Tax Deductions Checklist For Small Business

6 min read

Tax deductions (also known as tax write-offs) are a legal way for small businesses to reduce their tax burden by reducing the amount of income that is subject to taxation.

And the US tax code provides lots of opportunities for claiming deductions.

Take advantage of them.  Many small businesses leave money on the table come tax time simply because they’re not aware of all the deductions available to them.

The avoidance of tax is the only intellectual pursuit that still carries any reward.
—John Maynard Keynes

In this article, you’ll find a list of valid tax deductions that attempts to be comprehensive.

However, you should always check with a tax professional before filing–this list isn’t intended as legal advice, but as a great resource to make you aware of opportunities for savings and to prepare you for a productive conversation with a tax professional.

Nevertheless, you and your business may not be eligible for all of these deductions and the rules for being eligible can get quite specific.  Choosing the right business structure for your business will also affect what deductions you can claim and your taxes generally.

Also, keep in mind that The Tax Cuts and Jobs Act (TCJA) will affect your tax filings in 2019 and you should be aware of its implications.

tax cuts and jobs act logo

You’ll need to have documentation (such as receipts and invoices) to back up almost all of these deductions should you claim them.  Make sure you have processes set up for your business throughout the year.

Finally, keep in mind that there is a distinction between capital expenses (which are investments that are depreciated over several years) and regular deductible operating expenses (which are deducted in whole in a single year).

Our list below is regular deductible expenses, unless noted otherwise.

With that in mind, lets take a look at the standard business expenses that can be deducted.

Deductible Business Expenses

In general, business expenses that are normal costs of doing business can be deducted.

There are lots of details and regulations, but in general business deductions are in the tax code to encourage business ownership and development and to make sure legitimate costs aren’t taxed.

Common sense often rules here (although not always).  If you feel as though an expense was a legitimate cost of doing business it probably is deductible.  If not, probably not.

Bad Debt

There are few things less fun than loaning money to someone and not getting repaid.

Fortunately, when done in a business context, this isn’t a complete loss.

If you’ve lent money to employees, vendors, clients, partners, suppliers or distributors that isn’t repaid or if you have money owed to your business that you can’t collect (such as unpaid accounts receivable or advanced wages paid to an employee who then quit), these loans have ceased to have value and the IRS considers them ‘bad debt’ and you can deduct the amounts.

You’ll have to be able to show the IRS that you’ve taken ‘reasonable’ steps to try to collect and aren’t able to do so.

bank

Bank Fees

Bank fees include expenses such as wire transfer fees, ATM withdrawal charges, returned deposit fees, paper statements fees, minimum balance fees…..

The list goes on and on.  These are deductible.

Carryover Losses

If your business had a bad year and had a loss, you can either carry back the loss for two years (for a tax refund) or carry forward the loss for up to 20 years.

That is, you can claim the loss as a deductible ‘expense’ in  future years when you are profitable and have taxes to pay.

Charitable Donations

If your business makes charitable contributions of goods or products, these are often deductible.  Contributions of time and services are often not deductible.

Education

If you are educating yourself or your employees for business purposes, it’s deductible.  Whether it’s seminars, books or online courses or any other way.

Business periodical subscriptions and books can also be discounted.

Home Office

If you conduct business out of a home office (and use the office space solely for business) you have two options for claiming a deduction on your office expenses.

In option one, expenses directly associated with the office space (such as carpeting that room), are deductible in whole.  Expenses associated with the home as a whole, such as mortgage or rent, utilities, property taxes and homeowner or renter’s insurance, are deducted based on the size of your office relative to the total size of your home.

If your office is 1,000 square feet and you live in a 5,000 square foot home, 20% of those general home costs are going to be deductible.

The second method is known as the simplified method.  You simply multiply $5 by the square footage of your home office.  That’s your home office deduction amount.  It’s limited to $1,500 (or 300 square feet) in this method.

Insurance

The premiums you pay on general liability insurance, cybersecurity insurance, vehicle insurance, product liability insurance, malpractice insurance and any other type of insurance to cover your business are deductible.

The Affordable Care Act also allows business to claim a health care tax credit of up to 50% on employee health care coverage.

Intangibles

The costs associated with items such as protecting intellectual property, franchise fees, establishing and protecting trademarks and copyrights can generally be deducted as expenses.

Interest

The interest you pay on business loans and and business credit cards is deductible.

Maintenance

Routine maintenance costs on your building or equipment is deductible (unless it’s a significant upgrade adding value that will last several years–then it needs to be capitalized).

Marketing and Advertising

All of these costs are deductible: digital marketing, website development, radio ads, tv ads, billboards, promotional items

dining

Meals and Entertainment

50% of the money you’ve spent on business meals and entertainment for clients is deductible.  Be careful here and don’t play games.

One employee must be present at these meals and very expensive meals and entertainment might not qualify.

Again, use common sense.

Meals provided to employees at work are deductible in whole.

Non-Cash Gifts and Rewards

You may deduct non-cash gifts and rewards to employees within certain limits.

Office Supplies

Paper clips, papers, staplers, tape, envelopes, that awesome new day planner.  They’re all deductible office supplies.

Professional Services

Legal, bookkeeping, accounting, tax preparation, consulting, real estate advising and other professional services costs can all be deducted.

qulaified business income deduction

Qualified Business Income

This deduction is a very significant one.  It just got passed in the new tax reform bill and will be available for taxes filed in 2019.

It applies only to so-called ‘pass-through entities,’ which covers most small businesses in the US.

You can claim a 20% deduction on total business income.  There are a number of limits based on industry and amount of income.

Rent

Rent and lease payments on equipment and office space is deductible.

ressearch and development

Research and Development (R&D)

These aren’t really deductions.  But if your business conducts research and development activities (which can include software development), you can access some federal R&D tax credits.

There are limitations based on your company’s size.

Salaries and Wages

Salaries, including per-diems, bonuses, commissions, rewards and benefits programs are all deductible.

Site Upgrades

In general, site upgrades that increase the value of the building you own are capital investments and not deductible.  However, upgrades to leased properties can be deducted.

There are also some tax credits for energy efficiency improvements to buildings.

 

lotops logo

 

Software

Software subscription costs (such as your payments to LoTops) are deductible.

Major enterprise software installations must be treated as a capital expense and depreciated over three years.

Start-up and Organizational Costs

Costs that are associated with starting a business (such as setting up and LLC or buying equipment) that might otherwise have to be capitalized can be treated as deductible expenses in your first year of business.

All such expenses up to $5,000 are deductible.  After $5,000, certain limitations go into effect.

Taxes

Taxes can be deducted from your taxes.  Sounds crazy, but it’s true.

Sales tax on deductible items purchased can be included in the deductible amount. Real estate taxes on business properties is a deductible expense. So too are employer-paid payroll taxes.

Trade Shows and Conventions

If an event is related to your business, it’s a deductible expense. There are limits depending on locations (such as shows held on cruise ships).

travel

Travel

You can deduct all of the costs associated with overnight business travel, including transportation, accommodation and meals.

If your trip is ‘part work, part play,’ be careful to only deduct actual business expenses.  See the IRS guidelines for more details.

Utilities

Phone, internet, gas, oil, water and electricity can all be deducted.

sports car

Vehicle Expenses

The costs (loan payments, fuel, insurance, parking, tolls, repairs, etc) associated with using your vehicle for business can be deducted.

Instead of having to keep track of all of the actual associated costs, the IRS allows you to claim a deduction based on simple mileage using their Standard Mileage Rates.

 

2018-05-08T15:55:36+00:00
shares