It’s not fun, but it’s part of life. And for small business owners, it’s a big part of life. But taxes don’t have to be all bad. Finding ways to save your business money is rewarding, even if it involves taxes. It does take planning and organization, but there are dozens of tax deductions for small business owners that can mean more money in your pocket at the end of the year. This means more money to reinvest back into your business for the following year, which is especially important for business owners who are struggling during the COVID pandemic. Make sure your business is in order to get the maximum number of tax deductions.
What Is a Tax Write-Off or Tax Deduction for Small Business Owners?
Each year, your business will report its taxable income. Generally, this will be your net profit (gross profit minus all costs). And based off of that taxable income, you’ll be charged a certain percent that needs to be paid back to the federal and, in most cases, state governments.
But businesses are allowed to deduct or write off expenses that they incurred while operating their business throughout the year. Such business costs are not as simple as they might seem. If you run a liquor store, for instance, your costs aren’t simply the wholesale costs of buying your inventory. You also had to pay employees, rent, and much more. In the end, any deductions lower the amount of taxable income that you report to the IRS, thereby lowering your taxes owed.
Some of these additional business costs are more obvious than others. And those that are less obvious are sometimes missed by small businesses. So let’s go over several of the most common tax deductions that SMBs can take advantage of for next year’s tax season.
Disclaimer: Of course, it’s best to work with a certified accountant for your business taxes. The list below typically applies to sole proprietorships and LLCs, but there are many exceptions and the items in this blog may not apply to your business.
- Advertising and Marketing
- Capital Loss Carryovers
- Car Mileage
- Child Care
- Classes or Education
- Eco-Friendly Tax Breaks
- Employee Pay
- Equipment and Its Depreciation
- Home Office Space
- Interest Paid on Loans
- Internet, Phone, and Other Utilities
- IRA Contributions
- Licenses and Other Business Fees
- Moving Costs
- Operations Software
- Rent or Mortgage Interest
- Work Opportunity Tax Credit
1. Advertising and Marketing
All advertising costs are fully deductible, and can include a wide range of uses.
Of course, buying a media spot like a television or print ad will count towards advertising. But there are less obvious costs that contribute to this budget:
- Business cards
- Direct mailings
- Pay-per-click campaings
- Social media ads
- Commission to employees
The better your advertising is, the more revenue you’ll bring in. So, in a sense, these costs might be offset with bigger profits. But it’s important to keep track of all marketing expenses throughout the year.
2. Capital Loss Carryovers
Some tax write-offs can carry over from one year to the next. That means that if you recorded a loss in 2019, that loss may be applicable as a 2020 tax deduction.
For small businesses that are sole proprietorships, your business income tax is the same as your personal taxes. In these cases, capital losses include those that occur in the stock market.
Consult an accountant to determine if your business is eligible for such carryovers.
3. Car Mileage
If your business uses a car or truck for transportation, you can deduct all expenses involved, such as gas, parking, toll roads, and any maintenance. The IRS also offers a standard deduction rate of $0.54/mile driven as well. The standard rate is the more popular option for most business owners, but if you drive an older car that requires a lot of maintenance, consider itemizing your transportation deductions.
There are many mobile apps that can be used to measure total mileage. Simply turn tracking on when you’re using the vehicle for business purposes and keep it off when its for personal use.
Charitable donations can be deducted from business taxes just as they can from personal taxes.
These might include sponsoring a local event or donating items or services to a fundraising auction. Volunteering your time does not apply, however.
Before writing off any charity, check with the IRS that the charitable organization qualifies as one that is deductible.
5. Child Care
Business owners with children may be able to qualify for a tax credit to help compensate for child care costs. While deductions lower your overall reported income, credits simply erase part of your tax bill. You can claim the credit if you have a child 12 years old or younger and their paid care is provided by someone outside of your immediate family.
Small businesses that provide child care benefits for their employees (good for you!) qualify for deductions as a reward from the IRS.
6. Classes or Education
Providing education assistance for your employees can also allow tax deductions. Many businesses benefit from employees furthering their education. This might be ESL courses, additional certification, professional seminars, license renewals, subscriptions to professional publications, or even advanced degrees.
