If you are a small business owner, one of the best ways to improve profits is to ensure that you are taking all of the small business tax deductions you are entitled to. This will decrease your taxable income, allowing you to hold on to more of your working capital to keep your business running. Unfortunately, the U.S. Tax Code for small businesses is complicated. In this article, we’re going to outline 10 small business tax deductions you should be taking.
Small Business Tax Deductions Explained
A small business tax deduction (write-off) is a business-related expense that can be subtracted from your taxable income. In order to be considered deductible, the IRS states that a business expense must be ordinary and necessary.
If an expense is common & accepted in your business, it is “ordinary”. If it is helpful and appropriate to your business, it is “necessary”. Of course, it’s important to note that necessary does not mean indispensable. Many qualified business expenses are specifically addressed on the tax form, with a line to enter the amount. You can list other qualified expenses separately.
How Do These Deductions Work?
Basically, all businesses are required to file a tax return. However, the amount you pay in taxes will depend on how much your business has earned after all expenses are deducted. Small business tax deductions are an expense that can be deducted from your income to reduce your tax bill.
For example, if you had $150,000 in revenue and $50,000 in small business tax deductions, you will only be taxed on $100,000 of your revenue. This can save you thousands compared to the amount you’d owe if you were taxed on the full $150,000.
10 Small Business Tax Deductions
Below, we are going to go over 10 small business tax deductions that you need to be aware of, whether you are just getting started with your business or your company is well-established. You will want to consult with a tax professional, such as Nolan Accounting to find out which ones apply to your business.
Typically, the cost of advertising/promoting your business is 100% tax deductible. This includes expenses such as hiring someone to design your logo, running a social media campaign, launching a website, sponsoring an event, or buying ad space in print/online.
If you are using your vehicle for business activities, such as going to the store to buy office supplies or driving to meet a client, you may be able to deduct travel costs, as long as you keep track of mileage. In 2022, the deductible mileage rate is $0.58.5 per mile. Keep in mind that if you only have one vehicle that is used for both business and personal, you’ll need to keep the mileage separate to use vehicle expenses for a small business tax deduction.
If you take current/potential clients out for meals to discuss business, this expense is 50% tax-deductible. Additionally, any meals/snacks you provide for employees is 50% deductible. Typically, food provided at company parties is 100% deductible. However, the caveat to that is they must be reasonable- extravagant meals are not eligible.
Chances are, you have at least one type of insurance for your business and/or your employees. The premiums on these policies, whether data breach, property, workers’ comp, or liability insurance, are typically 100% tax-deductible.
Interest on Business Loans
If you have taken out business loans, including mortgages on real estate or credit lines- or you have used a business credit card, the interest paid on these loans may be 100% deductible.
Depreciation of Equipment
One way to spread the cost of equipment/assets over time is through depreciation. This is a measure of how much value of the asset has been used up over the year. Items that can be depreciated include machinery, computers, miscellaneous office equipment, office furniture, and business vehicles.
Home Office Expenses
If you run your business out of your home, you may be able to deduct some expenses related to creating/maintaining your workspace. In order to qualify for a home-office deduction, you must use a portion of your home consistently and exclusively for your business. You do not need a separate room, but it needs to be a space that is specifically designed for business. This can be determined in one of two ways: simplified (multiply a specified rate by the square footage used for your business) or regular (itemize expenses for home office use, including insurance, mortgage interest, utilities, rent, & depreciation).
Every package of paper, writing utensils, and ink cartridge you purchase for business use can usually be used as small business tax deductions. In order for supplies to be deductible, they must be considered necessary for running/maintaining a functioning office. It’s a good idea to save your receipts and categorize your expenses as you go to make the filing process easier.
If you are paying rent for a business property, you may be able to use the full amount as a tax deduction. However, if you use rent as a business expense, you will usually not be able to also use the home office deduction.
Typically, you can write off what you pay for internet/phone service for your business to decrease your tax liability. If your phone/internet are also for personal use, you can usually only write off a percentage of the costs that go towards business use.
One of the best ways to decrease your income tax bill is to make sure that you claim all of your eligible small business tax deductions. When you understand what expenses qualify, you’ll avoid overpaying at tax time- plus, it can help you make better business decisions throughout the year.
If you have a small business in Greenfield, West Allis, Waukesha, New Berlin, Milwaukee, or Muskego in Southeast Wisconsin, consider contacting Nolan Accounting. We can help you with determining your small business tax deductions and preparing your taxes, as well as accounting, bookkeeping, and payroll services.