses. Not only is it unethical to attempt to deduct unqualified expenses, but if the IRS catches you in the act, you’ll face stiff penalties.

      Here’s a list of some of the most absurd (and illegal) deductions ever attempted:

      • Deducting the money you paid an arsonist to burn down your business
      • Claiming your dog as a dependent
      • Deducting the money you paid for your tattoo as a “medical expense”
      • Claiming your daughter’s wedding as a “business entertainment” expense
      • Claiming your fallout shelter is “preventative medicine”

      While you probably have no intention of trying to claim your pet as a dependent or deducting the cost of a fallout shelter, it’s still easy for an honest business owner to get confused by what qualifies for a deduction and what doesn’t.

      One of the most common issues is blending business expenses with personal expenses. Small business owners usually have so much overlap in their lives that this delineation can become murky. For example, you might occasionally use your work vehicle for driving your daughter to soccer practice. Thankfully, the IRS provides robust information to help make the crucial distinctions necessary to keep your business and personal life separate on your taxes.

      “Generally, you cannot deduct personal, living, or family expenses,” explains IRS.gov. “However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part. For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible. Refer to chapter 4 of Publication 535, Business Expenses, for information on deducting interest and the allocation rules.”

      Take time to read through the information provided by the IRS—and you should also always consult with a tax professional before claiming a deduction. They can help you confirm what qualifies and what doesn’t while suggesting additional strategies to help you to lower your tax burden legally. Better safe than sorry, as they say.

      Small Business Deductions to Consider

      Manager showing staff a tablet

      It doesn’t matter whether your business manufactures office chairs or teaches children how to speak Italian—there are tax deductions available to you. Remember, not every deduction will be applicable. It all depends on your unique situation.

      Additionally, if you have hopes of deducting an expense, you had better keep the receipts and record any other relevant information. The IRS doesn’t have much patience for ambiguity when it comes to lowering your tax bill—either you have all the details in order for a deduction or you aren’t allowed to pursue it.

      With that in mind, here are some deductions that might help you to save some money next tax season.

      Licenses and Taxes

      Starting and running a small business often requires you to jump through hoops. Some of the expenses related to licenses can be deducted, such as the cost of your business license. You can also deduct some ongoing tax-related expenses, including payroll taxes, sales tax, personal property taxes, state income taxes, and fuel taxes.

      Education

      The more learning you do, the more it enriches you as a person. And when you incur expenses related to training and education that will improve the skills needed for your small business, you can often deduct them from your taxes.

      The relevance of a specific training will depend on your field and the nature of the education. Possible examples of deductible costs include webinars, seminars, workshops, professional magazine subscriptions, work-related books, and even transportation expenses incurred going to a relevant education event.

      Childcare

      Being a parent and a small business owner requires a continual balancing act. In most cases, childcare is required. You can usually deduct the money you spend on these services.

      It’s worth noting that you can also deduct care expenses for those who are over the age of 12 and aren’t able to care for themselves. This includes a spouse or dependent who has physical or mental disabilities.

      Business Meals

      Entrepreneurs need to eat just like everyone else, but that doesn’t mean that all meals can be deducted from your taxes. The IRS provides clear instructions for what qualifies and what doesn’t. The rules state that the food can’t be extravagant—so don’t even think about going on a caviar binge. Also, either the business owner or at least 1 employee has to be present at the meal.

      Be sure to save all receipts associated with the meals you plan to deduct. It’s also helpful to record the details of the meal so that if you need to provide context later, it’s readily available.

      Driving Your Personal Vehicle for Business Purposes

      You can’t deduct your daily commute to the office—that’s just part of the costs of being a business owner. But if your vehicle use is for specific business purposes, you can deduct the expenses.

      There are multiple ways to handle vehicle cost deductions, so make sure to do your homework on this one. You’ll need to figure out if you qualify for completely deducting the cost of operating your vehicle or if the deduction needs to be more situational. You’ll also need to decide whether to use the actual expense method or the more generalized standard mileage rate.

      However you decide to handle your deductions, be sure to keep a detailed travel log for your vehicle. You need to record your purpose for the trips, the miles involved, and other details.

      Travel Costs

      There are often times when your business duties require you to travel beyond your city. As long as these trips are for legitimate purposes and meet the other IRS requirements, you can deduct the associated costs. Examples include toll fees, parking fees, meals, hotels, airfare, or a rental car.

      Maintain a clear record of the trip so that you can justify the expenses you plan to deduct. These details should include your travel dates, the trip’s purpose, any business contacts you had meetings with, and a breakdown of each expense.

      Moving Costs

      Owning a business requires plenty of flexibility. This may mean that you’ll be relocating to a new location. Perhaps you’re downsizing to save money. Or you might be expanding operations and need more space.

      The good news is that you can often deduct the expenses incurred as you shuttle your inventory and equipment from 1 place to another. As long as the expenses are carefully recorded, you should be able to save some money come tax time.

      Advertising

      You need to spread the word about your business, so it’s important to know that your advertising, marketing, and other promotional efforts can be deductible. The money you spent on designing your new website or running that billboard on the interstate can be used to lower your tax bill.

      Just note that you can’t deduct any promotional efforts that have political entanglements. So if you hire a lobbyist in Washington, DC, or throw a rally for a senator, you won’t be able to deduct a single dime.

      Rent Costs

      As long as you’re making rent payments on a business location, you can usually deduct those expenses. Same goes for equipment. For example, if your business needs to rent an extra forklift to keep things moving during a particularly hectic month in the warehouse, you could likely deduct the money spent on that rental.

      Home Office Costs

      This deduction is great news for those who work from a home office and don’t pay rent on a separate business location. You can either take a basic approach, where you deduct a set amount of money for each square foot of your home used for your business, or break it out into specific expenses such as property taxes, utilities, and HOA fees.

