Reducing your taxable profit through deductions is beneficial because it leaves more money in your pocket, and some deductions can also be used for personal gain. Paying attention to what is and is not deductible according to IRS rules is advantageous.
When you’re calculating your business’s expenses at the end of the year, don’t forget these important business tax deductions.
If you either use your car for business or your business owns its own vehicle, you can deduct some of the costs of keeping it on the road. Learning and understanding the rules of car expense deductions can be difficult but ultimately it will be beneficial to you.
The two methods of claiming expenses are:
- Actual expense method. You keep track of and deduct all of your actual business-related expenses and deduct an amount for depreciation each year.
- Standard mileage rate method. You deduct a certain amount (the standard mileage rate) for each mile driven, plus all business-related tolls and parking fees.
If your primary use for a car is business-related, you will generally get a larger deduction by using the actual expense method. This allows you to write off depreciation on the vehicle up to an annual limit. In order to qualify for the standard mileage rate, you must use it in the first year that the car is used for business activity. Once you use the standard mileage rate, you can switch to the actual expense method in a later year. However, if you have claimed accelerated depreciation deductions, bonus depreciation, or a Section 179 deduction for the vehicle, you will not be able to switch back to the standard mileage rate.
If your car is used for both business and pleasure, you can only deduct the business expenses. This means you must track how often you use the vehicle for business purposes and calculate it at the end of the year. It would be unreasonable to claim that 100% of the car’s use is for business, so GPS-based apps or a paper logbook can be used to keep track of business driving.
As a small business, you can deduct 50 percent of food and drink purchases that qualify. To qualify, the meal needs to be related to your business and you need to keep the following documentation related to the meal:
- Date and location of the meal
- The business relationship of the person or people you dined with
- The total cost of the meal
To track business meal expenses, keep your receipt and write down notes on the back about the details of the meal.
Work-Related Travel Expenses
Any costs associated with business travel can be deducted when filing taxes, including airfare, hotels, car rentals, gratuities, laundry, food, and more. To qualify as work-related travel, your trip must meet the following conditions:
- The trip must be necessary for your business.
- The trip must take you away from your tax home, i.e. the city or area in which your company conducts its business.
- You must be traveling away from your tax home for longer than a normal work day and it must require you to sleep or rest on the route.
You can deduct your business insurance and renter’s insurance costs if you have a home office or use a portion of your home to run your business.
Expenses of Going Into Business
If you are running a business, you can deduct expenses such as advertising, utilities, office supplies, and repairs as current business expenses. However, you cannot deduct these expenses until after you have opened your doors for business. The costs of getting a business started are considered capital expenses, and you may deduct $5,000 the first year you are in business. Any expenses above $5,000 must be deducted in equal amounts over the next 15 years (180 months).
If you will have losses in the first few years of business, it is better to deduct these losses over five years so that there is some profit to offset.
Home Office Expenses
The new IRS guidelines for home office expenses allow you to deduct five dollars per square foot of your home that’s used for business purposes, up to a maximum of 300 square feet. To qualify for the deduction, your work area must be used exclusively for business and you need to use the home office regularly as your principal place for conducting business.
Phone and Internet Expenses
If you use the phone and internet for your business, you can deduct these expenses. However, if you use the phone and internet for a mix of work and personal reasons, you can only write off the percentage of their cost that goes toward your business use.
Business Interest and Bank Fees
If you use borrowed money to finance your business, the interest you’re charged on the loan is tax-deductible. This also applies to any service fees or other additional charges on your business credit card or bank account.
When you deduct depreciation, you can spread the cost of a big-ticket item like a car or machinery over the useful lifetime of that item, rather than deducting it all in one go for a single tax year. Here’s how to calculate depreciation:
The depreciation of an asset is equal to the total cost of the asset divided by the useful lifetime of the asset.
Books and Legal and Professional Fees
You can deduct the cost of business books from your taxes, including books that teach you how to do without legal and tax professionals.
If you pay fees to lawyers, tax professionals, or consultants, you can generally deduct them in the year they were incurred. However, if the work done by these professionals is clearly related to future years, the fees must be deducted over the life of the benefit you get from them.
