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10 small business tax deductions
“There’s no good reason you should ever pay more than you have to — in fact, it’s your right as an American not to pay more than you have to.”- Tony Robbins, Money: Master The Game
Maximizing your revenues and minimizing your tax burden is a key part of mastering the game of business. As a business owner, you never want to pay more than you have to – in fact, the life of your business depends on it.
As with everything in life, knowledge is the first step to empowerment: You must educate yourself on small business tax deductions.
There are the usual suspects, like home office, supplies and business meals – but even some of these can get complicated. What about the lesser-known write-offs? What about all those maintenance checks on your car? Then there are lesser-known small business tax write-offs that even seasoned business owners might miss.
This tax season, maximize your small business tax benefits with these 10 deductions you need to know about. With the right information and the latest tax tips, you can potentially save yourself from needlessly paying hundreds, if not thousands of dollars to the tax man.
1. Home office
If you run your business out of your home and you have an office space entirely devoted to the business, you can deduct its rent, utilities and insurance on your tax returns. Just take the square footage of your office, divide it by the square footage of your home, and use that percentage to calculate your expenses.
For example, if you pay $1,800 per month for a 2,000 square foot home, and your home office is 200 square feet, your calculation would be: 200 / 2,000 = .10 or 10%. Ten percent of $1,800 is $180 per month, times 12 months in the year = $2,160 that you can deduct on your return. Use the same percentage to find utilities, insurance and other bills.
2. Car expenses
Every year, the IRS issues a standard mileage rate to help you calculate the amount you can claim for small business tax deductions like business-related car costs. For 2019, that rate was 58 cents per mile. It’s easy math that makes for an easy deduction. But there’s an even better way.
Instead of applying the standard mileage rate to the number of business-related miles you drove, find the percentage of miles that were related to work. To do this, just divide your total number of business-related miles by the total miles driven, then apply that percentage to all costs associated with “maintaining” that car. This not only includes gasoline, but service, car washes, tire changes and even satellite radio costs! In most cases, the deduction is larger than if you use the standard calculation.
Miles driven commuting don’t count as business-related mileage. But any additional driving your job may require absolutely does. So keep tabs of where you drive and why you had to drive – it could end up paying off.
3. Business software
Business software isn’t cheap – but you can take it as a small business tax write-off. Under Section 179, you can deduct office equipment, including software, that you’ve put into use within the previous tax year. You must use it more than half of the time for business rather than personal use.
4. Bonus depreciation
Capital equipment that is used in your business, has a lifespan greater than a year and can wear out or be used up over time is eligible for a small business tax write-off thanks to the depreciation tax break. It applies to most business machinery, including computers, as well as furniture and appliances, but doesn’t apply to inventory, land or air conditioning units.
The 2017 Tax Cuts and Jobs Act changed this deduction so that it only applies to equipment purchased from September 27, 2017 to January 1, 2023. If you have large purchases you’ll need to make that fit the bill, start planning now.
5. Advertising costs
Any money you spend on advertising and promotion counts as a small business tax deduction. This can be something as small as printing business cards and sending out reminder postcards, or as large as purchasing advertising in the newspaper, on the radio or in online media. If you pay a hosting fee for your website, run social media campaigns or hold an event, don’t forget to include those costs as well.
6. Business meals
The business lunch is essential – it’s how you network, meet clients and grow your company. The IRS recognizes this by allowing you to deduct 50% of food and beverage costs for meals that are necessary for your business. The owner or an employee must be present, and the meal can’t be too “lavish or extravagant.”
You can also deduct 50% of the costs of meals you buy for employees, so go ahead and order that pizza for lunch. Better yet, at office parties, meals are 100% deductible. Always keep detailed receipts and documentation if you plan on using this small business tax write-off.
7. Consultant and independent contractor fees
If you hired an accountant to do your business taxes, an attorney to help with legal filings or a marketing consultant to improve your social media presence, you can write it all off as small business tax deductions. This is an essential tax break for small businesses, who frequently don’t have these roles filled by in-house personnel.
Likewise, if you hired independent contractors to help you with some extra work or cold call potential clients – among other examples – you can deduct those costs as well. You’ll need to issue Form 1099-MISC to anyone you paid $600 or more for these types of services.
8. Startup costs
If your business incurred expenses before you were even open, you can take them as small business tax deductions as soon as your business starts logging sales. You can deduct up to $5,000 in business startup costs for the first year, and the rest will be amortized over 15 years. Expenses that qualify include:
Expenses incurred during your research and development phase
To determine the viability of your business, you may have had to conduct market or product research. This could range from surveys to product analysis to checking out various factors involved in your business location. Any expenditures associated with this would be tax deductible.
Expenses incurred while getting your business ready to operate
Before launching, you not only have to train your staff and pay them wages and salaries, you have to find vendors, distributors and customers, which could create travel expenses. The good news is that such expenditures are deductible, as are any costs associated with advertising, professional and consultant fees.
The caveat here is that you need to keep adequate records of these expenses. Credit card reports are okay, but paper receipts are best. And remember, these costs will only be deductible if your startup phase ends with the formation of an operating business.
9. R&D tax credits
Any business that creates, develops or enhances products or processes can qualify for an R&D tax credit. Whether you’re a tech company working on the next great app or a pastry chef creating a sugar-free, organic frosting, all that matters is that you are changing the game. With the R&D small business tax deduction, you can deduct:
1. Wages paid to employees who directly contributed to R&D
2. Expenses associated with supplies and software used in R&D
3. Any money spent on contracted R&D services
If you think you might be eligible, but missed your chance, you’re in luck. The IRS is now allowing companies to “look back” three open tax years and take any credits that were never claimed! Submit those amended returns and 120 days later you will get cash back, with interest.
The R&D small business tax write-off is probably one of the more complicated tax breaks to understand, but if you do qualify, it can be a fairly valuable asset to your business. Just be sure to ask your CPA about it so it is done correctly. In most cases, your CPA will bring in an R&D tax credit specialist who will assess your situation and create a detailed report as to why you qualify.
10. Cost segregation
If you have purchased any type of commercial property since January 1, 1986, then you qualify for a cost segregation study, which categorizes all the components of the building into personal property or real property. Personal property includes things like equipment, furniture and fixtures – basically, all components that can be removed without compromising the integrity of the property. These items can be depreciated over five, seven or 15 years. Real property includes things like wiring and walls, which constitute part of the actual structure of the building and cannot be relocated. These items can be depreciated over 27.5 or 39 years.
Why do you need it? Without cost segregation, you would be depreciating the entire value of the building itself over 39 years. But with cost segregation, you are now able to break that cost down into various components that are depreciated over much shorter amounts of time. And by accelerating depreciation (and lowering your taxable income), you are putting more money in your pocket right now. And that’s the essential purpose of all small business tax benefits.