If your business financially assists with these programs, you’ll qualify for deductions.
7. Eco-Friendly Tax Breaks
Many businesses are relying more heavily on renewable energy sources to qualify for tax credits.
If your business made improvements to more energy efficient equipment this year you can qualify for up to 30% of the cost. Plus, you’ll have big savings on your utilities down the road.
8. Employee Pay
Most LLCs and sole proprietorships don’t allow you to deduct your own income, but you can certainly deduct all wages and salaries that you pay to your great team. This includes part- and full-time staff as well as contractors.
On top of their basic salary or earnings, you can also deduct all bonuses, per diem pay, or room/board that you compensated any employees for over the year. Company meals and events are also deductible up to a certain percentage of costs.
9. Equipment and Its Depreciation
In addition to the tax credit for buying new eco-friendly equipment, your business can deduct all new equipment purchases. For many businesses, this can be a major source of tax deduction. This also includes all furniture and office supplies that you may need.
Businesses also have the option to spread out tax deductions over a 7-year period. In this case, the IRS will deduct the anticipated depreciation of the equipment over that period. If an espresso machine that you bought for $25,000 is estimated to be valued at $10,000 in 7 years, the $15,000 difference will be deducted over the next 7 fiscal years.
10. Home Office Space
If you complete any work at your home, the IRS has made this deduction pretty simple: you can deduct $5/square foot for up to 300 square feet.
This space needs to be exclusively used for your business, so doing payroll from the kitchen table doesn’t count. You also must use this space regularly and conduct the majority of business operations from it.
Most brick and mortar businesses need to purchase a slew of insurance policies.
Depending on your region, you’ll need catastrophic insurance for hurricanes, tornadoes, floods, earthquakes, tsunamis, and zombies.
Other businesses need malpractice or cyber attack insurance.
You can also deduct personal health insurance premiums and workers’ comp insurance and payouts. If you pay for your employees’ health insurance, many businesses are also eligible for a tax credit of up to 50% of the premiums paid.
12. Interest Paid on Loans
Just like individuals can deduct paid interest on student loans from their reported income, businesses can deduct any interest paid on loans or lines of credit throughout the year (businesses with average annual gross receipts of over $26 million from the last three years are disqualified from this deduction).
13. Internet, Phone, and Other Utilities
Electricity, gas, water, and sewer may all be deductible for a brick and mortar business. Portions of these bills can also be applied to home office deductions.
All internet and phone bills might also be eligible for deduction, though for home offices only a second landline can be added to your tax deductions.
14. IRA Contributions
For business owners that report their personal and business income as the same, any contributions made to an IRA or other retirement account can be deducted from taxable income. There are maximum amounts that can be contributed to such accounts.
Likewise, if you contribute to any employee retirement accounts, this, too, can be deducted.
15. Licenses and Other Business Fees
Many brick and mortar businesses need specific licenses from city, state, and federal governments. Health department certifications, fire department code checks, or other professional licenses can be costly, but most can be deducted.
Legal fees can also often be deducted from your business’s income, including any consulting or court appearances and fees.
16. Moving Costs
Again, just as this applies to personal income taxes for homeowners, moving business locations can be applied to deductions. Your business must stay open full-time for at least a year to qualify, however.
17. Operations Software
Most businesses need various software to assist with their operations. Inventory management, accounting, customer loyalty, and payment processing are an integral part of most business operations.
The cost for your point of sale software is included in this. Both software and POS hardware can be deducted from your net sales.
18. Rent or Mortgage Interest
Monthly rent for a retail space can be fully deducted from your taxes. For eCommerce stores, your virtual rent payments for your domain can also be deducted.
Any interest that is paid on your mortgage for that year can also be deducted.
If your business needs to spend money on preventing theft or protecting customer data, these costs can also be deducted.
And if your business is the victim of a large theft, any costs that aren’t covered by existing insurance may be able to be deducted.
20. Work Opportunity Tax Credit
Most businesses are eligible for the Work Opportunity Tax Credit. This is a federal program that rewards business owners who hire military veterans, unemployed people, vocational rehabilitation candidates, and formerly incarcerated individuals.
In most cases, businesses can receive 40% of the first $6,000 earned by each employee that is part of this program.