What Can Small Business Owners Write off as Tax Deductions?
For small business owners, sole proprietors, LLC’s, or self-employed individuals, tax season can be overwhelming. Knowing what you can and can not write-off on your taxes is crucial to having the least taxable income possible. This article will go over different categories and expenses that will help small business owners maximize possible deductions on tax returns this tax year and many more to come.
Top Tax Deductions for Small Business Owners
Let’s start with the basics, you may be wondering “what does the IRS consider eligible as a write-off?” The IRS will allow business owners to deduct anything as an expense directly related to the functionality of a business. All items claimed as a write-off must be used strictly for business purposes. The cost of these items is deducted from revenue in order to decrease a business’s total taxable revenue. Some of the most prominent categories include general business expenses, office expenses, travel expenses, professional fees, and health insurance expenses.
General Small Business Tax Deductions:
- Real Estate: Real estate taxes paid at your local and state level can be deducted on your income taxes.
- Business Loans: Most interest on business loans can be deducted as a business expense.
- Business Activities:
- Entertainment Expenses: All entertainment-related expenses must be used for professional use only. Up to 50% of these costs can be tax-deductible.
- Charitable Contributions: Donations made to charities are eligible as tax-deductible on your tax returns.
Office Expenses/Place of Business:
- Home Office(home office deductions): Business use of your home can mean deducting costs associated with mortgage interest, insurance, utilities, repairs, and depreciation. However, there are rules such as deducting $5 per every 300 square feet of your home office space. Depending on the square footage of your office, you will be able to calculate the appropriate amount deductible.
- Office Supplies: The entire cost of technical equipment like a new laptop, phone, or software can be deducted.
- Repairs and Maintenance for Business Property: Repairs made to business-related real estate, or your home office can be counted as a tax write-off.
- Business Trips: Company retreats and mandatory business-related travel can be deducted.
- Mileage Deductions/Car Expenses: Deductions for vehicle miles can be calculated using the standard mileage rate of $0.545 per mile driven. You can also use the actual expenses method which includes keeping track of the total cost of operation including gas, oil changes, registration fees, repairs, and car insurance.
- Business Meals: When you are traveling for business or entertaining a client, meals are a tax-deductible business expense.
- Loan and Credit Card Interest: If your small business uses either a loan or credit it card to fund things such as business activities, the interest is tax-deductible.
- Business Cards: Digital printing, advertising, and printing business cards all count as a business expense.
- Tax Fees: You can claim up to $10,000 in tax deducting state and local income taxes, sales taxes, excise taxes, occupational taxes, real estate taxes, and personal property taxes.
- Independent Contractors: An example of this could be if a small business hires a freelancer. What is paid to them is eligible as a tax write-off.
- Startup Costs: According to the IRS publication 535 (chapters 7 and 8), you can elect to deduct up to 5,000 in start-up costs. However, sometimes these costs usually fall into the category of capital expenses due to the fact that they are part an investment toward your business
- Contributions to Retirement Plans: Any contributions made to an employee’s retirement account or employee benefits can be used as a deduction.
- Health Insurance Premiums: Health Insurance in many cases can either but used as a tax deduction or a tax credit. In order to claim health insurance, the IRS has different qualifications that must be met.
- Qualified Business Income: Sole proprietorships, LLCs, S corporations and partnerships can deduct 20% of their income on their taxes under the new tax law set forth in 2018.
- Bonus Depreciation: If you purchase new capital equipment you get a depreciation tax break which lets you deduct 100% of your costs upon purchase.
Making the Most out of Tax Season
In addition to the list about, there are many other commonly deducted expenses that are used for tax breaks. However, the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated several self-employed tax deductions. During the first years of owning a business, it may be helpful to see help from a tax professional in order to maximize federal income tax deductions and reduce your taxable income.
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