5 Tax Deductions Small Business Owners Need to Know

tax deductionsWithout an understanding of the tax deductions and allocations that a small business owner is allowed to claim, some businesses could end up paying 50% in taxes.

By being careless about saving your receipts and managing your spending, your small business could be paying more than the corporations you compete with.

It’s daunting to think about paying taxes if you’re sending them in regularly throughout the year. If you’re one of the 75% of businesses that don’t employ anyone, you could be tasked with managing your finances on your own.

If you’re a professional tax preparer, you may be more experienced with larger companies. There are special allocations that small businesses are allowed under most federal and state guidelines.

Before tax day arrives, it’s important that you have an understanding of what kinds of tax deductions you could be claiming. Check out these 5 commonly overlooked deductions for small businesses.

1. Home Office

If your business operates out of your home or part of your home, you could be claiming a deduction. If this is where you primarily conduct your meetings with customers, patients, or clients, you could be making serious deductions.

Home office deductions on your personal income taxes can account for a great deal of your AGI. Be aware though that if you’re merely using a spare bedroom where people can sleep, you might be disqualified.

Choose the simplified method if you don’t plan to claim any kinds of repairs or special insurance. That method is $5 times the square footage that you use for your business. The maximum under this deduction is $1500.

When you deduct expenses, you need to be talking about deductions specific to this space. If you needed to buy paint or perform repairs to this specific part of your home, you can deduct this amount. Insurance, utilities, rent, and repairs are allowed deductions multiplied by the percentage of your living space used for your small business.

If you did any repairs to your HVAC system yourself, you can deduct part of the expenses.

2. Startup Expenses

Starting a business usually requires a whole lot of upfront capital devoted to the company. Money in advertising, equipment purchase, training or education, and transportation are typical expenses related to starting a business. These are considered one-time tax deductions that will get your business off the ground.

There’s a cap of $5000 of qualifying startup funds you can claim. You can also deduct another $5000 for costs related to your organization. They are null and void if you’re overall startup costs hit $50,000.

If you end up with more than $55,000 in startup expenses, you’re disallowed from first-year tax deductions. You must then amortize your costs over the next 180 months of your business. This is a severe but standard limit set out by the IRS for every small business.

If you’re handling everything as the owner of the small business, try online tax software for professional tax preparers to keep track of your expenses.

3. Debt Loss

If you’ve got a lot of debt that you can’t collect, that should be included in your tax deductions.

Money that hasn’t been paid to accounts receivable or advance wages paid to a former employee could qualify. Thankfully, these losses will be able to count toward your deductions so that you don’t have to consider them complete losses.

Bad debts, in the eyes of the IRS, are a broad range of debts that are created or acquired by a small business which then become partially or fully worthless. Loans to clients, employees, or suppliers that never come back into the company accounts are part of this umbrella of bad debt. If you’ve got an insolvent partner who brought along or created a whole load of debt, that number could be included in this deduction.

So long as you’ve taken some kind of steps to collect the debt, you’re good in the IRS’s book.

The one caveat to claiming a deduction for bad business debt is if you had included any amount owed in your previous reporting of a gross income.

4. Advertising and Promotion

Regardless of how well your Snapchat ads or local TV commercials did, you can claim tax deductions for that cost. That means it’s never a bad idea to try to get the word out about your small business.

Business cards or any kind of promotional material falls under this umbrella. If you made some pens or folding fans for a conference, you can claim that amount here. This will obviously include print, digital, or media ads.

If you have a website, you can claim that amount as well. The associated costs of designing, maintaining, and hosting your site also count. If you had some graphics or logos created, this can be deducted as well.

Any small business that sponsors a sports team or an event can deduct associated costs as well. Anything you’ve done to try to get your name out there or build your customer base should count as part of this amount.

5. Vehicle-related Expenses

If you have a car or truck that’s exclusively for business, you can deduct that. What small business owners often overlook are tax deductions for a personal vehicle used partially for business. If you use your car 50% of the time for business rather than personal reasons, you can deduct that portion.

Any kinds of repairs, maintenance or fuel can be deducted.

Take note of the mileage on your car. You can multiply a portion of your mileage to generate a “wear and tear” figure related to your vehicle. You can, of course, deduct any kinds of tolls or parking fees for your vehicle as well.

Make sure you’re keeping a good log of all of the expenses related to travel and transportation. These are deductible as well.

Did you take a bus across the state for a meeting or a flight across the country for a conference? Include that expense in your tax deductions.

Tax Deductions Can Save A Small Business

Big businesses pay people hundreds of thousands of dollars to save them millions.

Unfortunately, you don’t have those kinds of resources to devote to your tax preparer, so you’ve got to be savvy.

For more tips on being a savvy small business owner, be sure to check out our blog.