What deductions can I claim for small businesses? How do small businesses maximize tax deductions? When you are in a business, these are the common thoughts you come across to achieve your tax-saving goal. You take all risks for your business and work hard to grow it, you deserve to keep maximum profit in your pocket. In this blog, we are trying to provide a list of the most common expenses which you may be able to w/off against your profit and pay minimum taxes. The list provided below is to bring awareness and could be helpful in planning and filing taxes.
To learn more about the applicability and the amount that you can w/off, please also visit our blog, “Small business deductions.”
You report your business income on Schedule C on your individual income tax return. You can claim a 20% deduction from your business income. The deduction limits the high-income earners, and it phases out for income over $160,000 for single filers, $160,725 for married filing separately, and $321,400 for joint filers.
When you purchase goods in your business, it is counted as inventory or raw materials if you are in manufacturing. Your opening inventory plus purchases during the year minus closing inventory at the end of the year is your cost of goods sold. You are entitled to deduct your cost of sales from your gross business receipts.
When you pay freelancers and independent contractors, are your tax-deductible expenses. You need to report on the 1099-MISC form for any amount paid to individuals over $600 or more for the worth of services provided to your company in any tax year.
When you import your goods from China or other parts of the world, you may end up paying freight, excise duties, and import duties. Expenses under these categories are your tax-deductible expenses.
Payments made to employees include salaries, wages, bonuses, commissions, and other taxable benefits, which are your tax-deductible business expenses. If you are incorporated, you can pay your salary to yourself, and it is tax-deductible expenses. You report all the payments made to your employees on W-2.
Anything you do to advertise or market your products is counted as tax-deductible expenses. You may need to prove that how effective you’re advertising or marketing.
Christmas, promotional, and special occasion gifts to your clients, customers, and other business associates are considered tax-deductible expenses for your business. However, when you gift to an individual, the gift amount is limited to $25 to an individual as a tax-deductible expense per annum. For promotion items like pens and calendars, do not count toward the limit if each item costs $4 or less and has your business’s name clearly and permanently imprinted on it.
Qualified properties like off-the-shelf computer software; certain film, television, and theatrical production costs qualify for 1005 depreciation.
Your annual account maintenance fees, monthly account maintenance fees, wire fees, payment processing, and other bank charges are tax-deductible expenses.
Interest on your long- and short-term debts, including interest that you on your credit card loans, are tax-deductible expenses. The loan must be used for the business, either financing your operational costs or fixed assets. You should have a valid loan where terms are defined between the parties.
If you paid interests on your federal or states tax owing, you cannot claim these interests as a tax-deductible expense.
All your business-related insurance costs are tax-deductible expenses. Business insurance includes insurance for business interruption, business vehicle, third party liability, professional liability/malpractice, and workers’ compensation insurance policies. And includes employee health, dental, vision, and life insurance premiums. However, your life insurance premium is not tax-deductible if you or your business is the policy’s beneficiary.
When you meet with your customers, clients, or business associates over lunch or dinner, you may pay the bill. Only 50% of this bill is tax-deductible. The bill should be reasonable.
You can also deduct the cost of meals for employees. The cost of food and beverages offered at office social events is 100% tax-deductible. Social events include such as parties or picnics. However, meals provided to employees when they are working late are only 50% tax-deductible.
Sales commissions paid regarding your sales activities are tax-deductible expenses.
The entire cost of operating your vehicle for your business is tax-deductible expenses. If you are using the vehicle for your personal use, then the expenses related to the personal use are not tax-deductible.
As per the IRS, there are two methods to calculate vehicle expenses if the vehicle is used for both business and personal:
The standard mileage rate is currently $0.58 / mile multiplied by the miles you traveled for the business.
Actual expense method: under this method, you can add all your vehicle expenses and prorate the expenses for miles you drove for your business.
Under both methods, you need to maintain the vehicle logbook.
Generally, the vehicle expenses include lease payment, the interest cost of financing, gas, oil, repairs, tires, insurance, registration fees, etc.
If you are Sole proprietors, limited liability companies (LLCs), and partnerships, you can not deduct contributions as a business expense. However, you report your charitable donation on Schedule A of your income tax return as a business owner. The donation must be paid to a qualified organization. However, a corporation can deduct charitable contributions only up to 25% of their taxable income.
Local transportation costs, like taxi fare, bus fare to visit a vendor or prospective customer or client, are tax-deductible.
Repairs and maintenance costs of your business building, warehouse, office building, and pieces of equipment are tax-deductible expenses.
Cleaning costs and supplies to maintain your business building, warehouse, office building, and equipment pieces are tax-deductible expenses.
Your accountants, bookkeeper, attorneys charge you legal and professional fees for business matters, bookkeeping service, online bookkeeping service, and tax preparation service are your tax-deductible expense.
If you have a property that you are renting to someone and if your tax-year rental income is less than all your expenses related to the rental property, then you have a rental loss. Your rental loss is a tax-deductible expense.
Rent paid for the properties that you are using in the business is tax-deductible expenses.
Your rent expenses will include TMI, i.e., taxes, insurance, and maintenance.