The Tax Cuts and Jobs Act brings changes that allow most small businesses to deduct 100% of the cost of equipment in a single year. This can be done by using 100% bonus depreciation, expanded Section 179 expensing, and the $2,500 de minimis deduction. Note that these deductions can be used for tangible personal property and computer software, but not real property, which must be depreciated over a period of several years.
For used or new personal business property placed in service from September 27, 2017, through December 31, 2022, 100% of the cost may be deducted in a single year through bonus depreciation. In later years, the first-year bonus depreciation deduction amount goes down, as follows:
- 80% for property placed in service during 2023
- 60% for property placed in service during 2024
- 40% for property placed in service during 2025
- 20% for property placed in service during 2026
- 0% for property placed in service 2027 or later.
Additionally, under Section 179 of the Internal Revenue Code, you are currently able to deduct the cost of equipment and certain business assets that you purchase and place in service for business use that year, up to an annual threshold amount. The Section 179 annual limit for 2021 is $1,050,000, and for 2022 it is $1,080,000.
In addition to the annual limit, there is a phase-out for how much property can be deducted under Section 179 which starts when a business purchases more than $2.7 million in business property in a year ($2.5 million for 2021). Once this annual investment limit is reached, the amount that can be deducted under Section 179 is reduced by an amount equal to the amount that the purchases exceed the limit.
The “de minimis safe harbor” allows businesses to deduct any tangible personal property that costs $2,500 or less in a single year. An election must be filed with the tax return to use this deduction.
Salaries and Benefits
If you’re a small business owner with employees, you can write off their salaries, benefits, and even vacation pay on your tax returns. There are a few requirements for writing off salary and benefit expenses:
- The employee is not a sole proprietor, partner, or LLC member in the business
- The salary is reasonable and necessary
- The services delegated to the employee were provided
If your business is any of the following – a partnership, a limited liability company, or an S corporation – your business can make a charitable contribution and pass the deduction through to you to claim on your individual tax return. If you own a regular corporation, the corporation can deduct charitable contributions.
If you have some old computers or office furniture that have been fully depreciated, you can’t claim a deduction for giving them to a school or nonprofit organization.
Taxes incurred in operating your business are generally deductible. How and when they’re deducted depends on the type of tax:
- Sales tax on items you buy for your business’s day-to-day operations is deductible as part of the cost of the items; it’s not deducted separately. However, tax on a big business asset, such as a car, must be added to the car’s cost basis.
- Excise and fuel taxes are separately deductible expenses.
- If your business pays employment taxes, the employer’s share is deductible as a business expense. Self-employment tax is paid by individuals, not their businesses, and so isn’t a business expense.
- Federal income tax paid on business income is never deductible. State income tax can be deducted on your federal return as an itemized deduction, not as a business expense. But the annual personal itemized deduction for state and local taxes is limited to $10,000.
- Real estate tax on property used for business is deductible, along with any special local assessments for repairs or maintenance. If the assessment is for an improvement—for example, to build a sidewalk—it isn’t immediately deductible; instead, it is deducted over a period of years.
Any money you spend on educations to help improve your business can be written off when doing your taxes. Educational expenses that qualify for deductions include:
- Courses and classes related to your field of work
- Seminars and webinars
- Trade publication subscriptions
- Books related to your industry
Child and Dependent Care
You can deduct childcare costs for children under thirteen or adult dependents from your taxes. If your own children are twelve or younger, you can also write off associated costs. This also applies to spouses or other related adults who are unable to care for themselves because of physical or mental disability.
The interest you pay on a loan for investing purposes can be written off, up to the amount of investment income earned.
If you are self-employed and pay for your own health insurance, you can deduct your health and dental care insurance premiums as well as any medical care expenses, including doctor’s fees, prescription drugs, and home care.
Advertising and Promotion
You can deduct the cost of regular advertising for your goods or services, like websites, business cards, and Google Adwords, as a current expense. You can also deduct promotional costs that create goodwill for your business, as long as there’s a clear connection between the promotion and your business. For example, if you name a team the “Southwest Auto Parts Blues” or list your business name in a program, that’s evidence of the promotion effort.
If you have a mortgage on your home and you use your home for business purposes, you can deduct the interest payments on your taxes. If you have a home equity loan, you can also deduct the interest on those loans.