Here’s the good news: There are many tax deductions you can (and should) take if you’re looking for small business savings come April. The (not really that bad) bad news? We mean it when we say “many.” Which is great, in most ways — if there’s an expense you need help offsetting, there’s probably some sort of deduction for it. But it can be intimidating to wade through what’s available — and what’s most useful.
So, we’ll keep our small business tax advice simple by offering 10 of the most common deductions that small business owners would want to take. Nothing too fancy, just the breaks that will most likely apply to at least one situation you’re in. First up? That car you’re driving.
10. Car Expenses
Every small business that owns vehicles to get the job done should absolutely be taking advantage of the auto expense write-off the IRS provides. There are a couple of different ways to take advantage of the deduction, so you’ll want to make sure you’re choosing the one that’s most worth your while.
First up is the standard mileage deduction, which simply allows you to claim 57.5 cents per business mile driven [source: Fishman]. (Keep in mind that any tolls or parking fees — not tickets, but nice try — can also be included.) If you’re willing to put more time into it, consider seeing if the actual expense deduction isn’t better for your vehicle. You have to keep careful track (that means records and receipts) of the actual expenses you accrue, but that can include a whole lot: tune-ups, car washes, the whole shebang [source: Newmarker]. You can also depreciate the cost of the vehicle if it’s used solely for business by deducting a portion of its value over the course of its useful life.
9. Home Office Deduction
Ah, no small business article would be complete without trying to find some way to shoehorn a home office deduction onto your return. But although a lot of tax articles might overstate their case a little bit, convincing you the home office deduction can help your tax return, world hunger and the common cold, it really does make sense for a small business.
For one, you shouldn’t hesitate to take the deduction if you really do have a dedicated space for your business at home. (Just be mindful of the rules around claiming a home office.) It’s a great way to get a deduction on your workspace, and the IRS has made it even easier by offering a simplified method for claiming it. And while the simple method is great — it involves multiplying your square footage times a dollar amount to get the deduction — you might want to consider the traditional method if you’re working in a larger area. With the traditional method, you can also write off a percentage of some home utilities and expenses, which might be worth it.
8. Employee Expenses
Those pesky employees you have to hire to actually do the work in the office can be a pain, no doubt about it. But before you start plunking search terms like “robot workers with no personality or knowledge of vacation” into your web browser, you should remember that a lot of the money you spend on employees can be written off on your tax return.
For instance, say you’re paying for employees to travel to another city for work. You can write off the cost, just like they would be able to write off unreimbursed business expenses on their own tax returns. You’re allowed to write off the cost of any expenses you pay for your employees to get the job done, in fact. Of course, employees must keep careful record of their expenses, and the business needs to have a plan in place for how to account for employee reimbursement. Don’t expect the IRS to blindly believe you, in other words, if you’re trying to claim employee costs.
7. Employee Benefits
Add this to that wish list of robot worker traits: an army of droids that never get the flu or break an arm. Because paying for employee health benefits can be a substantial cost for small business owners, it’s no surprise that deducting the costs of employee health benefits — including premiums — is a very common small business write-off.
And while health care and medical insurance are some of the biggest costs to employers, you can offer other fringe benefits to employees that also are deductible. If you provide a plan for assisting employees with adoption or provide a group life insurance plan, you can write off the costs. Even something like an educational assistance program — where you might give employees financial help going back to school — can be written off [source: IRS 334].
If anything, there might be a part of you that is super envious that your small business tax return looks so much better than an individual tax return. While small business owners no doubt have a headache or two (what, is it challenging trying to keep a small business sustainable year after year?), it is pretty sweet that their tax deductions include the entirety of the office electric bill.
Any utilities you pay for an office space are deductible, including water, sewer, gas and electricity. Shucks, you think (strangely speaking like a kid on a 1950s TV show): I don’t have a separate building for work and instead use a dedicated home office space. You’re in luck, 50s kid! You can also write off the cost of utilities that apply to your home office space, as long as you take that traditional method of deducting the space that we talked about earlier. If 20 percent of your home is used as a home office, you can deduct 20 percent off that heating bill.
5. Start-up Costs
One extremely useful (and thus common) small business deduction is the cost of starting up the business itself. While it may seem too good to be true, the IRS really does let you deduct business expenses before it’s really even much of a business.
OK, that is a little too good to be true. You can only start deducting the year the business is launched. You can’t just keep logging “start-up costs” for the 15 years since you thought of that idea for the pencil that stands on its tip — which probably isn’t much of a “business” in itself, anyway.
The point is this: Start-up costs are almost unbelievably broad. You can write off dinner with a potential client. You can write off going to that “How to Start a Business That Revolves Around a Pencil” course. You can certainly write off the cost of those business cards you optimistically printed (your title: “Pencil Pusher,” obviously). What you can’t do is go over a $5,000 deduction. That’s the limit on writing off start-up costs [source: Newmarker].
4. Advertising and Marketing
Advertising and marketing budgets usually aren’t gigantic for small businesses. So it comes as no surprise to learn that writing off advertising and marketing is a common deduction for small employers — and a welcome one.
A lot of the expenses are pretty predictable. If you’re paying for an ad in the local paper, you can write it off. Say the company is printing out fliers to promote a big sale around town. Deduction. But others are even cooler. Let’s say your company agrees to sponsor one of the roller derby teams in town. You can write off the cost of the branded T-shirts, helmets and skates you buy for them.
3. Section 179
Nothing warms the cockles of the small business owner’s heart like the mention of Section 179. Voted “Most Magical IRS Code” (by me — and there wasn’t much competition), it’s designed to help business owners write off the cost of business equipment. And not the regular boring way, which says you have to depreciate the item over the course of several years, taking a fraction of the cost until it’s all used up.
No, ma’am, with Section 179, you can write off the entire cost of new equipment that year, up to $1 million. If you buy, say, a $20,000 piece of machinery, that’s no small potatoes. Instead of taking off $1,000 each year for 20 years, you just write it off the year you buy it. Now, it used to be that you could do this up to a whopping $500,000 limit. Since tax reform in 2017, the new limit is $1 million. [source: Fishman]. That’s still a lot of magic. But be warned that — of course — there are rules and restrictions. Best make sure you qualify before you go writing off Section 179 deductions.
2. Travel Expenses
We talked a little bit about travel expenses as they related to employees, but it’s worth pointing out that travel expenses — in general — are a terrific way for small businesses to recoup some tax liability. If you have to make any kind of trip for work, don’t be shy about keeping track of all the costs that go along with it. That means food, travel, lodging — even baggage or shipping fees.
It’s also important to remember that unlike that pesky home office deduction, you don’t have to limit your travel solely to business for a write-off. Sure, the IRS is not going to deduct the cost of your entire trip to Disneyland if you went to LA for a single meeting, but you can certainly write off the business-related expenses you incurred from the trip. Just don’t try to deduct the cost of spending five days buying churros at the Happiest Place on Earth.
1. Employee Pay
And back to our robot workers, who so far do not require personal interaction, vacation time or health benefits. One more thing that would make them even more appealing? Being willing to work for free. But here’s the thing: Even if it was possible to hire such robots, it might not be necessary. Because guess what huge expense small business owners can write off? Employee salary or wages.
Employee pay is a deductible expense, and you’d have to be pretty bad with money to overlook it when filing small business taxes. As long as you’re paying a reasonable salary for the services you ask of your employees, their income is not just their gain — it’s yours as well [source: IRS 535].