The fact that the tax system is complicated shouldn’t be a surprise to anybody. As accurate as that is for individuals, it’s even worse for small business owners. That could make finding potential tax deductions tricky.
Part of this is because finding an official list of tax deductions for small business owners is almost impossible. The Internal Revenue Service (IRS) doesn’t publish a master list of deductions you can make. That could lead to many entrepreneurs paying more taxes than they should.
There is a general work-around to this, however. Known as the ‘ordinary and necessary’ rule, anything that’s considered essential for your business to run can be tax-deductible. In short, if it’s needed for your company, then you can write them off as expenses.
With the potential consequences of filing your company’s taxes incorrectly, you might want to err on the side of caution. What specific business expenses are tax deductibles? Some are much more common than you’d think.
Common Business Expenses That Are Tax Deductible
Business Income
If you’re based in the United States, you could claim some of your business income as expenses. That’s due to a 2018 tax reform law that changed how many people file their taxes. Specifically, small business owners can take advantage of multiple factors.
Since the new law, you can claim up to 20% of your company’s income back. There are some restrictions to this, however. If your business makes more than $157,500, for instance, then the deduction you’re eligible for starts going down. For anybody filing a joint return, the limit rises to $315,000.
After a certain point, you’ll no longer be eligible to claim back your small business’ income. While you can, though, it’s worth doing so.
Home Office
Home offices have become increasingly common in recent years. That doesn’t have to mean more home-related expenses. You can claim back multiple tax deductions, such as insurance, repairs, mortgage interest, and more.
There are some restrictions to this, however. As a rule of thumb, you should expect a deduction of $5 for every square foot of home office space you have. That goes to a maximum of 300 square feet.
You’ll also need to prove that you use your home office regularly and that it’s only used for business-related activities. If you happen to use it as a spare bedroom occasionally, for example, then you won’t be entitled to the tax deduction.
Repairs
Your company’s premises will need to be repaired every once in a while. This could be as simple as replacing your reciprocating air compressors or as complicated as fixing the plumbing. All of these repairs are tax-deductible expenses.
That doesn’t just mean repairing them when something goes wrong. Typical maintenance costs can also be deducted from your taxes. That adds another reason to keep everything running effectively.
While this could mean a decent up-front cost, you’ll save on it in the long term. In some cases, upgrading or replacing equipment can also be covered.
Rent
Most small business owners aren’t in the position to own the premises they operate in. That means that you might need to rent out a space, which might be costly. Rental costs in many places are going up, though, which could be more than you can afford.
Thankfully, your company’s rent is tax-deductible, which makes it more affordable than you might expect. While you’ll still need to get through the year, you can get this money back during tax season.
Office Supplies
Every business will have certain expenses in common. Office supplies are one of the most notable. Every company will need printers, ink, paper, and multiple other things to keep their office running smoothly.
Though these will seem like minor costs at the time, they can add up during the year. Claiming these back from your taxes will free up much more funds than you’d expect. New computers and other larger items, such as printers, can also be fully deductible.
Naturally, receipts will be needed to properly file for them, so it’s worth getting in the habit of keeping them. Having a specific place for them is recommended, with digital receipts also being an option. That’ll be quite easy if you buy many of your office supplies online or buy with a business card.
Marketing
Most people don’t think that they can deduct their marketing costs from their taxes. While this is limited, there can be multiple deductions to use. That includes social media advertising, Google ads, and even the cost of any business cards that you hand out.
Naturally, receipts and documents will be needed to verify them, but the deductions could be quite sizable. There’s no reason not to take advantage of it.
Utilities
Utilities will be a large cost for many businesses, especially if they operate in certain industries. These can often be prohibitively expensive for many small businesses, especially in their early months and years.
The IRS knows this and helps offset this cost with tax deductions. Similar to expenses related to your home office, you can claim back electrical costs, heating, and water. Phone and internet expenses should also be fully covered.
Like all other deductions, however, you should make sure that you keep detailed records of your utilities.
Car Costs
You’ll more than likely need to use a few vehicles to operate your business. The initial investment in these will be pretty large, as will the costs associated with keeping them running over time. Alongside gas, you’ll need to pay for repairs, maintenance, and car taxes.
Many of these are deductible, however, which reduces the overall costs associated with keeping your vehicles on the road. There are two ways you can do this; either with a standard mileage rate or by adding up all of the expenses.
Which one you go with will depend on how much your vehicle costs to operate, how economical it is, and how well-documented expenses are. If you want to get the largest deduction possible, you should keep all of the receipts.
Travel Costs
Depending on what industry you’re in, you or your employees might have a lot of business-related travel. Between gas, airline tickets, hotels, and other expenses, traveling will be costly. Thankfully, many of the costs associated with travel can be deducted from your taxes.
You and your employees will need to keep detailed records of travel expenses. These include receipts, tickets, and other documents related to the business trip. You’ll also need to prove that there was a qualified business reason to the trip, however.
Employee Benefits
Employee benefits could be one of the largest tax deductions you can take advantage of. That’s mainly because it can often be your largest expense. You can deduct this from your company’s taxes, which makes salaries less expensive than initially thought.
You can also deduct quite a few of the benefits you offer them. Notable among these are education assistance, retirement plans, and other social security-related benefits.
These tax deductions can also apply to any freelancers or contractors that you use. That’ll make running your company significantly more cost-effective. There might be some restrictions on this, however, depending on exactly where you live.
Insurance
Every small business owner wants to protect their business. Insurance premiums can often seem too high. These wouldn’t be as expensive as you’d initially think. The deductibles you’ll have to pay are almost entirely tax-deductible, making business insurance much more affordable.
That’s true regardless of the type of insurance you have; fire and flood, liability, and owner’s policies, among others, are all deductible. Medical insurance for your employees is somewhat more complicated, however.
Under certain circumstances, it is deductible. You’ll need to research whether or not your small business is eligible. If it is, then you should capitalize on it.
R&D
If your business is involved in anything to do with research and development, then you can claim some tax deductions on that basis too. Sometimes this kind of tax relief can be profound, and often it comes in the form of tax credits. If you run an SME that employs fewer than 500 staff, you should be able to deduct an extra 130% of your qualifying costs from your yearly profit, thereby reducing your taxable profits considerably. That is going to help a lot, as you might imagine. You can look into this for r&d tax credits explained if you think this might apply to your small business.
Debt Interest
While it’s not recommended that you operate your business with debt, that’s not an option for some entrepreneurs. It can be much riskier for you than you’d expect, with bankruptcy and other consequences being a possibility.
If you’ve already gotten a business loan, however, then you should use it to your advantage as much as possible. You can deduct your interest payments from your taxes. That should free up a noticeable amount of money to help you pay down the loan itself.
It’s recommended that you do so as quickly as possible, so it’s worth using the associated tax deductions to pay off a business loan early.
Wrapping Up
Navigating the tax system can seem too difficult for many people. Adding in the extra complications associated with running a small business and it can seem virtually impossible. That takes time away from other operations, such as improving your products or speaking with clients.
Taking the time to understand how to file your small business expenses will save you a lot of time and hassle. You’ll also be surprised at the number of tax-deductible expenses that you can claim. Those savings could lead to sizable reinvestments in your company.
With how tight a small business’ budget can be, that extra money could be vital. Regardless of whether you’re spending those savings on marketing, product innovation, or employees, it’ll be better spent than overpaying your taxes.
