Tax Deductions Small Businesses Might Miss

Being a small business owner comes with some unique challenges, including figuring out how small business taxes work.

The good news? We’re here to spill the essential small business tax deductions to help you keep that hard-earned money in your pocket.

As a small business owner, a sole proprietorship, partnership, or LLC, you may be able to deduct many business-related expenses that you would not be able to deduct if you were just an employee. These deductions don’t stop at simply reducing your taxable income either. When you take small business deductions for taxes, you also reduce your income, which is subject to self-employment tax.

Keeping track of small business tax deductions throughout the year is crucial to reducing the amount of taxes you owe come April. But, with so many possible write-offs, how are small business owners supposed to keep all of the tax deductions and non deductions straight? Read on to find out.

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What Is a Small Business Tax Write-Off?

Tax deductions for small businesses are costs and expenses that lower your taxable income. This is the amount that the IRS uses to estimate how much taxes small businesses pay in a given tax year. If your business spends money on products or services that are essential and ordinary for business, the IRS will allow you to “write off” or exclude these expenses from your income.

Write-offs are not limited to business expenses. If a client goes bankrupt and cannot pay their bill, small businesses can write off unpaid invoices and minimize their losses. Small businesses can also deduct other types of taxes on their state and federal returns.

Benefits of Taking Tax Write-Offs

Tax deductions are a legal way to lower your tax bill. Eligible business expenses reduce your taxable income. In some situations, deductions can push you into a lower tax bracket and shave several percentage points off your tax bill.

How Business Tax Write-Offs Work

Owners who want to take advantage of small business tax write-offs need to record all of their eligible expenses. A bookkeeping system or professional bookkeeper can store all receipts and documentation.

At the end of the tax year, these expenses should be entered into the correct tax form. Business deductions will lower the taxable income, but this doesn’t translate into a dollar-for-dollar reduction in tax owed. For this reason, business tax refunds are uncommon.

Top Small Business Deductions That Are Commonly Missed

ATM Fees

Don’t you hate it when you’re stuck in an airport or hotel, and you need cash, like now? Even if your only choice is a competitor’s bank, don’t sweat those ATM fees!

ATM fees are considered banking fees, and for small business owners banking fees are part of what the IRS considers regular operating expenses. As long as they’re ordinary and necessary for your line of work and the fees are from a business account, the fees are tax deductible.

Keep in mind that regular people are not allowed to deduct ATM or bank fees as business expenses, so take care to only claim those business expenses associated with your business accounts. So the next time you see a Wells Fargo machine when you bank with Chase, relax! Uncle Sam is ready to foot the bill for that $2 (or $5 or $7) fee.

Work Travel and Car Expenses

While both employees and small business owners use their vehicles for work, only the self-employed can deduct automobile expenses. As a small business owner, you can claim the actual expenses of driving your vehicle. This is the total cost of owning and operating your vehicle each year.

The number is calculated by adding up all of your vehicle expenses such as mileage, the cost of repairs, vehicle depreciation, gas, car insurance, and registration fees and then determining the percentage of time you used your car for business versus personal travel.

So what counts as qualified business miles? Believe it or not, driving to and from the office does not count towards tax deductions. Driving to an off-site meeting or temporary workplace does.

Fortunately, all cab fares, public transit costs, tolls, and parking fees related to your business are also 100% tax deductible.

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Meal deductions are some of the most commonly misunderstood write-offs for small businesses. That’s because the IRS has quite a few stipulations that need to be met before they’ll pay for your dinner!

In order to write off the cost of a meal as one of your business expenses, keep a few things in mind:

  • The meal must be business related to be considered a business expense. If you take your grandmother during your lunch hour, it doesn’t count. Business related means that business is being conducted or that the business meals will result in some sort of business transaction (i.e. someone is going to make money).
  • Make sure not to double-dip and claim business meals in two different categories; it’s either a meal write-off or a business travel write-off, but not both. If you’re dining while away on business, you’ll most likely want to claim the meal as a travel expense.
  • As part of the Consolidated Appropriations Act, the deductibility of meals has recently changed from 50% to 100%. Businesses can generally deduct the entire cost of food and beverage that are business related at a restaurant.