If you are renting or leasing and equipment for your business is a tax-deductible expense.
You may be using some are of your home for your business purposes. Business purposes like bookkeeping, other administrative or managerial activities. $5.00 per square foot times the square feet used for business purposes is tax-deductible subject to a maximum of $1,500 per tax year.
Home office expenses may include rent, utilities, mortgage interest, real estate taxes, depreciation, and cleaning and repair expense.
Utilities include payments made for heating, hydro, gas, and water that you use in your business premises or office premises are tax-deductible expenses.
When you are trying to develop a new product or process, you are doing research and development, and all expenses related to such activities are tax-deductible.
Whether for cleaning or maintaining or consuming in offices, all business supplies for your business are tax-deductible expenses.
This category of tax-deductible expenses may include all your business license registration fees and state income taxes.
This category of tax-deductible expenses will include your business landline, cell phone, fax, and internet. However, if you have only one landline at your home and even though you are using it for business, you can deduct it as your tax-deductible expense. If you have 2nd line at home dedicated to your business, you can deduct it as a tax-deductible expense. Please note if you are using your cell with a data plan for both, for your business and personal, then only the business portion is allowed as a tax-deductible expense.
Almost all businesses have a website. The cost of developing and maintaining the website is your tax-deductible expense.
You may need to general use software to buy or develop software tailor-made for your business. These may qualify under capital property; however, under the category of bonus depreciation is 100% tax-deductible for your business. You are paying regular maintenance and updates fees, and these are also the tax-deductible expense of you your business.
Travel may include for you or your employees, the costs of airfare, meals, lodging, and miscellaneous expenses for business trips are all tax-deductible.
Miscellaneous expenses may include car rental or other transportation services while on the business trip, parking, tolls, dry cleaning, tips, international calls, and shipping of materials or samples to the city where you are doing business. However, the cost of daily commuting to and from work to your home is not deductible.
You may come across a situation when your customer does not pay you. For example, he has become bankrupt. Your uncollectible portion accounts receivable is your tax-deductible expense.
There is a difference between business expenses and capital expenses. A capital expense could be the purchase of building or furniture, or equipment’s for the business and is used in the business for more than a year or years. You can not write off the entire costs in a single tax year. However, you can claim depreciation or amortization over periods (years) as tax-deductible expenses. Certain qualifying properties like computer software qualify for 100% tax-deductible expenses that mean full tax write-off in the year you purchase.
You need to maintain or enhance your expertise and skills to operate your business and be competitive. The IRS fully understands that and allows you to deduct all education and training costs if you have incurred these expenses to adds value to your business. This may include in-class or online materials and training, workshops, seminars and webinars, books related to your business, and subscriptions to trade or professional publications. Your training costs may include traveling expenses.
However, if you are changing your carrier or intending to do a different business type, you can not claim these expenses as tax-deductible for your existing business.
Your self-employed, your business is in a profit, for the tax year, and You are not eligible for an employer’s health plan, including your spouse’s plan, you can deduct the costs of your personal health insurance premiums. The premium you paid is directly adjusted to your income, and you do not need to report on Schedule A – itemized deduction as your medical expenses. This insurance may cover your medical care, including qualified long-term care for yourself, your spouse, and your dependents.
As a self-employed business owner, you can also deduct other out-of-pocket medical expenses, like office co-pays and prescriptions. You report these on your personal tax return as itemized deductions on Schedule A.
Contributions to your self retirement plan and retirement plans for employees are tax-deductible expenses. You are also entitled to claim a tax credit, which is 50% of the first $1,000 you invest in starting a retirement plan.
When you form a business structure like a legal entity, you incurred state fees and professional fees. You can deduct up to $5,000 as your organizational costs.
Up to $5,000.00 is tax-deductible expenses available for you to claim under this category. Business Startup Costs include expenditures to start a business or to investigate acquiring a business. You may need to incur travel and other expenditures related to finding suppliers, customers, employees, and distributors; the cost of advertisements, publishing a new business can be categorized under this heading.
Sometimes you may need to move business equipment, supplies, and inventory from one location to another. Expenses under this category are also tax-deductible.
Suppose you pay from your business to the first two years’ wages to targeted employees, like recipients of long-term family assistance funds from the government, veterans, and youths hired for summer jobs. You can take advantage of this work opportunity credit.
Depending on the type of targeted employee, the credit is calculated as a percentage of the employees’ wages, ranging from $2,400 to $9,600 per employee.
Depending on your income, you can qualify to claim on your personal tax return 25% to 30% of your allowable expenses for the child and dependent care. The dependent must be a child under 13 or a spouse or other dependent who is physically or mentally unable to do routine life activities for himself or herself.
As business owners, you can claim a credit when wages are paid to your employees while they were on family and medical leave under the Tax Cuts and Jobs Act. The credit ranges from 12.5% to 50% of a person’s salary paid and increases to 25% if the leave payment rate is made at a regular rate.
RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters. RKB a CPA(Delaware), CA(India), and CIA(USA) has over 25 years of experience in accounting and taxation in dealing with various countries in the world.
Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.