Tax Deductions for Small Businesses
A desktop with a piece of paper that reads “tax plan” with a calendar turned to April and calculator.When tax time comes around, business owners should be on the lookout for potential tax deductions. While businesses of all sizes have expenses, knowing which ones are legitimate write offs can be confusing, especially if you're not a pro with the tax codes in your state or the IRS. Members of our Small Business Legal Subscription Plans have access to qualified tax attorneys, and you can ask questions and get advice at tax time, or any time! While the following information shouldn’t be considered tax or legal advice, this blog post will cover some of the most common small business expenses that can be deducted on your yearly taxes.
Writing Off Expenses
The IRS says that business expenses must be "ordinary and necessary" in order to claim them on your tax return. This means that your expenses must be common for your industry and relate to the operation of your business and work performance. Once you determine which expenses you can deduct, you'll need to know which forms to use to report your expenses, and this depends on your business entity type. For instance, a sole proprietor or an LLC with a single member would report these expenses on a Schedule C form, where you report your business' profits and losses. The figure will be subtracted from your gross profits and the final amount is then transferred to your personal 1040 as business income. If you are a C Corp, you file an 1120 with the same expenses and revenues, but you also provide a balance sheet.
This process can get complicated the more expenses you have to deduct, determining which expenses qualify for deduction, and to what category they belong. Members of our legal subscription plans can get the help they need at tax time; one of our network tax attorneys is always available to answer questions.
Common Business Tax Deductions
Industries differ on which expenses can be deducted, but there are some common deductions so long as you keep good records and save receipts:
Start-Up Costs
New businesses may be able to deduct up to $5,000 of start-up costs, provided that they are related to research into creating a business, preparing for the business' launch, or creating a business entity. Start-ups can also deduct up to $5,000 each year for the first three years for costs incurred while creating an employee retirement plan.
Transportation
Some professions require some amount of driving and travel as part of the job, and these expenses can be deducted under certain circumstances. You must keep records of mileage, gas receipts, maintenance bills, license and registration fees, parking fees, and the costs of tolls. You can deduct a standard mileage rate of .58 cents per mile for business use, according to the IRS. The trick is in separating your business use from your personal use. If your vehicle is also used for personal uses as well as for your business, you will need to keep meticulous records of work use versus personal use in order to deduct these costs.
Travel and Meals
Some jobs require you to travel out of your home area, and you may be able to deduct those expenses, provided they meet certain criteria. For travel expenses, these must be:
Necessary for work
For the purpose of business activities
Outside of your "tax home"
Planned in advance
For meals, the rules are a bit more complicated. As an example, if you take a potential customer out to lunch to discuss your work, you usually can deduct 50% of the cost of the meal. Additionally, meals purchased on a business trip are usually deductible.
Rent
If your business requires a physical location, you should be able to deduct the cost of your rental space on your taxes, so long as you are not receiving equity or title to the property.
Business Insurance Costs
Most businesses have some kind of business insurance, and in almost all cases, the cost of business insurance can be deducted from your tax bill.
Advertising
Any expenses related to advertising and marketing can usually be written off, with the exception of expenses related to lobbying to influence legislation.
Education
Paying for training for employees or yourself can usually be deducted, including travel expenses related to the education.
Depreciation
Business equipment loses value over time, and you can write off the lost value of that equipment on your taxes over the life of the equipment. The IRS has some rules for this, including how you depreciate the equipment: you can choose to depreciate at a steady rate over time or take a bigger deduction within the first few years and smaller deductions later.
Office Supplies
Most consumable office goods are tax deductible so long as you haven't deducted them in a previous year.
Utilities
Costs of electricity, heating and cooling, telephones and other communication devices, water costs, and sewage costs are all eligible for deduction from your taxes so long as they are strictly used for your business and not personal use.
Health Care Tax Credits for Small Businesses
If you have fewer than 25 full-time employees, you may be able to get a tax credit if you provide health insurance benefits. This credit can be up to 50% of the premiums paid, and smaller employers get a bigger credit.
Self-Employment Tax Deduction
Working for yourself means that you are responsible for both the employer and employee contributions to Social Security and Medicare/Medicaid. This self-employed tax rate is 15.3% for incomes up to $142,800. You may be able to deduct the portion that would be the employer's portion from your net income on your income taxes.
Home Business Tax Deductions
Working from home is more common today than ever before and you may be able to deduct the costs of working from home. Sole proprietors, freelancers, contractors and others may be able to deduct the costs of a home office on their tax returns, but there are certain stipulations that must be met in order to claim them.
Home Office Deduction
While it's not as simple as just writing off the cost of your rent or mortgage, you can get a tax deduction for the space you use for work. The IRS stipulates that the space must be used exclusively and regularly to conduct business, so if you use a spare bedroom as your home office, you can deduct $5 per square foot of space or total the cost of your mortgage or rent, utilities, and other expenses and calculate the percentage of your deduction based on the percentage of your home is being used to conduct business.
Small businesses shouldn’t have to worry about IRS audits, and working with a professional tax attorney can alleviate those worries, making sure that you get every deduction and credit you're entitled to and avoiding claiming ones that you're not. Our legal subscription plans for small businesses is a great investment at tax time, and you're sure to find many reasons to use your subscription and discuss business issues with your provider attorney all year long. You can speak with a dedicated, qualified, small business tax attorney about your small business taxes and make sure that all your filings, paperwork, and documents are correct, accurate, and complete before you file. Plus, you can talk to your provider law firm about many other topics, as well, such as contracts, agreements, employment issues, and much, much more! Learn more about the many benefits of being a subscriber to our legal subscription plans for small businesses or sign up today!
