While they are essential to keeping the country running, taxes aren’t exactly everyone’s favorite subject. Small business tax deductions, however, are one of the components of the tax code that make entrepreneurs happy. There are many small business tax write-offs that could benefit your business, though many of them are quite niche.
To make this as useful as possible, we’ve focused on some of the broadest and most impactful business write-offs owners can take advantage off. We’ll review what is a tax write-off for small business, 27 of the best tax deductions and when you need to file your taxes.
What Is a Tax Write-Off for Small Business?
Simply put, a tax deduction lowers your overall tax liability by decreasing your taxable income. Tax deductions are often confused with tax credits. The difference is that tax credits directly reduce the amount of taxes you owe, not your taxable income.
There are two categories of tax deductions: standard deductions and itemized deductions. The standard deduction is a universal dollar amount set by the IRS each year. For example, the standard deduction amount for a married couple filing jointly for fiscal year 2018 is $24,000. When choosing standard deductions, there are no calculations to make, receipts to submit or additional tax forms to complete. While it’s the simplest approach to take, it’s possible you’re missing out on beneficial deductions.
Itemized tax deductions, conversely, could further reduce your taxable income than the standard deduction, but there is a lot more legwork to be done. As we’ll explore later, the IRS allows you to write-off medical expenses, charitable contributions, business loan interest and hundreds of other expenses. To maximize your tax return, it’s best to work with a tax professional who knows which deductions will best fit your business situation.
To deduct a business-related expense, it must be categorized as both ordinary and necessary. As defined by the IRS, ordinary expenses are costs that are common and accepted in your industry or business. A necessary expense is a cost that is considered helpful and appropriate for your industry or business, but not essential.
Some examples of “ordinary and necessary” business expenses include employee compensation, retirement plans, rental expenses, local, state and/or federal Taxes, interest and any type of insurance. In addition, the IRS also emphasizes the importance of segmenting your business expenses into the following categories:
Expenses used to determine your COGS (cost of goods sold)
- The cost of products or raw materials, including freight
- Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
- Factory overhead
- Business start-up costs
- Business assets
- Business improvements
- General living costs
*It’s possible that many of your capital and personal expenses may be intertwined. To determine which of your items can be deducted in full and which should be divided, refer to IRS Publication 535.
27 of the Most Common Small Business Tax Deductions
There are hundreds, if not thousands, of business tax deductions that are relevant to small business owners. However, some are more pertinent and applicable for you as well as the majority of businesses across the country.
Qualified Business Income Deduction
Business structures with pass-through income (Sole proprietors, S corporations and partnerships) may be eligible for a 20% deduction on their total income, also known as Qualified Business Income (QBI). QBI can be filed through Worksheet 12-A.
QBI is your business’s income for the fiscal year, minus any of the following:
- Capital gains or losses
- Dividends or interest
- Annuity payments
- Foreign currency gains or losses
Owner compensation and guaranteed payments to business partners for services rendered can also be included in this list. However, they are not as straightforward. Any amount paid to business ownership must be deemed “reasonable” by the IRS. Given its ambiguity, ask your accountant about how to best handle these two potential business write-offs.
Car & Truck Expenses
There are two ways to track car and truck expenses: standard mileage or actual costs. If you choose to track your miles, the 2018 standard mileage rate is $0.545 per mile, an increase from $0.535 in 2017.
Even if your actual mileage costs are less than the current rate, you can still apply the standard mileage deduction. Any mileage costs claimed must be associated with business activity; proper documentation of these costs must also be kept on hand for seven years after you’ve filed.
For further detail on car and truck expenses and how to report them, refer to Publication 463.
There are quite a few tax deductions when it comes to business travel. For example, if you’re on the road for business, any travel cost incurred while traversing to and from your destination is eligible for tax write-off.
In addition to transportation, lodging, dry-cleaning, phone charges or any other item purchased to conduct business can be written off. Just as you would with any vehicle claims, be sure to keep travel expenses on file for seven years.
