Whether you’re in the thick of tax season or planning for the year ahead, tax deductions are one of the easiest ways to save your business money. And the best way to maximize tax deductions is to itemize your expenses.
Heads up: When it comes to itemizing your expenses, the most powerful tool at your disposal is thorough bookkeeping; only accurate, up-to-date financial records let you track and record deductions. We recommend Bench for small business bookkeeping—you’ll get a team of bookkeepers who’ll make sure your records are complete at year-end.
First time itemizing expenses? Don’t worry—first, we’ll cover the basics, so you understand exactly how itemized deductions work. Then, we’ll dive into the most popular—and money-saving—tax deductions for your small business.
What are itemized deductions?
To file itemized expenses, you compile a list of all your deductible expenses for the year and report them. The IRS subtracts the total amount from your gross income, then taxes you on what’s left—your net income before taxes.
As well as itemizing, you have the option to choose the standard deduction.
What is the standard deduction?
If you don’t feel like itemizing deductions, or you don’t have the bookkeeping records and receipts necessary (more on that in a bit), you can opt for a standard deduction.
The standard deduction lets you subtract a single lump sum from your gross income. The amount is determined based on your income bracket, marital status, and number of dependents.
In some cases, a standard deduction can save you as much—maybe even more—money than an itemized deduction will. But until you do the math, there’s no way to know how. That’s why it’s important to have a complete record of your deductible expenses for the year.
Who’s eligible for the standard deduction?
Not everyone qualifies for the standard deduction.
If you’re a non-resident alien, you must itemize all your deductions. The standard deduction is not an option.
And if you’re a married couple filing separately, you both have to choose the same type of deduction—either standard or itemized.
The Top Tax Deductions For Small businesses
Here are the most popular deductions for small businesses. As you complete your taxes for the year, go back through your business records and add up these expenses. They may save you significantly more than a standard deduction would.
Advertising & Promos
The cost of advertising and promoting your business is 100% deductible.
- Hiring someone to design a logo for you
- Printing costs for cards or brochures
- Online or print advertising
- Website costs
- Event sponsorship
Business meals are 50% deductible. This includes meals purchased for employees. Be sure to hang on to any receipts for business meals, making note of the occasion—who the meal was purchased for, and, if it was a business meeting, what you discussed.
A few requirements:
- The cost must be an ordinary and necessary part of carrying out your business
- The meal must not be lavish or over-the-top, given the circumstances
- You (business owner) or an employee must be present at the meal
Use of Your Car
If you use your vehicle entirely for business, you can deduct 100% of the cost of operating it. If you use it only partially for business, you can deduct an equivalent portion of operating costs.
These costs don’t include the cost of commuting between home and your place of business.
There are two ways to calculate car expenses for tax deductions. You’re welcome to choose the one that saves you the most:
- The standard mileage rate: Multiply the hours driven by the standard mileage rate. The standard mileage rate for the 2020 tax year was $0.57½ per mile.
- The actual expense method: Track all expenses related to operating the vehicle for the year—gas, oil, repairs, tires, insurance, registration fees—and multiply them by the percentage of miles you drove for business.
Premiums you pay for business insurance are deductible. This insurance may cover:
- Property coverage—furniture, equipment, buildings
- Group health, dental, and vision insurance for employees
- Liability coverage
- Workers’ compensation coverage
- Car insurance for work vehicles
- Life insurance covering employees, so long as the business or business owner is not covered as well
- Business interruption insurance
Any fees you pay to contractors you hired in the past year should all be tax deductions.
When you purchase large assets, you’re typically required to deduct the expense gradually, over the course of the assets’ useful lives. Examples of such assets include vehicles or machinery necessary for running your business.
If you would rather write off the expense entirely the year you bought it, rather than depreciating it over multiple years, the IRS gives you options for doing so.
- De minimis safe harbor election. If the expense was less than $2,500, you can deduct it the year it was incurred. Learn more from the IRS FAQ.
- Section 179 deduction. The Section 179 deduction lets you deduct up to $1.04 million in property to put into use during the year. This deduction is limited to your business’s taxable income, so you can’t claim a loss. But any of the Section 179 deduction you don’t claim can be carried forward into next year.
- Bonus depreciation. By taking advantage of bonus depreciation, you can deduct 100% of the cost of equipment, machinery, computers, appliances, and furniture.
Depreciation is complicated, and it can have huge consequences for your tax bill; it’s a good idea to talk to an accountant before making any major decisions.
When education increases your professional expertise and adds value to your business, the cost is tax deductible.
- Classes and workshops to improve skills relevant to your field
- Seminars and webinars
- Subscriptions to trade journals or other professional publications
- Books specific to your industry
- Transportation costs to and from classes
However, if you’re taking a class in order to change careers, it isn’t business deductible. Qualifying education expenses must be relevant to your current line of business.
Tax deductions for your home office can be tricky, but we’ve made it simple. There are two ways to deduct the cost of your home office:
- The simplified method. For every square foot of your home used for business, deduct $5.
- The standard method. Track all expenses related to maintaining your home: Mortgage issue or rent, real estate taxes, utilities, housekeeping, repairs, homeowners’ association membership. Add them up, and multiply them by the percentage of your home you use for business.
The area you use for your home office must meet two requirements:
- Regular and exclusive use: Meaning you use it on a regular basis for business, and it doesn’t serve another primary purpose. So a kitchen table you use as a desk wouldn’t count as a home office.
- Principal place of business: You conduct the majority of business from your home office.
Note: If you use the standard method for calculating your home office deduction, you’ll need to file Form 8829 along with your Schedule C.
Legal & Professional Fees
The cost of hiring lawyers, tax advisors, accountants, bookkeepers, or other “back office” professionals is tax deductible.
Businesses can deduct the cost of moving while filing taxes. The cost of moving all inventory, equipment, and supplies is fully deductible.
If you rent a business location, or equipment essential to your business, you can deduct the cost of it.
However, if you have a home office and pay rent, deduct the cost of rent as part of your home office expense. Don’t deduct it a second time under the “rent” category.
Taxes & Licenses
Certain taxes at the state level, as well as the cost of business licenses, are tax-deductible. These may include:
- State income taxes
- Payroll taxes
- Property taxes
- Real estate taxes paid on business property
- Sales tax
- Excise tax
- Fuel taxes
- Business licenses
Phone & Internet
If cell phone and internet use are key to running your business, you can deduct the cost of each. However, if you have a landline, even if you use it exclusively for business, you cannot deduct the expense. You are only able to claim it if you have a second landline devoted to business.
Further, you can only deduct the percentage you used for business from phone and internet bills. For instance, if one-quarter of the time you spend using the phone is spent doing business tasks, you can deduct 25% of your phone bill for the year. The same goes for internet service.
Be sure to keep itemized records and bills on file in case of an audit.
If this is your first year claiming deductions, be happy: Once you’re familiar with the deductions you commonly claim, it’s easier to track them. Next year will be easier.
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