Small Business Tax Deductions Checklist: All You Need to Know About Tax Deductions

Tax liability is an inevitable part of running a business. Every year business owners have to bear the burden of the tax season, paying taxes for income, payroll, property, sales, and so on. In total, nearly 30% of a business’ income is needed to cover all tax payments. According to statistics, the U.S. government received total tax receipts of 4,05 trillion USD within a year. And the money that your company earned is part of it! If you’re fed up with spending too much money on taxes, it’s time to find a way to tackle it.

Tax deductions are a key financial tool to cut down on tax overpayments. Look through your profit and loss report and research the applicable tax deductions for your business starting from work-related trips and ending with accounting software subscription purchases. You’ll be surprised how much money you can actually save!

In this article, you’ll learn what tax deductions are, which expenses are deductible,  and how to minimize the risks of the IRS tax audit.

Contents:

1. What exactly are tax deductions?

• How to claim small business tax deductions

2. 12 tax deductions that apply to small businesses

3. What is a 100% tax deduction?

4. Which expenses for small businesses are not tax deductible?

5. How to ensure your tax deductions are accurate?

What exactly are tax deductions?

Running a business is inextricably connected with having expenses, such as office maintenance, travel costs, professional services, etc. However, it’s possible to offset the losses by using tax deductions.

Tax deductions are legitimate tax write-offs that decrease SMB’s tax liability. The principle of this accounting mechanism is to deduct expenses from taxable income. Expenses are accumulated during the year and apply to the gross income at the onset of the tax season. It’s worth mentioning that only expenses that are both ordinary and necessary can be deducted. It means that these expenses are part of the regular business processes of the company.

A list of deductible expenses is regularly published on the IRS official website. However, many SMB owners still remain unaware of them, as the IRS isn’t obliged to inform SMBs about possible tax breaks. Below you’ll find a list of tax deductions that can apply to SMBs.

How to claim small business tax deductions

Note: To find the right way to claim the most deductions possible, it’s better to consult a professional, like a CPA, to sort everything out. 

When dealing with taxes as a business owner, you wouldn’t want to: 

• Waste extra money on your taxes that could have been saved;
• Awake IRS guys’ interest in your business because of a small mistake. 

You can claim most small business deductions on Schedule C (for a sole proprietor) and Schedule E (for income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits – REMICs) forms. All you need is to determine the taxable profit during the tax year and report it on your personal 1040 form. Based on this information, your accountant will need to calculate the taxes due for your particular case. 

12 tax deductions that apply to small businesses

All of the tax deductions that we’re going to describe below can be claimed by sole proprietorships, small-business owners, C-corps, S-corps, partnerships, and LLCs. There may be different rules for each business type though.

1. Workspace

The requirements and conditions might be different for each jurisdiction. Some tax deductions may trigger eventual tax increases, not tax cuts. Consult a professional.

Home office expenses

If you’re a freelancer or a business owner and you use your house as an office, there’s a possibility to deduct 5$ per square foot of your home up to a maximum of 300 square feet (but only if it’s used exclusively for business purposes on a regular basis). 

For this tax deduction, you have to meet the following requirements: 

• The area you’re working in is used only for business activities;
• The area you’re working in must be the principal place of business (you should be ready to prove this by documents);
• The majority of the time you spend in your homework area must be devoted to business activities. 

Methods of calculating the home office deduction: 

1. Simplified method: you deduct $5 per square foot of your home used for business purposes by filling out the appropriate worksheet on Schedule C of Form 1040.
2. Regular method: you calculate the % of your home used for business and apply that % to your home expenses – rent or mortgage interest, property taxes, electricity, heat, water, and anything else. In this case, you need to report expenses using Form 8829. 

Phone, internet, and office supply expenses

Surprisingly, many business owners forget or neglect these kinds of tax deductions, even though they’re easy to calculate and very useful in running a business. Every time you pay for a mobile connection, internet access, paper, ink cartridges, or other office supplies, you can deduct these expenses from your income. It may seem like insignificant money-wasting, however, in terms of your annual budget, it’s a decent amount of money that you could put back into the business flow.

2. Banking and insurance

The requirements and conditions might be different for each jurisdiction. Some tax deductions may trigger eventual tax increases, not tax cuts. Consult a professional.

Business interest and bank fees

Business owners who pay interest have the opportunity to deduct it from their taxable income. Interest expense is a payment charged for the use of money, which was borrowed for business needs, for example, bonds issued by a company. The interest paid to bondholders decreases the taxable income and, as a result, the amount of taxes.

