Tax season can be stressful for everyone, but it’s especially challenging for business owners right now. If you run a small business, you’re probably already struggling to balance multiple priorities. Worrying about your business, working from home – especially if you have children – keeping in touch with family and friends, and staying up to date on the news all compete for your attention daily.
There’s a lot on your plate, so it can be tempting to rush through and finish your tax return as quickly as possible. This is even more complex when tax reform changes the rules, or when a pandemic hits the United States and the government adjusts tax deadlines or payments. Now you’re no longer certain what you are or aren’t supposed to do.
Individual taxpayers can claim a standard deduction that reduces your tax burden by lowering your taxable income. Meanwhile, entrepreneurs running small businesses like yours don’t have that option. Your only choice is to itemize and file for all your specific business tax deductions. But many business owners don’t know what the best business tax deductions are, or even what qualifies as a tax deduction.
Petty cash refers to money you use as a business owner for small purchases and other minor expenses for your business. While these purchases may be small, they add up over time, and the total deducted amount from these expenses can make a significant difference when taken out of your gross income.
Track these purchases throughout the year. Good record-keeping is key! You will need receipts and a detailed log of these transactions to get the maximum benefit from filing these costs.
Research & Development
You can also deduct costs incurred to develop a new product or service. For a new small business, this can include a lot. Research and development isn’t cheap.
You can either deduct these expenses all at once or amortize them over a period of time beyond this tax year. You can learn more online about how to get the most benefit out of this deduction. For information on the Research Tax Credit, find out more about IRS publication form 6765.
Home Office Deduction
If you work from home, or if your entire business is based out of your home, then you qualify for the home office deduction. Home-based businesses are pretty common, especially for sole proprietorships, where you are the single owner of your own company.
As long as you’ve been operating at a profit for the last tax year, you can deduct expenses for your home office based on the money you spend on housing costs. These housing costs can include utilities, property taxes, rent, and much more.
If the business use of your home qualifies for a tax deduction, you will need to measure the square footage of your office in terms of the total size of your home. That ratio will determine how much you can deduct.
Business Startup & Organization Costs
These costs include all of the legal fees, professional fees, and state registration fees you have to pay as you organize your company. Any business startup costs you incur in the process of creating or purchasing your business can be written off for this deduction.
The first $5,000 of startup costs can be used for a deduction in your first tax year return. Costs beyond that point will be amortized over 15 years as determined by the IRS.
Interest on Debts
Business loans and lines of credit are the financial foundations for any new business owner. Keep track of the interest you pay on this financing debt and write it off as well. Interest on debt is tax-deductible if it meets certain requirements.
You can count interest payments as a deduction for any debt secured to help you operate your business. As an individual filing your own taxes, you might also be able to include other expenses like student loan interest, for example, although they may not be eligible as business expenses because your student loans are not financing your company.
Many small businesses make use of charitable giving and tax deductions. Business tax deductions include any charitable contributions the company makes, as long as the company is one of these following types:
- Limited Liability Corporation
Deductions from charitable contributions cannot be more than 10% of your total income. Donating old equipment and furniture also doesn’t count for this deduction if you’ve already used their full depreciation for a deduction previously.
If you’re a self-employed business owner, any contributions you make to a retirement savings account or plan are also possible deductions you can make on your tax return. Here are the main types of small business retirement plans eligible for this deduction:
- Self-employed simplified employee pension (SEP) plan
- Savings incentive match plan for employees plan (SIMPLE)
- Solo 401(k)
- Keogh or HR-10 Plan
If you want to find out which plan could be best for you and your business, as well as your possible tax savings, we recommend speaking to a retirement planning expert.
If you use your own personal vehicle for doing business, then you can deduct your mileage using either the standard mileage rate or the actual expense method. Deducting your standard mileage or actual expense on taxes is tricky and the best option will depend on your particular circumstances.
If you use your car for both personal and business-related travel, then only the business-related travel is eligible for deduction. You will need to calculate your costs based on the relative percentage of business use versus personal use.
Some larger expenses cannot be used for a business tax deduction all at once, but can be carried over to future years. Keep a record of these so that you don’t forget to get the full benefit of these costs in later years. Possible carryover deductions include:
- Capital loss deductions
- Passive activity losses
- Business startup costs
- Home office deductions involving set-up or moving expenses
- Charitable contributions that go beyond 10% of income for that tax year
Miscellaneous Business Expenses
This list of tax deductions is not exhaustive. There are so many different items that small businesses spend money on each year, and more of them may be deductible than you realize.
If an expense is ordinary and necessary to the daily operations of your business, then they are likely deductible. Keep track of these costs and be ready to show to the IRS that they are indeed ordinary and necessary for your company. Here are a few more possibly deductible business expenses:
- Business gifts
- Club/membership fees
- Seminars and trade shows
- Bad debt expense
- Bank and credit card fees
- Continuing education costs
- Parking and tolls
- Website and internet costs
- Industry publication subscription costs
Making the Right Choices for Your Business
Clearly, there’s a lot to remember as you file your tax return this year. Make sure you don’t leave any tax deductions behind!
One way to make sure you get all of your possible deductions and keep your tax bill down is to hire an accountant. Instead of wasting time trying to learn the ins and outs of this complex system, bring in an expert to get it done in a fraction of the time.