Most Common Tax Deductibles for Small Businesses – As an entrepreneur, paying taxes is what you least enjoy all year. But any business owner likes to use all available tax deductibles to reduce what they owe the IRS.
Any entrepreneur wants to retain as much of their hard-earned profits as possible.
For this to happen, you must know the tax deductibles the IRS offers to small businesses. By knowing which business expenses you can and cannot report on your tax return, you can decrease(reduce) the amount of income subject to tax.
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What is Tax–Deductible? – Most Common Tax Deductibles for Small Businesses
Throughout the fiscal year, you naturally have expenses related to the operations of your business, and the IRS allows you to report many of these everyday expenses. By keeping a careful record of these expenses, you can reduce the amount of your income subject to tax and thus reduce what you owe in taxes.
Many mistakenly believe that the deductible applies directly to the amount you owe the IRS: in reality, deductibles are used to reduce the income that must be reported, which reduces your business’s tax liability and subsequent taxes.
The IRS allows you to declare these two types of business expenses as deductible
- Ordinary expenses: these are everyday expenses that are usually made in your type of industry. Standard costs include, for example, the tools carpenters need to complete projects: levelers, hammers, drills, and other building materials.
- Necessary expenses: these are useful and appropriate expenses for your business. Continuing with the example of carpentry, purchasing safety equipment such as helmets, special boots, and protective glasses would be considered a necessary expense.
Saving and organizing every receipt throughout the year can be overwhelming. Fortunately, storing each piece of paper in folders or cardboard boxes is no longer necessary. An expense tracking app can record and manage your expenses efficiently. This application category allows you to digitally record your sales, receipts, payments, and other data on your computer or cell phone. So you can access this information when declaring your taxes and the rest of the year.
30 Most Common Tax Deductibles
The items registered below are the most common expenses business owners use as deductibles to reduce their tax burden. Before stating these deductibles, make sure it’s appropriate for your business type (sole proprietorship, LLC, partnership, or corporation).
If you are uncertain if a particular expense is allowable, seek the advice of an accountant so that you can file your taxes correctly. Sole proprietorships and single-member LLCs file their fees on Schedule C ( Form 1040 ), partnerships and multi-member LLCs use Form 1065, and corporations use Form 1120.
If you’re unsure which IRS form to use, don’t hesitate to contact a tax professional.
1. Advertising – Most Common Tax Deductibles for Small Businesses
Typical advertising expenses include business cards, yellow page ads, radio and television ads, and other payments to promote your business.
2. Bad Debts:
Loans to customers, vendors, employees, and sales to customers that you haven’t been able to collect are considered legitimate business tax deductibles.
3. Business Trips
You can deduct lodging and transport expenses if you spend the night outside of your city because of a convention or a seminar related to your company. Further down, you’ll find another travel-related deductible (meals, #17).
4. Commercial use of your Home
The IRS requires you to complete Form 8829, which calculates your Home’s business use based on the percentage of your Home’s total square footage.
If you buy or sell a business and pay a broker a commission, it’s deductible as long as you don’t include this expense anywhere else on your return.
6. Continuing Education
Business owners must demonstrate that the courses they have taken during the year enrich their skills or are a legal requirement to maintain a professional license. In some cases, continuing education expenses offered to employees may be deductible.
7. Independent Contractors
Payments made to independent contractors who complete the work with their tools, equipment, and materials may be deducted. They are self-employed and are not considered employees.
8. Gifts to Clients
The IRS stipulates that you can deduct $25 per customer. If you have a customer with an item valued at $100, you can only remove the first $25.
9. Depreciation and Section 179 Expenses
You can declare as deductible equipment and vehicles that have suffered depreciation from the time you first used them as business property until you took them out of service. It is also possible to claim the full amount of money for assets you buy, finance or rent if they are used exclusively for your business.
10. Employee Benefit Programs
Accident and health plans, group life insurance, and dependent care programs are eligible as deductibles.
