Although taxes are a fact of life, especially for a small business owner, there are ways to maximize your deductions so that more of your hard-earned money winds up in your pocket, and not with the IRS.
The good news is that figuring out business tax deductions is pretty straightforward. However, because of important changes in the tax laws in the past few years, it’s good to have a refresher on what is tax deductible. Use this small business tax deductions checklist to determine what is most appropriate for your company.
Having the correct small business insurance can be the key to maintaining your financial health. Your business might require several types of business insurance policies, and you can often write off commercial insurance premium costs as part of your small business tax deductions.
These policies are usually included among those that would be tax deductible:
General liability insurance
Professional liability insurance
Commercial property insurance
Business interruption insurance
Cyber liability insurance
Workers’ compensation insurance
Commercial auto insurance
Health and life insurance
Marketing and advertising
Whether you engage in a small-scale marketing tactic, such as printing a few batches of business cards each year, or a large-scale promotion like hiring a social media contractor to market your business, those costs can always be claimed as deductions on your tax return.
You might be the kind of businessperson who likes to wine and dine your clients, or maybe you take your staff out for occasional work lunches at the local watering hole. Either way, if you’ve spent money on business-related meals, you can deduct 50 percent of that cost. To maintain this deduction, keep a log of:
Amount of the meal
Date and location
Business relationship of the people who were there
When you get into items that might be for both business and personal use, such as cars, Wi-Fi, and home-office space, it’s a little trickier to determine small business tax deductions.
The general rule of thumb for a vehicle is that if it’s for both work and personal use, the deduction would be based on the amount of use. Track each business-related trip you make and submit that mileage cost as your deduction. If the vehicle is solely for business and never used for personal travel, you can deduct the entire cost of operating the vehicle and maintenance.
There are certain IRS-approved travel expenses, but the travel has to be purely for business, more than a day, and outside of the city in which you normally work. Keeping receipts for these expenses will be essential when it comes time to file for business tax deductions. List each trip and the associated expenses, and maintain a log of all business-related travel.
Years ago, a person who worked from home would calculate the cost of specific items to claim a home office deduction. Now that working remotely is commonplace, it’s easier than ever to determine your home-office small business tax deductions. Simply deduct $5 per square foot of space that is used as a home office, up to 300 square feet, which would be a $1,500 deduction.
Your per-square-foot deduction includes costs for utilities like heat, electricity, and Wi-Fi. Be prepared to prove that your workspace is exclusive to business use. There are three requirements:
The workspace has clearly defined boundaries. It should be a separate room or portion of a room; working from your bedroom is not considered exclusive to business use.
It has to be the regular, or normal, place where you work.
You need to be engaging in the regular and important business of your company from your home office. For example, if you are a medical provider who sees patients in an offsite office, but you do paperwork and billing at home, that likely would not qualify.
Employee salaries and benefits
In most cases, you can deduct salary and benefit expenses from your business taxes. However, this only applies if you employ someone other than yourself (i.e., your business is not a sole proprietorship or partnership).
Legal and professional expenses
If you retain lawyers, accountants, bookkeepers, or other professionals specifically related to your business operations, you can take deductions for those fees.
Adding it up
Tracking and logging expenses throughout the year are crucial to filing your deductions as efficiently as possible. It will be much easier to work through your small business tax deductions checklist if you have kept meticulous records all year.
It’s also a good time to do an insurance inventory of your business coverage to make sure you have the appropriate policies for your business needs. Whether the last year was one of growth, downsizing, or simply staying the course, you might be able to find additional savings.