Since deducting expenses from your top-line revenues reduces your tax burden, it’s easy to be too aggressive in claiming them. However, not deducting all that you are allowed leaves money on table. Use the following checklist of rules to reduce your taxable income as much as legally possible.
(Note: Due to the complexity of tax laws, a great accountant will save your company lots of money.)
Checklist of Tax Deductions for Small Business
1. Employees’ Pay. You can deduct the pay you give your employees as long as the pay is in cash, property or services.
2. Inventory (Cost of Goods Sold). Businesses that manufacture products or purchase them for resale can deduct the cost of goods sold.
3. Employee Benefits. Benefits like health plans, adoption assistance, educational assistance, and life insurance for your employees are generally tax deductible.
4. Profit-Sharing or Pension Plans. You can deduct contributions you make to your employees’ SEP, SIMPLE, and other qualified plans.
5. Home Office. To calculate how much of the home-related expenses are tax deductible, measure your work area and divide by the square footage of your home. The resulting percentage is the fraction of rent, mortgage, insurance, electricity, housekeeping, etc. that you can claim. Make sure your home office is dedicated to your business work. Claiming your entire living room because that’s where your laptop is will get you in trouble if the auditor comes knocking.
6. Auto Maintenance and Mileage. There are two ways to calculate vehicle deductions: standard mileage rate or actual expenses (such as gas and maintenance). Use the method that results in a larger deduction.
7. Utilities. The water, power, trash, and telephone bills at your office are all 100 percent deductible as regular business expenses. If you have a phone line that has a mix of business and personal calls, highlight the business calls and deduct only the business related portion of the bill.
8. Advertising and Marketing. As long as they are directly related to your business, you can deduct the cost of ordinary advertising (business card purchases, yellow page ads, and so on), as well as promotion costs for good publicity (such as sponsoring a local sports team).
9. Depreciation. If you buy property to use in your business, you generally can’t deduct the entire cost in the year of purchase — but you can spread the cost over more than one tax year and deduct part of it each year.
10. Office Supplies. Pens, paper, staples, thumb tacks… keep those receipts!
11. Bad Debts. Your bad debt is deductible only if the amount owed to you was previously included in gross income.
12. Education. This includes seminars and trade shows, but don’t forget any magazines, books, CDs and DVDs that are related to your business or industry. They are all 100 percent tax deductible.
13. Professional Fees. Accountants, lawyers and other professional consulting fees are fully deductible.
14. Travel Expenses. Nearly all business travel expenses are 100 percent deductible. These include airfare, hotels, and other on-the-road expenses (like dry cleaning, Wi-Fi or cab fares). Eating out on the road is also deductible, but only up to 50 percent.
15. Entertaining. Eating out with colleagues on a day-to-day basis is not deductible, but if you bring along a client or prospective client, that meal is 50 percent deductible. Taking a current or prospective client out for drinks or a show is also 50 percent deductible, but it has to be within a business setting or take place before or after a business meeting.
16. Furniture. You can either deduct the entire cost in the year of the purchase or depreciate it over several years.
17. Office Equipment. That new fax machine, copier, or computer is also 100 percent deductible. You can take it all in one year or depreciate it.
18. Insurance Premiums. You can deduct premiums that you pay for credit, liability, malpractice, and workers’ compensation insurance, among others.
19. Employee or Client Gifts. A gift to a client or employee is 100 percent deductible, up to $25 per year per person.
20. Startup Expenses (Capital Expenses). You can choose to deduct up to $5,000 of startup costs, which include any research costs incurred for creating your business.
21. Interest. Mortgage interest, finance charges (like credit cards), interest on payment plans, and interest paid on other loans are all 100 percent deductible.
22. Software. Boxed or downloaded software are included. With more software being made available as a service, software subscriptions are also tax deductible.
23. Charitable Contributions. If you contribute $250 or more, and claim the deduction, you need to have a letter from the organization which verifies your donation. To figure out how much you can deduct with non-monetary donations, see IRS Publication 561, Determining the Value of Donated Property.
24. Theft and Loss. A general rule of thumb: If the theft or loss wasn’t avoidable, you can deduct it. However, accidents and normal wear don’t count.
25. Petty Cash and Tips. Just because you didn’t get a receipt doesn’t mean you can’t deduct the cost, but you should have some documentation. It’s as much for you as for a potential audit. Small cash expenses here and there can add up to a significant amount by the end of the year!
26. Service Fees. Those fees for processing credit cards? One hundred percent deductible.
27. Taxes. As strange as it sounds, taxes incurred in running your business are deductible.
28. Rent. You can deduct rent as an expense if the rent is for property that you use for your business. However, you can’t deduct the rent if you have even partial equity (or will receive equity) in the property.
29. Freelancers. If you hire an independent contractor, you can deduct their pay as a business expense.
30. Repairs and Maintenance. The cost of repairs to keep your business property and equipment in operating condition is deductible.
31. Licenses. License fees, as well as regulatory fees, are deductible.
For more information on small business tax deductibles, see the following IRS Publications:
- Publication 334, Tax Guide for Small Business
- Publication 535, Business Expenses
- Publication 463, Travel, Entertainment, Gift, and Car Expenses
Greg Go is the cofounder and CTO of Wise Bread, a top personal finance community that offers daily tips on how to live large on a small budget. You can follow his tweets from @GregoryGo and @WiseBread.