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Phone and Internet Expenses While Traveling

Isn’t it annoying that some airports still don’t offer free WiFi? What is this, 2002? Lucky for you, the cost of that overpriced 24-hour pass or a subscription to Boingo Wireless is a tax deduction as long as you’re using your surf time for business purposes.

Just like at home, you can’t deduct 100% of the cost of internet expenses if you’re also using it for personal use. If your time spent on Facebook is more about catching up with friends than promoting your business, just be sure to calculate percentages accurately and claim only business related time.

Business Insurance

Lower your tax bill by protecting your business. Premiums for business insurance are one of those business tax deductions that are often overlooked. This small business deduction is also one of those expenses that is a 100% deductible expense.

Health Insurance Premiums

Small business owners who are self-employed can deduct health insurance premiums for their dependents, spouses, and themselves. This is for those of you that pay the premium for your own health insurance and do not participate in a plan provided by your spouse’s employer.

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Mortgage Interest

Mortgage interest is a deductible home business expense. If you use your home for business, you can deduct mortgage interest payments paid toward mortgage loans. This includes loans to improve, construct, or buy your home (but only that part which is business related).

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Legal and Professional Fees

Legal fees and professional fees are deductible business expenses. If you hire a bookkeeper service, accountant, or a legal professional, 100% can be deducted on your tax return. These services must be directly related and necessary to running your business.

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Home Office Expenses

With the home office business deduction, small business owners and freelancers can use one of two methods for calculating home office expenses: the simplified method or the regular method.

The simplified method entails deducting $5 per square foot (up to 300 square feet) of your home that is used as business property. The regular method takes into account the percentage of your residence used as business property.

Office Supplies

Office supplies are a deductible business expense not to be overlooked. This includes large office supplies such as filing cabinets and desks along with smaller supplies like pens, staples, and paper. These may be small items for small businesses, but they can add up to costly expenses.

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Independent Contractors

If you hire freelancers or independent contractors as part of your workforce, then the cost of hiring them is a 100% deductible business expense. This includes hiring them for any business related purposes.

Other Taxes

If business related, there are some taxes that you can deduct on your tax return. These include such taxes such as local and state real estate taxes, personal property taxes, sales taxes, and income taxes. Up to $10,000 in taxes can be written off.

Educational Expenses

If you take advantage of any educational opportunities designed to improve your current work related skills, then this is a deductible business expense. Educational expenses include things such as tuition, books, supplies, and lab fees. Heading to an educational conference? Both the conference fees and the travel expenses are deductible.

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Stamps and Mailing Costs

As long as your mailing or shipping is business related you can deduct the cost of postage, envelopes, P.O. box rental fees, and delivery services like FedEx and UPS.

The IRS will even let you deduct the cost of a messenger service as long as something like that is regular and necessary for your business. (Sending a courier message to ask your best friend to lunch won’t count.)

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Moving Machinery and Machine Parts

For instance, if you move machinery or machine parts from one city to another, you can usually deduct the cost from your taxes under the Moving Machinery category. This decreases the amount of money you owe in taxes by the cost of installing machinery in the new area.

Storage Unit Expenses

Expenses spent on storing documents and assets for future use to avoid loss and damages are tax deductible under the Storage category.

The Bottom Line

While not an all-inclusive list of small business tax deductions, these 16 “write-offs” are among the most commonly missed and misunderstood and provide a starting point for small business owners to file smart and save money.

Before filing your taxes:

  • double check small business deduction rules on the IRS website.
  • gather and save receipts and documentation in the event of an audit.
  • reach out to a bookkeeper, tax professional, or accountant if you have questions or need additional help.

Tax deductions are an essential way to minimize the amount of tax you have to pay and good record keeping will ensure you get to keep these deductions if the IRS comes knocking.

Have your team of dedicated bookkeepers at R & D Legal Bookkeeping track all of the expenses related to running your business to ensure you’re taking advantage of every legitimate deduction.

Send R & D’s books to your accountant at year end, or let us take the tax filing off your plate for good.

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