Business insurance

Different types of business insurance could be deducted. For example, the cost of your own health insurance, as a business owner, business continuation insurance and your policy are all 100% deductible. 

The other types of business insurance that could be deductible include:

• Commercial property insurance;
• Professional liability insurance;
• Workers’ compensation coverage;
• Auto insurance for business vehicles; 
• Business interruption insurance (covers lost profits if the business shuts down due to fire or another cause).

3. Professional service

The requirements and conditions might be different for each jurisdiction. Some tax deductions may trigger eventual tax increases, not tax cuts. Consult a professional.

Legal and professional fees

Though accounting, legal, and consulting services help a lot with business development, they’re very expensive. The assistance of a fancy business consultant can cost you a fortune. However, even these expenses can be claimed as tax deductions. As a result, the net price of your bookkeeper or attorney will be much lower.

Professional service fees

Any legal, accounting and bookkeeping services fees that are needed for your business are also deductible. If you’re using, let’s say, you’ve hired an accountant, the money you pay them might qualify as a tax deduction.

Note: You can check the IRS guidelines for legal and professional fees that’ll help you identify whether a particular service expense is for work or personal use. 

Software subscription

A situation similar to the previous one. If you buy software specially for your business activities, its cost could be deductible. You can claim these types of expenses on your Schedule C tax form under “Other Common Business Expenses → Other Miscellaneous Expenses”. 

Bad debts

If you face a problem when a customer or your client doesn’t pay for the product/service that you’ve already provided them with, here applies the term “bad debt”. Basically, bad debts are the money that a customer or client owes you and you’re unable to collect it. In this case, you can write off bad debts at the end of the first year. 

Bad debts also include:

• Loans to suppliers and clients;
• Business loan guarantees;
• Credit sales to customers. 

You can deduct it on Schedule C of Form 1040, Profit or Loss From Business (Sole Proprietorship) or on your applicable business income tax return.

Note: You can’t take a bad debt deduction for unpaid salaries, wages, rents, fees, interests, dividends, and similar items.

4. Workers

The requirements and conditions might be different for each jurisdiction. Some tax deductions may trigger eventual tax increases, not tax cuts. Consult a professional.

Salaries and benefits

For business owners who have employees, the good news is that salaries, wages, bonuses, and commissions are deductible. Besides, business owners can deduct their payroll tax. It doesn’t apply to the federal taxes or the FICA taxes, only to an employer portion of the payroll tax.

5. Advertising

The requirements and conditions might be different for each jurisdiction. Some tax deductions may trigger eventual tax increases, not tax cuts. Consult a professional.

Marketing and promotion

As long as you can prove that the promotion expenses are really related to your business, you can fully deduct the money spent on digital and print advertising, website design and maintenance plus the cost of printing business cards. The money paid to a freelancer for creating a business logo also could be deductible. 

6. Additional business expense

The requirements and conditions might be different for each jurisdiction. Some tax deductions may trigger eventual tax increases, not tax cuts. Consult a professional.

Vehicle-related expenses

Do you use a car or a truck for business? If yes, then you can record the expenses for gas, parking, technical services, and other maintenance costs to lower the taxable income. Your lease payments and the interest on your car loan can be deducted as well. 

If you want to apply this type of tax deduction, you should remember to distinguish between personal and business car use. For example, you can record a mileage log. You can find the rates of auto-related deductions in the IRS Standard Mileage Rate.

Work-related travel expenses

If your job is connected with traveling, you can use these expenses to reduce your tax liability. These kinds of tax deductions cover not only tickets but also accommodation and other travel-related costs (even tips in restaurants!). But don’t confuse them with local commuting costs, such as the expenses of getting to and from the digital workplace. These expenses are not deductible.

To deduct travel expenses, your trip must meet the following conditions:

• It must be related to your business;
• It must take you away from the tax home (the city or area where your business is located);
• It must be longer than a normal weekday; it’s expected that you’ll be required to sleep and rest during this work-related trip. 

The list of tax deductions we’ve given above includes only the most common ones that a company can face. The full list of deductible expenses is longer. It’s hardly possible to mention all of them in one article as tax deductions greatly depend on the structure of the business. For example, self-employed people can also deduct from their income expenses on health insurance for themselves and their dependents. In turn, sole proprietorships, partnerships, and S corporations can apply a qualified business income (QBI) deduction. There are also dozens of tax deductions on the property, franchise, and other expenses. 

