If you’re like many small business owners, when you hear the word tax, you may cringe. Follow the word “tax” with the word “audit”, and you want to weep! While audits by the IRS are rare, small business owners, in particular, sole proprietorships, are more likely to be audited than other businesses.
Yet follow that word tax with the word deduction, and your mood improves 100 percent! Read below for your small business tax deductions checklist.
The Sixteenth Amendment
Why do businesses have to pay income taxes? In 1913, Congress ratified the 16th Amendment to the U.S. Constitution. The amendment empowered the federal government to tax income. Fortunately, the amendment included six deductions, including the ability to write-off business expenses.
What you’re allowed to deduct as a business expense, depends on many different factors. In the simplest terms, business expenses are the costs of running a business. There are two very basic ways to determine if a business expense is tax deductible:
- Is it ordinary: is it a common expense accepted in your industry?
- Is it necessary: is it helpful and appropriate for your business?
Sounds pretty simple, right? Yes, but it can get complicated really fast, which is why small business owners need to the advice of a certified public accountant to maximize deductions without inviting an audit by the IRS.
Small Business Tax Deductions Checklist
The concept of taxing an individual’s or small business’s income was born out of the idea that one should only be taxed based on their ability to pay – unlike, say, sales tax. The challenge has always been how to fairly define an individual or business’s ability to pay.
Below is a list of key tax deductions for small businesses. Be sure to consult your CPA about which of these apply to your business.
Insurance Premiums
General liability, professional liability, commercial property, business interruption, cyber liability, workers compensation, commercial auto, health, life, dental, long term care as well as premiums for your spouse and dependents.
Marketing and Promotions
Marketing deductions cover advertisements in digital and print publications; social media and social media scheduling software; fees for sponsored content by influencers; content marketing; postage for direct mail; and trade show entry fees.
Promotion deductions include costs related to marketing events for the general public like food, drink, catering, DJ, tables, chairs, speakers, parking attendants, and venue rental. This is not an all-inclusive list, so check with your CPA.
Meals for Business Purposes
This deduction includes meals while traveling, with employees for meetings, with customers, suppliers, vendors, and associates. The new 2018 tax laws do not allow tax deductions for entertainment.
Business Travel
For an expense to be considered for a travel expense tax deduction, you have to travel outside the area where you usually conduct business and for longer than a regular work day. Examples of travel expenses are airfare, hotels, meals on the road, parking, tolls, dry cleaning, and costs related to shipping business materials to destination.
Business Vehicles
There are two ways to deduct vehicle expenses. You can track your business mileage and multiply the annual total by the IRS standard mileage rate. The second way is to deduct insurance, gas, repairs, oil changes, and car washes.
Office Expenses
This category of deductions includes daily supplies (think toilet paper, pens, paper); decorations, furniture, equipment, and tools; utilities, telephone, and internet; one-time and ongoing software subscriptions. Improvements you make to your rental space are tax deductible. These need to be improvements that you can’t take with you, such as painting or plumbing work.
Home Office
To qualify for home office deductions, your work area at your home must be used exclusively for your business with clearly identifiable boundaries; your homework area must be your primary place to conduct business. Your home office is where you spend most of your work time and conducting the most important activities for your business. You can deduct 5 dollars per square feet up to a maximum of 300 feet.
Professional Fees
Consultants, lawyers, accountants, contractors, freelancers, janitorial services, web designer, photographer, bookkeepers are tax-deductible expenses.
Bank Fees & Interest
This includes monthly service fees, ATM fees, overdraft fees, wire transfer fees, and other fees to maintain your business’s bank account. Credit card interest, annual and late payment fees are tax deductible. Business loan interest is deductible along with originating and closing costs.
Payment Processing Fees
Merchant/card processing fees, payment gateway, and payment processor fees are deductible – think PayPal, Stripe, Square, etc.
Payroll Expenses
Fees or taxes related to running payroll such as local, state and federal payroll taxes and payroll service fees can be deducted.
Child Care
The cost of placing your children in daycare while you run your business is tax deductible.
Depreciation
This allows you to deduct high-cost items over time instead of deducting the cost of the asset once.
Education
Activities and publications – classes, seminars, webinars, subscriptions, books, workshops – that add value to your business and increase your expertise are tax deductible. This deduction applies to educational activities for you and your employees
Licenses and Permits
Professional licenses required for you to conduct business; and permits to conduct your business are tax deductible. This category includes licenses for alcohol resale.
Commissions
If you pay third parties, like affiliate marketers, more than 600 dollars in a tax year, it’s tax deductible. Commissions paid to salespeople are also tax deductible.
Bad Debt
If you advance money to an employee or vendor and did not receive payment or goods back, you can claim a deduction.
Charitable Contributions
If you make a cash or in-kind donation to a 501(c)(3) non-profit charity, you can deduct it. Donations to political non-profits are not deductible.
Cost of Goods Sold
These are costs directly related to making the product you sell. These shouldn’t be confused with operational costs. Costs of goods sold include raw materials (such as food, spices, cooking oil), labor (direct labor related to making good but not selling them), and inventory (merchandise you purchase to resell.)
Work Opportunity Tax Credit
If you hire military veterans or other long-term unemployed people, you may be eligible for a tax credit.
Other Common Small Business Tax Deductions
Machinery and equipment rentals; employee salaries and benefits; gifts to customers, associates and employees; shipping and packaging; trademarks and intellectual property fees; storage rentals, moving expense; and more!
Maximize Your Tax Deductions
It would be hard to call any small business tax deductions checklist complete. Political changes and economic policies impact IRS tax deduction rules. Different business types have nuances in how they claim tax their deductions.
The best way to avoid an audit by the IRS is to not abuse your tax deductions, don’t consistently lose money, don’t disproportionately rely on independent contractors, file on time, and report precise numbers.