For further information on which travel and non-entertainment related expenses can be deducted and how to report them, refer to Publication 463.
You may be eligible for a home office deduction if there is a dedicated area within your home that is used only for business. The size of the area dictates the overall deduction and can be calculated by multiplying the square footage of the home office by $5.
If you’re expensing your home office costs as itemized deductions, use Schedule C (Form 1040). You will also need to fill out Form 8829 if you’re using the simplified method, which according to Revenue Procedure 2013-13 from the IRS, is “an easier way to determine the number of expenses you can deduct for a qualified business use of a home.”
Any supplies you need in your office to conduct business can be written off. Claim these items on Line 18 of Schedule C (Form 1040).
Tools and Supplies
Beyond office supplies, any tools or materials required to run your business can be deducted. Computers, however, are not eligible for deduction and may need to be depreciated. These items would also be listed on Schedule C (Form 1040).
Repairs and Maintenance Costs
Excluding items that have been replaced, what you’ve spent to repair and maintain your place of business is eligible for deduction. For example, reconditioning the floors in your place of business, repairing signage, painting and electrical repair are examples of costs that can be written off on line 21 of Schedule C (Form 1040).
As long as they are not for personal use, utilities can be deducted include heating, electricity, water, sewage and phone services. Itemize these deductions on line 25 of Schedule C (Form 1040).
Considering the near ubiquity of Internet usage in the U.S., Internet services are vital to conducting business and are therefore deductible. Internet-related services include any domain registration fees and any webmaster consulting costs.
Similar to Tools and Supplies, if your business requires a specific piece of software to function—like a point of sale system for a food truck—the cost can be deducted.
Health plans, sick and vacation pay, accident coverage, welfare benefit funds, life insurance coverage, meal programs and dependent care assistance are all benefits that are eligible for deduction. For more specifics, see the IRS’s business expense deductions publication.
Employee Wages and Bonuses
If your staff members earn a reasonable wage for their work, employee wages can be deducted. In addition, certain bonuses and awards can be deducted.
Any educational expense that enhances your—or your employees’—professional standing in your current industry, qualifies as a tax deduction. Use Form 1040, Schedule C to report the costs of any classes, workshops or conferences you’ve attended and document each as professional development.
Contributions made to your employees’ retirement plans can be written off using Schedule C (Form 1040).
Malpractice, accident, theft, loss, liability as well as fire and storm insurance typically qualify as a write-off. Health insurance can be deducted for self-employed business owners. You may also deduct the cost of any business insurance policy—including your homeowner’s insurance if you work out of a home office—as well.
Real estate taxes and income taxes can often be written off. Any of these deductions need to be filed via Schedule A (Form 1040).
Legal fees can commonly be written off, including business licenses, tax preparation and franchise or trademark fees. Use Schedule C (Form 1040) or Schedule C-EZ (Form 1040) to write off these expenses.
As long as you’re liable for the debt, you’re able to deduct any interest you have paid or accrued during the fiscal year. If you’re only liable for a portion of a debt, you may only deduct the interest you’re responsible for.
If your business is a startup that was established after October 22, 2004, you can elect to deduct up to $5,000 in startup costs and $5,000 in organizational costs.
The deduction of startup costs allows you to write-off expenses that were required to prepare your business for its first year in business. Example costs include advertisements, salary and wages for employees and instructors involved in training, costs associated with market analysis and travel expenses incurred while securing customers, suppliers or distributors.
In addition, the claim for organizational costs allows you to deduct legal fees, state fees and travel fees for organizational meetings from your taxable income.
Expenses made in relation to promoting your business can typically be deducted. Sole proprietorships and single-member LLCs should file this expense on Form 1040, Schedule C, while partnerships and multi-member LLCs need to use Form 1065.
Research and Experimental Costs
The costs of developing or improving an existing product are usually categorized as capital expenses, though you can deduct them as a current business expense. To learn more about how your organization should expense these costs, see Publication 535, Chapter 7.
