Whether you are filing on July 15 or taking an extension, maximizing tax deductions for your small business will help you reduce the amount of taxes you have to pay and increase your chances of getting a refund check.
What are business-related tax deductions?
According to the IRS, small businesses are allowed to deduct “ordinary and necessary” business expenses. Expenses are considered “ordinary” if they are common in your industry and “necessary” if it’s helpful and appropriate to your trade or business, so if you need certain items or services to survive as a business, you can write them off.
How do small business tax deductions work?
A tax deduction (or "tax write-off") lowers your taxable income and the amount of tax that you need to pay the government as part of your tax return. Understanding which deductions you are eligible for can save your business thousands of dollars, so it's best to consult a professional to know what tax deductions you can apply to your small business.
We've put together a list of the most common small business tax deductions for review with your accounting professional.
Tax deductions on vehicles and equipment
If your small business uses a vehicle solely for business purposes then you can deduct the cost of operating and maintaining the vehicle - gas, maintenance, parking, mileage, etc. You can also deduct the mileage you drive calculated according to the standard mileage deduction.
Vehicle costs can add up, so deducting these expenses is an obvious way to put money back in your business, so make sure to keep your records organized and benefit from this write-off. If you drive your car for personal reasons in addition to your business use, you can only deduct the costs related to business usage.
When you purchase big-ticket items for your business like furniture, equipment, and other business assets, you are writing off the item’s cost over the years it is in use. It is calculated: Depreciation = Total cost of the asset / Useful lifetime of the asset
However, if you purchased new equipment and it is in use between September 27, 2017, and January 1, 2023, you may qualify for section 179 , which allows businesses to deduct the full cost of capital assets (like furniture and equipment) right away instead of depreciating them. This deduction is limited ($1,020,000 in 2019; $1,040,000 in 2020). There is also a bonus depreciation, another type of write off in the same year costs are paid or incurred. The limit is 100% for property acquired and placed in service in 2019 (as well as in 2020).
Tax deductions related to your employees
Here are some significant deductions that you could be eligible for if you employ staff at your small business:
This can include salary, wages, commissions, and bonuses. Also fringe benefits such as moving costs if relevant. There are a few stipulations for writing off employee compensation:
- The “employee” is not the sole proprietor, a partner, or an LLC member
- The salary is reasonable, ordinary, and necessary
- The services were actually provided
You may be eligible to deduct employment taxes including Social Security and Medicare (FICA) taxes, federal unemployment tax (FUTA), and state unemployment tax.
You can also deduct contributions to retirement plans, educational assistance, and other benefit program costs. If you pay freelancers or contractors, you may also be able to deduct what you pay them.
Work Opportunity Tax Credit
If you employ veterans or other long-term unemployed people who have faced significant barriers to employment, you may be eligible to take advantage of the
Work Opportunity Tax Credit of 40 percent of the first $6,000 in wages you pay them.
Employers can many times deduct certain benefits that they offer employees and not owe any taxes on them. Examples include medical coverage, retirement plans, and more.
Marketing-related small business tax deductions
Gaining visibility is crucial to helping your small business grow. Luckily you can deduct almost all the expenses from advertising, business cards, brochures, billboards, travel, participating in a trade show, and other reasonable expenses related to promoting your business.
Tax-deductible operating expenses for your small business
No matter where it operates from, there are expenses that your small business incurs regularly. Many of those are tax-deductible. Here are some examples:
- Legal fees
- Raw materials
- Licenses and permits
- Software subscriptions
- Telephone and internet
- Cleaning services
- Maintenance and repairs
- Subscriptions to trade organizations
- Professional services
- Freelancers and contractors
If you run your business from a home office, you will probably be able to deduct expenses for the business use of your home (mortgage interest, insurance, utilities, repairs, depreciation, renovation, etc). However, this can get a bit complicated, and you should speak to a professional before pursuing this tax write-off. You need to show that your office is used exclusively for the business and not just a room with a table and a computer that doubles as something else in your home (like a guest room). Read more about this tax deduction.
Tax deductions on travel
Many small business owners and employees spend their time traveling to do business. The costs can get pricey, but many of those expenses can be written-off. For a trip to qualify, it must be ordinary, necessary, and away from the entire city or area in which you conduct business. You need to travel away for longer than a typical day’s work, requiring you to sleep or rest en route. Expenses include:
- Travel to and from your destination by train, bus, car or air
- Car rental
- Using your car while at the business location
- Dry cleaning/Laundry
- Business calls
- Other necessities while on a business trip
Tax deductions for meals
Entertaining clients is part of the cost of doing business, and you can deduct these expenses up to 50%. You can also deduct the costs of providing meals for your employees at a company picnic or a holiday party. Just make sure to record the details of the meal in case you need to justify the expense.
Additional tax deductions for your small business
Here are some more tax deductions that you should verify if you are eligible for:
Loan Interest & Bank Fees
If you take out a loan to fund your business activity, the bank will charge you interest. You can deduct the interest charged for loans or credit card fees. For instance, Melio allows you to use your credit card to pay business bills with your credit card for a 2.9% fee. That fee is tax-deductible up to 0.75%. You can also deduct banking fees.
Contributing to a charity is a great way to connect with your community, and you may be able to deduct charitable contributions if you know the guidelines. You can donate supplies, equipment, money, or property, but the charity needs to be a tax-exempt organization. Donating to charity can be a bit complicated, and it is best to seek the advice of a tax professional on the best way to go about it.
Licenses, Trademarks, and Intellectual Property
Expenses related to the registration or protection of intellectual property are potentially deductible. However, depending on what you are trying to deduct, some costs are depreciated over multiple years, while others are fully deducted the year they were acquired. To ensure you comply with the correct filing requirements, speak to a tax professional who can guide you through the exact process.
Tax benefits for education
If you attended any seminars, workshops, or training sessions designed to help you improve your skills or renew a professional license, the work-related expenses associated with them are potentially tax-deductible.
If your business owns a building or property, you could be eligible to deduct the mortgage interest rate.
Bad business Debt
Sometimes your business suffers a hit from a vendor who did not deliver what you paid for or a customer who did not pay you for the goods and services your small business provided. You may be able to write off part of this bad debt.
Child and dependent care tax deductions
As a small business owner, the costs of caring for children 12 years or younger or adult dependents are potentially tax-deductible. You can write off costs associated with their care.
What is 1099?
1099 forms are federal income tax forms that document certain financial transactions conducted during a tax year. If you manage your small business payments with Melio, you can easily classify and export a .CSV file of all your payments for your annual 1099, forms making it easier to file information about the payments that you made for your business.
The bottom line…
Ensuring that your small business takes advantage of every legitimate tax deduction is essential to reduce the tax you have to pay and save your small business big time. Tracking all the expenses required to run your business will make it easier when it comes to filing the return for your small business, and if the IRS ever comes to visit. Also, the deductions are continually changing to so working with a tax professional can help you better stay updated to any new information.