Running a small business and keeping it afloat is challenging and stressful at the best of times. It’s exciting, but part of the excitement is that so many small businesses only barely stay afloat.
Every small business owner knows that when your budget is so tight, and your margins don’t leave you much space for failure, every dollar counts. This is especially true amid a global pandemic when customers are quarantining, and so many businesses are shutting down.
And when times are tough and every dollar counts, it’s the business that holds onto a few more dollars that manage to scrape by. That’s why knowing how to handle your small business taxes is essential. There are numerous deductions exclusively for businesses that let you reduce your income tax burden. When you don’t claim every deduction available, you are losing money for your business.
Top Small Business Tax Deductions
The tax system is infamously complicated in the United States. You can’t blame yourself for not knowing what opportunities are available.
Unfortunately, with the way the system works, many small business owners end up paying more than their fair share of taxes, while the larger businesses with more resources end up paying less.
The IRS offers tax deductions for small businesses that allow you to decrease your taxable income. The idea is that you should be compensated for the expenses you make for business purposes without being taxed. Therefore, money that goes toward those costs is not profit and should be taken out of your taxed income.
Read on to find some of the most useful and powerful tax deductions you might not be claiming. When you sit down to prepare your small business tax return, don’t forget to use every business deduction that applies to your situation.
1. Marketing Costs
Whatever you spend as a business owner on advertising and marketing should be fully deductible. If you were an employee, you wouldn’t be responsible for making those expenses so that you can deduct the costs of that advertising from your income.
Here are a few of the marketing costs you may be able to deduct:
- The cost of a public event set up for advertising purposes
- Print advertising
- Paid social media marketing
- Services contracted from a marketing professional
- Website administration and design costs
2. Utilities and Other Workspace Costs
More and more people are working from home these days, which means more and more home offices. If you’re renting a workspace, that rent counts as a business expense.
Suppose you’re a business owner working from home. In that case, a portion of your rent costs, mortgage interest, and even your utilities can be claimed as business expenses through the home office deduction in 2020.
3. Qualified Business Income
Since the 2017 Tax Cuts and Jobs Act, the IRS has allowed small business owners to claim the Qualified Business Income Deduction, which will enable you to deduct up to 20 percent of your qualified business income from your taxable income.
This is a general deduction you can claim in addition to specific expense deductions, but it is only available to pass-through businesses. This means that only business owners that file their personal and business income together are eligible. It is intended to help reduce the tax burden on small businesses and encourage growth.
4. Vehicle Use
Some self-employed people use their vehicles for business purposes. If you do, you may be able to deduct your vehicle expenses based on how much you use it for your business.
Instead of keeping track of individual expenses, you could also record the miles you drive for work. Then you can deduct those miles from your taxes based on the standard mileage rates set annually by the IRS.
5. Travel Expenses
If you do any overnight travel entirely for valid business purposes, you may be able to deduct the money you spend on transportation and lodging. This includes conferences or seminars out of town, or possibly visits to distant clients.
While business meals and entertainment expenses are no longer fully deductible as they used to be, you can still deduct 50 percent of the cost of meals you provide for customers or employees under certain circumstances.
If you are present, and the meal isn’t overly extravagant, you can deduct half of the cost of meals you provide for a valid business need, whether it’s for employees or clients while working or traveling.
7. Employee Benefits
The IRS also encourages business owners to save for retirement by offering deductions on contributions to certain retirement accounts. You can deduct contributions to retirement plans up to a set amount each tax year. Here are some of your options for tax-deductible retirement savings plans for the self-employed:
- A simplified employee pension (SEP)
- A 401(k)
- A savings incentive match plan for employers (SIMPLE IRA)
If you are self-employed and don’t qualify for health insurance through your spouse’s employer, you can deduct your insurance premiums from your taxable income. That is a cost you are taking on because you are a business owner, and therefore it is a business expense.
Premiums for most other insurance policies related to your business should also be deductible.
9. Necessary Fees and Subscriptions
Any regular fees you have to pay related to your business might be tax-deductible. Regular credit card fees are tax-deductible if the credit cards are not for personal use. Credit card interest on business purchases is also eligible as a business expense.
Other deductible fees include subscriptions for business software or trade publications. If you can justify the expense as necessary for your business operations, the cost is likely fully deductible.
Prepare for Tax Preparation
The less money you spend on taxes, the more you have to keep investing in your business’s future. However, to get the most out of these deductions, you’ll need to keep track of your expenses during the year.
That’s why effective record-keeping for small businesses is so essential.
In times like these, your business needs all the help it can get. If you want to ensure you’re not leaving money on the table at tax time, consider working with an accountant or tax professional to put together a plan.