Running a business can be expensive. In any given month, you may need to pay building rent and utilities, employee payroll, business car expenses, supplies…and the list could go on forever. But the good news is that many of these costs are qualifying small business tax deductions.
The general rule is that if you spend money on your business, there’s a good chance that it may be deductible in some way. But the rules and limits on small business tax deductions can also be confusing.
In this guide, we’ll cover 15 of the most common small business tax deductions, including cash and non-cash deductions, and how you can determine if you qualify for them.
Non-Cash Small Business Tax Deductions
Did you know that it’s possible to get small business tax deductions for “expenses” that don’t require cash actually leaving your hands? It’s true. Here are two of the most common non-cash small business tax deductions.
If your car or truck is only used for business, you can deduct its entire cost of operation. But things can get a bit more complicated when the car is used for personal purposes as well. In that case, you’ll need to keep good track of the business expenses, since only those are deductible.
To track your deductible vehicle expenses, you can use the standard mileage method or the actual expense method. The actual expense method is more complicated as you’ll need to add up the total cost of using the car, including gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments), in relation to the total miles driven for business.
The standard mileage method is easier to calculate. Simply multiply the number of miles driven by the standard mileage rate. To see the current standard mileage rate, check out Publication 463, Travel, Gift, and Car Expenses.
To use the standard mileage method, you’ll need to choose it in the first year that your car is used for business purposes. But in subsequent years, you’ll be able to choose between the standard mileage or the actual expense method.
2. Home Office Expenses
For those of you who work from your home like me, this could be a very valuable small business tax deduction. And this is a great non-cash small business tax deduction because you’d have to pay for your home expenses either way!
But there are a few hoops that you’ll need to jump through. In order to claim a home office small business tax deduction, you’ll need to have a specific room (or rooms) in your home that has “exclusive and regular” business usage.
In other words, you can’t just pick a random room (like your kids’ bedroom) in your home and call it your “home office.” It needs to truly be a room that has a primary function of serving as your office. If you do have a room like that in your home, it could save you a lot of money on your taxes. A few examples of home expenses that can be deducted include repairs, utilities, mortgage interest, and depreciation.
The exact amount that you can deduct depends on the size of your office and how it relates to the overall size of your home. One of the ways to calculate the business percentage of your home is to divide the square footage of your home office by the square footage of your home.
For example, if your home office is 250 square feet and the total area of your house if 1,250, your business percentage would be 20% (250 divided by 1,250 = .20). So, in this case, 20% of your qualifying home expenses could be deducted on your taxes.
Cash Small Business Tax Deductions
Ok, so now that we’ve covered the two most common non-cash small business tax deductions, let’s move into cash expenses that can be deducted on your tax return.
3. Office Equipment And Supplies
Even if you don’t qualify for a home office deduction, you can still deduct what you spend on equipment and supplies. Just about anything tangible that you purchase can be deducted up to the acquisition cost, including computers, office furniture, fire alarms… you name it!
And there have been recent changes that have made this deduction even more attractive. As a result of the Tax Cuts and Jobs Act (TCJA) in 2017, business owners can deduct a larger portion of eligible equipment expenses in the year of purchase, as opposed to depreciating it out over several years.
As a result of the law changes, the maximum deduction for Section 179 properties has increased from $500,000 to $1 million.
4. Employee Pay
Any regular compensation that you pay employees is deductible on your taxes. And the good news is that this applies to both W-2 and 1099 independent contractors.
If you’ve paid any contractor more than $600 in compensation this year, make sure that you issue them a 1099 at the end of the year, so that you can claim those deductions.
5. Employee Benefits
Salaries and bonuses aren’t the only types of employee compensation that you can deduct on your taxes. Employee benefits are an eligible small business tax deduction too. Examples of qualifying benefits include:
- Health insurance
- Retirement plan contributions
- Sick pay
- Education benefits
You can also deduct a few other De Minimis Fringe Benefits like employee use of the photocopier, snacks, or holiday gifts as long as these expenses are unusual in frequency.
6. Retirement Plan Contributions
It was already mentioned above that contributions to your employees’ retirement plans are deductible. But you’ll be happy to know that contributions to your own retirement plan are deductible as well. You can also deduct any plan administrative fees.
Do you spend a lot of money each year on business trips? If so, you’ll want to keep those receipts, because you may rack up quite a few deductible expenses. Here are a few of the business travel expenses that you can deduct:
- Transportation (airplane, bus, taxis, etc.)
- Baggage and shipping
- Dry cleaning and laundry
- Business calls
You can deduct meal expenses as well, but generally, they are subject to a 50% limit.
If your trip included some personal leisure expenses, you’ll generally need to exclude these from your travel deductions. However, there’s an interesting exception. If your trip was outside the United States and less than a week, the entire trip can be considered “for business.”
