If you own a small business and run it for a profit, you can likely deduct the costs incurred. Small business tax deductions reduce your taxable profits and, therefore, business taxes. From home office expenses to advertising bills, here are some small business tax deductions owners can claim.
A financial advisor can help you create a financial plan for your business needs and goals.
Common Small Business Tax Deductions
The general rule for deductible business expenses is that they must be ordinary and necessary. As a result, if most businesses like yours have a similar expense and it’s helpful and appropriate for your business, it’s likely deductible.
Good recordkeeping is important for taking small business tax deductions. For example, you may be able deduct the business portion of some expenses that are partly for personal and partly for business. But you’ll need accurate records to substantiate that the deducted portion was for business purposes.
Business Use of Your Home
If you use part of your home exclusively for business, some homeownership costs may be deductible on your business tax return. First, calculate the percentage of your home’s size in square feet used for business. Then add up your home-related expenses, including mortgage or rent, utilities, insurance, repairs and depreciation. Finally, multiply the result by the percentage devoted to business use and you have your small business tax deductions.
You can deduct car expenses if you use your vehicle for business. If you use the vehicle only for business, total what you spent for gas, maintenance and depreciation. Those will be your small business tax deductions.
If you use it partly for personal use, keep track of the mileage for business and personal use. Then deduct a percentage of the expenses equal to the percentage of business use. Or multiply the number of business miles times the standard IRS deduction. In 2019, this was 58 cents per mile.
You can deduct everything you spend to light, heat and cool your store, office, factory or other business workspace. You also can deduct the costs of Internet service and a landline telephone, assuming you use them only for business. If you have a cellphone used for business and personal purposes, you can deduct the business portion of the bill.
Employee Wages and Salaries
Money you pay employees can generally be deducted. You can also deduct payments for contract and freelance labor. Remember to send a 1099-MISC form to anyone you pay $600 or more. If your business is incorporated, you may be able to deduct wages and dividends you pay yourself. However, if you are a sole proprietor or LLC, you can’t deduct the wages you pay yourself.
If your business has a retirement plan, you can deduct contributions to the plan made for you and your employees. Costs for other employee benefits may also be small business tax deductions. These include health plans, pensions, profit-sharing, tuition reimbursement and child care assistance. If you’re self-employed, however, you’ll deduct health insurance premiums on your personal return, not your business return.
You can deduct rent paid for office, store, warehouse, factory or other space your business occupies. You can also deduct fees to rent machinery, equipment, furniture and even event spaces.
Taxes and Fees
Federal, state, local and foreign taxes you pay in order to conduct business may be deductible. These include sales taxes, payroll taxes and property taxes on real estate your business owns. You can also deduct fees paid for business and professional license and trademarks.
Interest paid on mortgages, business loans, lines of credit and business credit cards is also deductible. Mortgage interest for a home office can be deducted as part of the deduction for business use of your home.
Premiums for insurance protecting your business against loss are deductible. This includes policies for liability, accidents, theft, malpractice, flood, business interruption or other business risk. Auto insurance on company-owned vehicles is deductible. But you can’t deduct it again if you’ve already taken it for business use of a vehicle.
Advertising and Marketing
Costs for business cards, digital and print display ads, TV and radio commercials, flyers and billboards are deductible advertising and marketing expenses. Likewise social media ads, pay-per-click ads and website design, content creation and hosting bills. Promotional items with your company logo, event sponsorships and food and entertainment costs for promotional events are also deductible costs.
These are just some of the more common and significant deductions. Business owners may be able to deduct depreciation, legal fees and bank charges. Office supplies, bad debts, and even travel, meal, and entertainment costs are also potentially deductible. Even if the entire cost isn’t deductible, part of it may be.
Small Business Tips
- If you’re still wondering how your small business will weather tax time, consider speaking with a financial advisor. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Deducting qualified expenses to reduce taxable profit is one of the most effective ways business owners can boost after-tax net income. However, if you’re a small business owner preparing for tax season, SmartAsset has a set of tax planning strategies that may be worth small business owners’ consideration.
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