Top 10 Small Business Deductions You Should Be Making
The self-employed make up 35% of the workforce in America – and by 2020 it’s predicted that the rate will rise to 50%. While the self-employed and small business owners are educated on many areas of the business, for many it’s still a gray area. In fact, according to a study conducted by SCORE, 40% of small business owners cited bookkeeping and taxes as the worst part of owning a business.
So, we’re here to help. We’ve compiled a list of 15 common tax small business deductions side hustlers, freelancers, and entrepreneurs you may not know you are capable of claiming. Here’s our list of top 10 small business deductions you should be making!
1: Home Office Use
If you use part of your home for exclusively business, you can deduct certain expenses like a percentage or your mortgage interest, insurance, utilities, and repairs. You will also depreciate the portion of your home used as a home office. You also have the option to deduct these expenses using a standard or simplified method of $5 per square foot on up to 300 square feet.
2: Vehicle Use
Most business owners use a car, light truck, or van. If your vehicle is used exclusively for business, you can deduct certain expenses. Two things to keep in mind: If you use your car for both business and personal purposes, you must divide expenses based on the percentage of actual mileage driven for each use. Also, the cost of operating the business vehicle is deductible only if there are required records to prove business usage, so maintain records!
[Resource: Read up on Publication 463, Travel, Entertainment, Gift, and Car Expenses and Standard Mileage Rates.]
You may deduct certain federal, state, local, and foreign taxes directly related to your business as an expense.
4: Employee and Contract Worker Wages
As a small business owner, your income from the business is not deductible, but payroll for your employees (W-2 employees) or contract labor (1099-MISC contractors) is.
If you know you will be paying a contractor more than $600, send them a 1099-MISC form and track your payments to them!
5: Rent on Business Property
The cost of renting a business office space — like a storefront or office — is deductible.
6: Advertising Costs
A big part of growing a small business is publicizing it. Thankfully, ordinary advertising costs are deductible. Business cards, online advertising costs, billboards, mailers, signs, giveaway items (subject to certain limits), your business website, postcards, magazine advertisements, and marketing agency fees are some of the examples of acceptable business deductions.
7: Professional Fees
As a small business owner, it’s common that you’ll need professional legal, tax, (ahemm – H&R Block) and even business coaching services. These are all tax deductible expenses.
Generally, the cost of materials and supplies used in the course of a trade or business may be deducted as a business expense in the tax year they are used, according to the IRS. Items acceptable for a deduction include things like cleaning supplies, paper, and even supplies used to produce or ship products. This is another important area to show documentation to the IRS, pending an audit. Make sure to document everything, and use…
9: Insurance Fees
Many small business owners hedge risk by having insurance. (Think umbrella policies, business liability insurance, malpractice coverage, any insurance related to your trade, business, or profession, but not life insurance for the business owner). Also, if you self-fund your healthcare insurance, you may write it off on your taxes. However, there are two rules to note for health coverage. A small business may qualify to claim a tax credit for up to 50% of the premiums (a better tax break than a deduction). Also the cost of health coverage for self-employed individuals and more-than-2% S corporation shareholders is not a business deduction. Instead, the premiums are deducted on the owner’s personal tax return.
10: Business Travel
If you travel for business exclusively, the cost of transportation (airfare, train, bus, etc.), baggage feels, lodging, and meals is deductible subject to a 50% limit. But, you must meet substantiation requirements explained in IRS Publication 463 to claim any travel deduction.
Remember: as a small business owner, not all business expenses qualify as a tax deduction – they must be ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
So, determine what deductions you qualify for, and make them on your upcoming tax return. Remember: you are not alone in this! You can consult a tax professional to help you make sure your expense a) is qualified, and b) the correct amount is deducted.
Learn more about claiming expenses when self-employed with advice from the tax experts at H&R Block.
Learn more about self-employed tax filing with advice from the tax experts at H&R Block.
Learn more about expenses for the self-employed with advice from the tax experts at H&R Block.
What’s the difference between partnerships and S Corporations? Need help with your Schedule K-1? Learn more and get tax answers at H&R Block.