      Don’t forget to record your expenses related to home office supplies. This can be a great way to save money on your taxes.

      “This one may sound obvious, but many people miss out on this area,” explains financial planner David Rae. “When you order paper or ink cartridges from places like Staples or Office Depot, you are pretty aware of the fact that you are buying office supplies. When you stroll through a Target and throw some office supplies on top of your otherwise full cart, will you remember to deduct those expenses? Take the extra few minutes to separate the business purchases from the personal expenses. Put them on a separate receipt and pay with a business-specific credit card. Believe me, when tax time rolls around, you won’t remember what was or wasn’t a business expense.”

      Whichever approach you take, make sure that you’re accurate in your reporting. For example, you can’t claim your entire basement as a home office if it’s also commonly used for other purposes. Your home office must be a space dedicated to the running of your business.

      Employee Salaries

      You can deduct the money you pay to employees for their salaries. This category of deductions also includes employee benefits. As long as the employee in question isn’t a part owner of the business and the pay and benefits were fair and based on legitimate services, you should be good to go.

      Contributions to Charities

      If it seems like your entrepreneurial friends are a giving bunch, you’re definitely on to something. It’s an established fact that entrepreneurs have bigger hearts than the average American.

      “Most entrepreneurs feel strongly philanthropic, typically giving 50% more annually to charity than people not running or advising their own companies,” explains a philanthropic report from Fast Company. “They are also far more likely to volunteer. (They also realize that acting generously burnishes their reputation, and the reputation of their company.) …All told, entrepreneurs give about $1,200 more to charity than those working for traditional companies at the same income level. Two-thirds of them also volunteer at least 2 or more hours per month to cause groups.”

      This penchant for giving does more than just help others—the contributions are often tax deductible. One of the main qualifiers: the recipient must be a registered organization, rather than an individual in need that you gave some money.

      Contributions to Retirement Funds

      Small business owners are also skilled at looking toward the future. So if you’re making contributions to your retirement account (or those of your employees), you can deduct it from your taxes. Just make sure to confirm the details with a tax professional to ensure you’re complying with IRS requirements.

      Don’t Forget the Credits

      Business manager smiling with her staff

      Tax deductions are undeniably amazing, but you should also look for ways to save money using tax credits. The difference between a deduction and credit is that deductions come before you’ve calculated your taxes. You deduct the cost of a specific qualifying item, such as travel costs or child care, so that your tax bill is lower.

      Tax credits don’t come into the picture until after you’ve finished calculating your taxes. Any credit you have earned will then be subtracted from what you owe. Deductions are handled as percentages, but a tax credit is a dollar-for-dollar reduction: if you qualify for a $900 credit, that’s the exact amount removed from the tax bill.

      The IRS offers tax credits to small businesses to incentivize them to take actions that meet certain goals held by the agency. A credit is basically a reward that makes these initiatives mutually beneficial.

      As with deductions, tax credits require you to be proactive. You’ll need to research the requirements and then only claim those that are relevant to your business. Your tax professional can help you to navigate the process.

      Here are 24 federal tax credits to consider for this next tax season, including the general business credit, investment credit, and energy efficient home credit. Clicking on the link will take you to the qualification details and submission info on IRS.gov.

      1. General Business Credit (Form 3800)
      2. Investment Credit (Form 3468)
      3. Work Opportunity Credit (Form 5884)
      4. Alcohol and Cellulosic Biofuel Fuels Credit (Form 6478)
      5. Credit for Increasing Research Activities (Form 6765)
      6. Low-Income Housing Credit (Form 8586)
      7. Recapture of Low-Income Housing Credit (Form 8611)
      8. Disabled Access Credit (Form 8826)
      9. Qualified Plug-in Electric and Electric Vehicle Credit (Form 8834)
      10. Renewable Electricity, Refined Coal, and Indian Coal Production Credit (Form 8835)
      11. Empowerment Zone and Renewal Community Employment Credit (Form 8844)
      12. Indian Employment Credit (Form 8845)
      13. Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips (Form 8846)
      14. Credit for Contributions to Selected Community Development Corporations (Form 8847)
      15. Biodiesel and Renewable Diesel Fuels Credit (Form 8864)
      16. New Markets Credit (Form 8874)
      17. Credit for Small Employer Pension Plan Startup Costs (Form 8881)
      18. Credit for Employer-Provided Childcare Facilities and Services (Form 8882)
      19. Low Sulfur Diesel Fuel Production Credit (Form 8896)
      20. Qualified Railroad Track Maintenance Credit (Form 8900)
      21. Distilled Spirits Credit (Form 8906)
      22. Energy Efficient Home Credit (Form 8908)
      23. Alternative Motor Vehicle Credit (Form 8910)
      24. Alternative Fuel Vehicle Refueling Property Credit (Form 8911)

      You should also be aware of the Earned Income Tax Credit (EITC). As long as you file a Form 1040 Schedule C, you could be a prime candidate for this lucrative credit. The federal government offers it to entrepreneurs and other individuals facing financial burdens. Reference the EITC Assistant to see if this credit could help your tax situation.

      When you let tax deductions and tax credits join forces for your benefit, you’ll find that your tax-related stresses decrease accordingly. Choosing that joyous feeling as your goal can provide the motivation needed to track all the details through the year and ensure you’re in a position to claim everything confidently come tax time.

      Did you know your company’s tax preparation could feel as good as a day at the spa? With Lendio, it does.

       

      The information provided in this post does not, and is not intended to, constitute tax advice; instead, all information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their tax professional to obtain advice with respect to any particular tax matter.
      About the author
      Grant Olsen

      Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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