11. Funded Deferred Compensation Plans
This business tax deduction includes contributions you make to your employees’ annual retirement plan, profit sharing, or another type of yearly plan.
12. Insurance – Most Common Tax Deductibles for Small Businesses
Payments made to your commercial insurance to cover property, professional liability, and products, among others, are also tax deductible.
13. Interest paid
They are typically reported on Form 1098. Interest paid on a commercial property mortgage is considered an expense. You can only deduct business-related charges plus applicable interest if you use a credit card to pay for personal and business expenses.
14. Legal and Professional Fees
The money you pay to a lawyer, accountant, or other specialists related to your business can also be deducted. If you use a tax professional to help you with your return, don’t forget to include this expense.
You pay the fees to the state or local government for your business.
Materials and supplies you purchase during the tax year are deductible as long as they are not also part of your inventory on your return.
You can deduct 50% of the value of your business meals (made during meetings with clients, with potential clients, or with other contacts that have to do with your company).
18. Miles Travelled
You can use the standard rate to report business miles or deduct expenses like gas, repairs, and auto insurance. Regardless of determining the deduction, you must keep accurate documentation records.
19. Office Furniture and Accessories
Deductible items include desks, chairs, bookcases, tables, and cubicle partitions. These items are mobile and are not permanent building elements.
20. Office Supplies
These types of supplies include items you buy and use throughout the year. Some examples include paper, post-it notes, staplers, folders, printer ink, and postage. The supplies you use to make, ship, and package products are the cost of goods sold.
21. Parking and Tolls
These costs are deductible if you visit a customer, park in a garage, or pay tolls along the way.
22. Rent – Most Common Tax Deductibles for Small Businesses
You can subtract the rent you pay for your vehicles, machinery, equipment, or commercial space.
Ordinary repairs and maintenance are deductible if they do not increase the property’s value.
24. Research and Development
You can deduct expenses related to the process of searching for and creating new products and services.
If you use one to store stocks, bonds, and other investment-related documents, the cost of a safe is considered a business expense and is tax deductible.
26. Software and Technology
Purchasing new or updated software, computers, smartphones, and other small devices for business use is considered an expense of your company and is tax deductible. Your accountant can advise you whether larger purchases should be reported as depreciation or registered in full under Section 179.
27. Taxes – Most Common Tax Deductibles for Small Businesses
This includes business taxes paid on real estate. You should consult with an accountant to determine if state and local taxes you paid as a seller of goods and services can be deducted.
28. Losses Due to Theft
That is to say, you can deduct money or business property from your taxes if someone steals money or business property.
29. Public Services
Above all, the electricity needed to supply a commercial space is deductible. You can deduct all company-related mobile phone charges and company landlines.
Moreover, payments to employees in the form of salary, commissions, bonuses, and fringe benefits are considered business expenses and are deductible.
Expenses you Cannot Deduct = Most Common Tax Deductibles for Small Businesses
Here are some examples of expenses the IRS doesn’t consider business tax deductions:
- Work Clothes: It’s normal to want to look your best when working with clients. However, the clothes and shoes you buy for work are not deductible unless it is a uniform or protective equipment.
- Cell phone expenses: Itis better to use a phone dedicated exclusively for business use to deduct the associated costs. Use a solitary phone for both business and personal purposes. You can only claim the portion of the usage that was for business purposes and being able to prove this portion is very complicated.
- Commuting to work: The distance you travel from your Home to your place of work cannot be deducted, and you can only remove mileage from your workplace to a destination related to your business.
- Parking Tickets: You can’t deduct traffic, traffic, or parking tickets even if they occurred while traveling for business.
- Political donations: If you donate to a political candidate or pay to support the government, you can’t deduct them from your taxes.
Use These Deductions and Save Money
Therefore, the IRS is pretty generous regarding the number of business tax deductions allowed. Meanwhile, if you know what conclusions you can use, you can maximize your company’s profits. But if you intentionally lie on your tax return about reported deductibles, the IRS considers it a form of tax evasion and can impose severe penalties.
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