8. Building Rent
Any rent that you pay for property that you don’t own (including equipment and land) is deductible. And, by the way, this rule applies even to your own home rent if you have an eligible home office.
One thing to keep in mind, though, is that the IRS will keep a close on eye rent that is paid to a close friend or family member. If it’s considered excessive, they won’t allow you to take the deduction.
Also, if you pre-pay for a lease, you can only deduct the rent expenses that count toward the current tax year. For example, imagine you sign a 2-year lease at $15,000 per year and decide to pay the full $30,000 upfront. In this case, you could only deduct $15,000 in year one and then another $15,000 in year two.
Any interest that you pay on small business debts can generally be deducted. The most common example of where this would pop up would be the interest that you’re charged on a small business loan.
But if you paid interest on a business credit card, that would count as well. And interest paid on an auto loan for a business vehicle is deductible too.
Yes, believe it or not, you can deduct taxes from your…taxes.
As confusing as that concept may seem, these rules are generally in place to help you avoid double taxation. For instance, if your state is already taxing your gross income, you can deduct that from your federal taxes.
Another big tax that small business owners pay is the employer-portion of employee payroll taxes. Thankfully, you can deduct this as well from your federal return. Other taxes that may be deductible include real estate taxes, sales and excise taxes, and personal property taxes.
As long as insurance was purchased in connection with your business or trade, you can generally deduct the premiums. A few examples of deductible insurance premiums include:
- Liability insurance
- Commercial property insurance
- Car insurance (for a business vehicle)
- Malpractice insurance
- Workers’ compensation insurance
- Casualty and theft insurance
In order for an insurance policy to qualify as a deductible expense, it must meet the “ordinary and necessary” guidelines. If the insurance policy is not a necessity for running your business, then it generally won’t qualify. Also, life insurance premiums are ineligible for small business tax deductions.
Are you a self-employed small business owner? If so, there’s great news for you. One hundred percent of your health insurance costs are deductible.
That could make a big difference in your annual Adjusted Gross Income (AGI). The self-employed health insurance tax deduction applies to dental and long-term care as well and includes premiums that you pay for your spouse and eligible dependents.
12. Moving Expenses
Until recently, anyone could deduct their moving expenses on their tax return. But when the Tax Cuts and Jobs Act was signed into law, it removed the ability for taxpayers to deduct their own personal moving expenses.
However, you can still deduct the cost of moving machinery and equipment to a new location. For instance, if you plan to move to a new plant, it could cost tens of thousands of dollars to move your machinery.
According to current tax law, you can still deduct all of these expenses. You simply can’t deduct the cost of moving your own personal property.
13. Research And Development Expenses
When it comes to business expenses, the IRS generally splits them into two main categories. The first is expenses that have a value of less than one year. These types of expenses will generally be deducted. Since this is a tax deduction guide, every expense that we’ve covered so far has belonged to that first category.
However, it should be noted that business expenses that have a value of longer than one year are generally considered capital expenses. And these are depreciated according to an amortization schedule.
One exception to this rule is the Section 179 properties exclusion that we discussed earlier. And another exception is for research and development expenditures. Typically, the IRS would recommend that small business owners amortize their R&D expenses over an amortization timeline of 60 months or longer. But through December 31, 2021, small businesses can choose to deduct them in the current tax year.
Even when this allowance is removed in 2022, small businesses may still qualify for a valuable R&D Tax Credit. Businesses that are less than 5 years old or have less than $5 million in gross receipts may qualify for an R&D tax credit of up to $250,000 per year!
14. Repairs And Maintenance Expenses
Repairs and maintenance expenses are often considered capital expenses and will need to be depreciated over several years. However, there are times when these expenses can be fully deducted in the current tax year.
Here’s how it works. If the maintenance merely keeps your property or equipment in a normal operating condition (think a car oil change), it may be fully deductible. However, if the repair would be considered a “betterment” or a “restoration,” the expense would need to be depreciated.
15. Software, Copyrights, Trademarks, Or Other Intangible Asset Expenses
We already mentioned that you can deduct the purchase of business computers on your taxes. But did you know that you may be able to deduct the software on those computers too?
In order for a software expense to qualify, it will need to be software that is specifically used to help you run your business. For example, if you have a graphic design business, Adobe Photoshop software would qualify. And your tax accounting software is deductible as well.
And software isn’t the only intangible business expense that is deductible. Copyrights, trademarks, patents, and formulas may be deductible as well. However, if any of these intangible assets cost more than $2,500, you’ll generally need to depreciate the cost over several years.
It’s important to point out that depreciable expenses will need to be noted in your income statement.
The Bottom Line
Owning a small business opens a whole new world of tax deduction possibilities. But in order to take full advantage of all the deductions available to you, you’ll need to keep accurate accounting records.
If staying on top of your small business accounting is a constant struggle, Cloud Friday would love to help. Learn how we can take the guesswork out of your weekly and monthly small business finances.