Tax Deductions Every Small Business Should Know
Running a small business comes with many expenses, but the good news is that some of these costs can be deducted from your taxable income. Taking advantage of tax deductions can help you save money and improve your bottom line. Here are some key deductions every small business owner should know about:
1. Home Office Deduction
If you use a portion of your home exclusively for business purposes, you may qualify for a home office deduction. This includes a percentage of your rent or mortgage, utilities, and home insurance based on the square footage of your office. It is very important that this space used for business does not have any personal use applications. As well if you use this space across several businesses, you will not be able to take this deduction.
2. Business Equipment and Supplies
Office supplies, computers, software, and other necessary tools for your business can be fully deducted. If the equipment is more than $2,000, you may need to depreciate the cost over several years. The overall cost of the product or asset could be subject to being a capital asset rather than an expense.
3. Vehicle and Mileage Expenses
If you use your vehicle for business purposes, you can deduct mileage, fuel, maintenance, and insurance costs. The IRS allows a standard mileage rate or actual expense deduction, so track your business-related miles carefully. It is very important to take photos of your Odometer on January 1st and December 31st. If you do not have photos of the odometer as well as the log of trips and purpose for those trips the IRS will disallow the credit in an audit.
4. Business Travel
Flights, hotels, rental cars, meals, and other travel-related expenses incurred for business purposes can be deducted. Be sure to keep receipts and documentation to prove the expenses are business-related. The purpose of the trip must be for business purposes. Unfortunately you can not write off travel costs for a personal trip that you work on. If you do work on a personal trip you could deduct the cost of wifi to run your business or a co-working space that you rented for a day, etc.
5. Marketing and Advertising Costs
Expenses related to promoting your business, such as website development, social media ads, print materials, and sponsorships, are fully deductible.
6. Employee Salaries and Benefits
If you have employees, their wages, health insurance, retirement plans, and other benefits can be deducted. Even independent contractor payments may qualify, but be sure to issue Form 1099-NEC where applicable. It is important to ensure that there is a fringe benefits plan set up and detailed when hiring any employees and providing health care and 401K and etc.
7. Professional Fees
Payments to accountants, lawyers, consultants, and other professionals who help you run your business are tax-deductible.
8. Education and Training
Courses, seminars, and training programs that enhance your skills or improve your business operations can be deducted.
9. Business Insurance
General liability, professional liability, and business property insurance premiums can be deducted as business expenses.
10. Rent or Lease Payments
If you rent office space, warehouse space, or equipment for your business, these costs are deductible. Please note that these are outside of the home office costs detailed above.
Keep Good Records!
Proper documentation is crucial for claiming deductions. Maintain receipts, invoices, and logs to support your deductions in case of an audit.
By taking advantage of these deductions, small business owners can significantly lower their tax burden. Consult with an accountant to ensure you’re maximizing your deductions while staying compliant with tax laws.
**General Rule of thumb is to have an accounting system in place where you can ensure to keep all the documents. For every transaction it is recommended to log what the business purpose of the expense was to avoid any further confusion down the road.**