What is a 100% tax deduction?

A 100% tax deduction is a type of tax break that allows a taxpayer to reduce the amount of taxable income to zero. It’s the equivalent of eliminating taxes altogether. This type of deduction is available to individuals, businesses, and other entities that pay taxes.

The examples of expenses that might be 100% deductible are:

• Business travel and its associated costs (car rentals, hotels, gas, etc.);
• Self-employed health premiums;
• Annual business phone bills.

To be certain about each tax deduction, consult a professional. Some of your deductions may affect other expenses and instead of leading to tax cuts, eventually result in tax increases.

Overall, a 100% tax deduction can be a great way to reduce your tax bill. But it’s important to do your research and understand the details of the deductions you’re claiming in order to maximize your savings. With the right information, you can take full advantage of this generous tax break.

Which expenses for small businesses are not tax deductible?

When it comes to running a small business, it’s essential to understand what can be claimed as tax deductions.

 Typically, they aren’t directly related to your business:

• Fines and penalties assessed by the government;
• Legal costs (when you’ve broken a law);
• An individual’s daily commute;
• Transportation costs; 
• Personal expenses and activities;
• Contributions to support political candidates. 

All in all, small business owners need to understand which deductions can’t be claimed in order to prevent costly mistakes. Understanding these restrictions can help small business owners minimize their overall tax liability.

How to ensure your tax deductions are accurate?

There’s a myth that applying for tax deductions can increase the likelihood of tax audits by the IRS. However, it’s greatly exaggerated! If you qualify for a tax deduction, there’s no reason to worry about a tax audit. Nevertheless, you can take some steps to ensure that your tax deductions are absolutely correct.

Keep in mind that your steps are more about preparing all the documents – consult a professional CPA for advice and to be certain that everything is fine.

Proper recordkeeping

Tax deductions have their own rules for business recordkeeping. It requires collecting systematic and detailed information about every payment you received or made. Here’s where online accounting programs can help. Smart finance software such as Synder records all historical and ongoing transactions in your books and provides classified data about each payment (fee, discount, shipping, inventory, etc). In addition, it’ll track your income and expenses without requiring manual entry. 

Learn more about how Synder can save your time and make your income tax management and return error-free!

Find out how Synder can help you record Canadian taxes correctly.

Plan your expenses

In a business environment, it’s highly important to plan your expenses beforehand to minimize financial losses. You should remember that sometimes different types of tax deductions apply to the same kinds of expenses. For example, car-related expenses can be deducted by claiming the actual cost or applying an IRS standard mileage rate. By planning it in advance, you’ll be able to choose a better tax deduction option for your business.

Separate personal and business expenses

It’s one of the most painful topics in tax deductions. Most often, the major reason for the IRS tax audit is the errors in calculating personal and business expenses. It especially concerns expenses on vehicles, home office, telephone, and the internet, when it may be hard to separate  personal needs from business aims. To minimize the risk of such mistakes, you should accurately track both kinds of expenses.

Additionally, the IRS highlights the importance of distinguishing between business and personal expenses.

• The expenses needed to calculate the cost of the goods you sell;
• Capital Expenses.

These expenses are NOT deductible.

Keep an eye on tax law changes

The list of deductible expenses is constantly changing in the IRS new publications. By tracking all changes in the legislation, you can take advantage of additional tax opportunities that other businesses have no idea about. Sometimes, tax reliefs and deductions are introduced as a reaction to social and political news. And if you, as a business owner, are aware of them, you’ll be able to save money and make your company much more profitable.

All in all, don’t hesitate to apply for professional accounting assistance to find out new ways to reduce taxable income and ensure that all deduction methods apply to your business. Otherwise, one mistake can make your tax bill grow even more.

Read our article and learn about Post Tax Deduction!

Conclusion

Tax deductions for small businesses can help reduce their overall tax burden and make running a business more affordable. It’s important for business owners to understand the different types of deductions and how to maximize them in order to take full advantage of tax write-offs. 

Even though keeping up with all the ins and outs of tax deductions is rather complicated and often requires assistance from an accountant, it saves you money for your further business growth. You can also automate your accounting by using online software to help you with this. Optimizing tax filing to save money on tax payments is well worth the effort. 

Once again, we urge you to consult a tax accountant to get professional advice on your tax deductions. Since different jurisdictions have unique requirements and conditions for taxes and tax deductions, it’s better to double check everything with a tax professional.