Many self-employed business owners fail to deduct certain qualifying business expenses. As a result, small business owners unnecessarily pay millions of dollars in taxes every year. We have compiled a list of frequently missed deductions and/or deductions you may not be fully utilizing. We encourage you to review your records to determine if you are missing any of these deductions.
What is a Deductible Business Expense?
Congress has always understood the old adage that “it takes money to make money.” Understanding that businesses must spend in order to profit, the Internal Revenue Code classifies expenditures incurred to produce business income as tax deductible expenses.To qualify as a deductible business expense, the expense must be:
- Ordinary and necessary for the needs of the business
- Not extravagant, and
- Incurred primarily for the business (not personal).
Some expenses are immediately deductible, and others must be depreciated over a period of years.
Common Small Business Tax Deductions
You can deduct advertising costs incurred to sell a product or service, to help establish goodwill for your business, or to create brand recognition.
Car and Truck Expenses
There are two methods used to deduct your vehicles expenses: the Standard Mileage Rate Method and the Actual Auto Expense Method. You may only use one method per vehicle. Please note that you must also keep track of business and personal usage and allocate the expenses accordingly.
Did you hire a contractor to build your website or assist with excess work? The fees you pay to contractors are generally tax deductible. You are required to provide contractors with a Form 1099-MISC each year if you pay them over $600.
Equipment or office furniture that suffers wear and tear, and therefore loses value over time, can be written-off either immediately in certain cases or can be deducted over a predefined period of time.
Personal Assets Converted to Business Use
If you have contributed personal assets to your business, e.g. a computer, the fair market value of these assets qualifies as a business deduction, subject to depreciation limitations, beginning with the date of conversion.
You can deduct the amount you paid to your employees, as well as benefits you provide like insurance or retirement plans.
Do you own a policy on your business or a piece of equipment? Those insurance costs are deductible.
Home Office Expenses
If you use a portion of your home as an office, you may be able to deduct the expenses associated with that office.
Rent or Leases
Do you rent a workspace or lease equipment? You can deduct these items as well.
Expenses related to the business use of your personal telephone, cellular phone, and internet connections may be deducted.
The utilities you pay at your rented workspace are tax deductible.
Fees and Interest
Did you pay interest on a loan, or pay transaction fees to a payment processor like Square? Those fees are generally tax deductible.
Did you hire a lawyer, consultant, or other professional for some aspect of your business? You should be able to deduct those fees, subject to certain limitations.
Items you use as office supplies — from paper clips to your copier — are tax deductible.
Repairs and Maintenance
Did you have to repair a piece of equipment or perform routine maintenance to keep it in good working order? That’s deductible, but the rules are onerous. We recommend you consult with us to determine the maximum deductible each year.
Taxes and Licenses
Did you pay business taxes or apply for a business license? You can deduct those items.
Did you take a client to a business dinner?
Business-related meals are 50% deductible.
Did you travel for business? Perhaps to see a client or attend a convention that would benefit your business? You can deduct those expenses, too.
Which Business Expenses Cannot be Deducted?
- Federal or state income, gift, and estate taxes
- Lobbying and political contributions
- Business clothing (unless it qualiﬁes as a uniform)
- Social club dues
- Entertainment expenses (with a few exceptions)
- Commuting costs (with a few exceptions)
- Fines and penalties
- Business gifts valued at more than $25
- Personal expenses unrelated to any business purpose
If you use your personal funds for business expenses such as office supplies, these qualify as business expenses, which you may deduct. We recommend only using your business bank account or business credit card to make business purchases. It is important to maintain separate books and records for your business to substantiate the fact that you are operating as a typical business.
With combined federal and state income tax rates as high as 50%, it is important to maximize your tax-deductible expenses. If you have questions about whether or not certain expenses qualify as tax-deductible, please do not hesitate to schedule a consultation.