The best way to make sure you don’t get a higher-than-necessary bill at income tax time is to double down verify that you are getting all possible deductions. There are several small business tax deductions available for sole proprietorships and other small business organizations, such as LLCs.
Different tax deductions you can apply to your business
Keep in mind that while the list below contains some common deductions that may apply to your business, some of this list may not work for your particular situation. Always check with your accountant before claiming a deduction on your taxes.
1. Home office
This is one of the most common deductions that small business owners can use. In order for you to qualify for the home office deduction, your space must meet the requirements. You must use the area exclusively for your business. Working from your bed will not give you the deduction. You should also regularly conduct most of your activities from this location.
Beginning in 2013, the IRS introduced a simplified option for you to claim your home office deduction. This allows you to claim up to 300 square feet at a rate of $ 5 per square foot. It has not changed who can claim the deduction. But it just made it easier to ask for deductions. You can also claim your deduction using the standard method. However, this has a few differences:
It allows you to claim a percentage of the home used instead of using a 300 square foot ceiling.
A depreciation allowance for a part of the house used is allowed as well as the recovery of depreciation on the sale of the house.
Actual expenses are used to determine the deduction instead of the standard $ 5 / square foot.
Which option you choose when making a claim will depend on your overall tax situation. Spend time reviewing your entire tax situation to determine what will work best for you.
2. Commercial use of the car
Just like your home office, using your car for business purposes can get you a nice deduction on your taxes. This deduction is a bit more difficult to follow if you use your vehicle for both personal and business use.
If you buy a vehicle that will be used at least 50% of the time for business during the year, you can deduct it from your taxes. SUVs may qualify for a deduction of up to $ 25,000. Small passenger cars can give you a deduction of up to $ 11,060.
If you plan deduct your business mileage, keep in mind that you need to have proper and complete documentation on the exact relationship between your mileage and your business. You should also keep these documents on hand for up to seven years after taking the deduction. You can either deduct the actual cost of the mileage or take the standard deduction.
Legally, you can benefit from the standard deduction even if the actual cost of your mileage is lower. However, if you take the standard deduction, you will not be able to deduct the operating expenses of the vehicle. These costs include gasoline, maintenance or insurance.
Advertising can be one of the biggest, but also the most necessary expenses a small business owner can incur. All your advertising and promotional material can be 100% deducted. Therefore, this expense can quickly become your biggest deduction as well.
These deductions not only include your paid online and offline advertisements, such as billboards or Google ads. It also includes business cards and brochures that you hand out at networking events. If you’ve paid for SEO services or pay a monthly fee for email marketing software, you can deduct those expenses as well.
Advertising for vehicles is a bit difficult to infer an advertising expense. It is very common for local small business owners to have their vehicles decorated with their company name, logo and contact details. The actual cost of adding promotional material to your vehicle is deductible. However, driving costs for people to see your vehicle are not deductible.
Advertising and sales costs should also be kept in mind. If the sole purpose of your business website is to advertise, the monthly maintenance fees and charges are deductible. However, if you also take payments on your website and sell your products there, this is considered a sales commission and is no longer deductible for advertising purposes. This also applies to signage. If you post a temporary sign to draw attention to your business, you can deduct it. Permanent signs, such as those lasting one year or more, are not deductible.
4. Care of children and dependents
If you have someone who is dependent on you for care, such as your children or a spouse / family member who is unable to take care of yourself, you can deduct expenses you incur while paying for them during your working hours. .
If you own your business and have employees, offering to pay your employees’ child care expenses can also give you a pretty lucrative deduction on your taxes. This can add up to $ 150,000 per year by claiming 10 to 25% of that expense.
It is always a good idea to deepen your knowledge and skills in your chosen area of expertise. By attending workshops, taking classes, and purchasing books directly related to improving the skills you need to run your business properly, you can get a big deduction.
The IRS will certainly review these expenses and determine if they qualify for the deduction. Yet, every education-related expense you incur while continuing your education will be deducted 100%. Education-related expenses that are not directly related to your business or that will not help a new career will not be eligible.
6. Pension contributions
As much as you love what you do, eventually you will want to retire. Contributing to your pension fund will give you an excellent nest egg for the future. This will also give you a big deduction from your income now. You will need to work closely with your tax advisor or accountant to make sure you have a qualified plan in place. Only certain plans are eligible and each plan is only eligible up to a certain amount.
Just like your vehicle expenses, trips for business purposes are also deductible. If you plan to be away from your home for more than one working day, you can deduct any expenses accrued during this period, provided you carefully document who you are meeting, the purpose of the trip and the return / departure days. . Some of the deductible expenses included are:
- Travel costs, such as plane or train tickets
- Meals, including service tips
- Shipping of all luggage and equipment necessary for the business trip
- Just like vehicle expenses, keep very detailed records of your business trips to submit with your taxes. Keep those records for a few years afterward.
8. Legal and professional fees
The deductions also include the payment of any type of professional to work with you. These professionals include accountants, business specialists and lawyers.
Every business owner has to pay a lawyer, even if it’s just to help clean up all of their business documents or to draft partnership documents. These professional expenses are deductible. You can also deduct costs for legal matters like creating your will as long as you only deduct the part that relates to your business within the will.
An accountant or other tax expert is essential for any small business owner. Doing your taxes incorrectly can not only cost you hard-earned deductions now, it can also cost you thousands in audit fees down the road by not filing everything correctly.
Keep in mind that if you pay one of these professionals more than $ 600 during the year for their fees, you may need to file a 1099-MISC. This will definitely be something that you will need to consult a professional, as it can be very complicated to determine who should file the 1099-MISC and for what expenses.
Don’t pay more than necessary
While owning your business can be one of the most rewarding experiences you can have, it can also be quite expensive, especially when it comes to income taxes. Knowing what you can – and can’t – deduct from your taxes means you don’t pay more than you absolutely need.