Credit Card Fees
Processing fees that are applied to every credit card swiped in your business are deductible. In addition, a portion of your business credit card usage—including the interest paid and any annual or late fees—can be written off through a few different deductions.
Business-related meals that are properly documented qualify for a 50 percent write-off. To be eligible for this deduction, you must have a record of the date and location of the meal, an itemized cost breakout of each expense and the business relationship(s) of the person(s) you ate with. One of the best ways to keep track of these expenses is to write down the purpose of the meal and what you discussed on the back of the receipt. To claim business meal expenses, use Form 1040, Schedule C.
Any contribution your business has made to a charitable organization that is registered as a 501(c)(3) is tax deductible. C-corporations deduct these costs on their corporate tax returns while S-corporations, Sole proprietorships, partnerships and single-member LLCs will use their personal returns to record these contributions using Schedule A (Form 1040).
Dependent Care Expenses
Care provided (while you’re at work or looking for work) for children under the age of 12 or a spouse or relative who is unable to care for themselves, is tax deductible. Complete Form 2441 and attach it to Form 1040 to properly file these expenses.
Depreciation enables you to reduce the cost of a high-ticket business expense throughout its lifetime, as opposed to one large deduction. For example, let’s say your business has a machine that is used to produce its primary product. To calculate attributable depreciation, you must estimate its asset life and scrap value (the worth of the machine’s components after it’s no longer useful). In this scenario, the machine costs $250,000 and is expected to have a value of $75,000 in 5 years. Therefore, the depreciation expense for the machine is $35,000 per year, which is calculated by subtracting $75,000 from $250,000 and dividing by 5, equaling $35,000. To learn more about depreciation, see Form 4562.
If you’re self-employed, you can deduct your health insurance, doctor’s fees, home care and the cost of prescription drugs. In addition, if you’re the policyholder on your family’s plan (spouse and/or dependents), their premiums also qualify as a deduction. To claim medical care costs, use Schedule A (Form 1040).
When to File Small Business Tax Deductions
If your business’s fiscal year ends on December 31st, your business’s taxes are due on the 15th of the 4th month after your fiscal year ends, otherwise known as April 15th. However, depending on the type of business organization you have, there are different dates you need to be aware of.
Here are the deadlines small businesses need to be aware of for Fiscal Year 2018:
March 15, 2019
Who needs to file?
- Partnership – need to file returns for each partner via Form 1065 with Schedule K-1
- Corporation and S corporation – need to file returns for each member via Form 1120 S with Schedule K-1
- Multi-member LLCs – need to file for each member via Form 1065 with Schedule K-1
April 15, 2019
Who needs to file?
- Sole proprietorship and single-member LLC tax returns need to be filed with the owner’s personal tax return
If your business is unable to file by the due date of your return, you need to request an extension. By filing an Application for Automatic Extension of Time To File U.S. Individual Income Tax Return (Form 4868), you may qualify for a 6-month extension. Though you may be granted an extension of time to file your taxes, any amount you owe will be due on your given date. Any tax that is not paid by the due date could be subject to a late payment penalty or other fines.
The Last Word on Tax Deductions for Small Business Owners
Ultimately, tax deductions are there to give your small business additional opportunities to reduce its taxable income. We recommend that you devote time to learning the specifics of how the tax code impacts your industry so that you can take advantage of each possible deduction. Hiring a Certified Public Accountant is a wise investment, as well—even if you’re well-versed in which tax deductions affect you—as their knowledge could net you additional savings. Employing a CPA will also keep your business from claiming incorrect deductions and therefore lowering your chances of being audited.
Small business write-offs help you keep capital in your business so you can continue investing in your vision, people and customers. While taxes are used for a variety of things across federal, state and local municipalities, it’s important for you to keep an eye on every dollar that comes in and out of your business. This guide to tax write-offs for small business owners should certainly help you keep more of what you’ve worked so hard to earn.