A Guide to Common Tax Deductions for Small Businesses
The tax code is complex and ever-changing, and navigating it can be a daunting task for small business owners. Fortunately, the IRS allows businesses to deduct certain expenses as long as they are “ordinary and necessary” for the business’s operations. There are numerous deductions available to help reduce the tax burden and maximize profits.
Home Office Deductions
If you use part of your home exclusively for business purposes, you may be eligible for a home office deduction. This allows you to deduct a portion of your rent or mortgage, as well as insurance and utilities for the space. To qualify, the space must meet certain criteria, such as being used regularly and exclusively for business purposes.
When calculating the amount of the deduction, the IRS allows you to use either the actual expenses method or the simplified option. The actual expenses method requires that you calculate the total expenses for the space and then calculate the percentage of your home devoted to business activities. The simplified option allows you to claim $5 per square foot of the home used for business – up to 300 square feet as of the posting of this article.
The deduction can also be used to offset the cost of any furniture or equipment you use in the home office. For example, if you purchase a computer, printer, or other office equipment, you can deduct the cost of the item as part of your home office deduction. You may also be able to deduct a portion of the costs associated with maintaining your home office, such as cleaning supplies or phone bills.
Businesses can also deduct vehicle expenses, such as fuel, repairs, and insurance. You’ll need to track your total mileage and divide it into business and personal trips to determine the percentage of business use, then deduct the cost of operating the vehicle based on the business use percentage. The IRS offers two options for calculating your vehicle expense deduction:
The standard mileage rate is a set amount of money per mile that is periodically updated. This is a simple method that allows you to deduct a predictable amount for each business mile you drive. The actual expenses method deducts the actual costs of operating the vehicle. This includes expenses such as fuel, repairs, insurance, registration fees, and depreciation, as well as parking fees and tolls for business trips.
If you have employees, you may be eligible for deductions for the benefits you provide.
Businesses may receive a deduction for health insurance premiums paid as part of a qualified health plan. The deduction is limited to premiums paid for employees and their families, and for employees who are age 65 or over. Employers paying for their own health insurance premiums may also be eligible for a deduction.
Your business may be eligible for deductions for contributions to qualified retirement plans. These plans may include 401(k) plans, Simplified Employee Pension (SEP) plans, and Savings Incentive Match Plan for Employees (SIMPLE) plans.
Qualified Transportation Fringe Benefits
Commuting expenses to and from a place of business and home are generally not deductible. However, qualified transportation fringe benefits such as transit passes, parking, and carpooling provided by an employer to an employee may be excluded from the employee’s gross income and wages.
There is an exception for bicycle commuting expenses that permits the employer to deduct bicycle commuting reimbursements in order for the employee to include the amount in their income.
If your business makes charitable donations, such as cash or in-kind donations, you may be able to deduct these amounts from your taxable income. To qualify for a deduction, a donation must be made to a qualified charitable organization, which includes non-profits such as churches, educational institutions, and other organizations that have been granted tax-exempt status. You must maintain records of the donation, including the amount, date, and recipient.
Other deductions in addition to those listed above may include start-up costs, advertising, and professional services such as legal and accounting fees. Business owners can also deduct costs associated with rent, including rent paid to use both commercial and residential properties, as well as any improvements made to the property. The cost of any business insurance, such as health, liability, and property insurance, may also be deductible.
Because tax deductions for small businesses can be so complicated, consulting with a tax professional can help ensure that you’re taking full advantage of the deductions available to you. Contact us today to get a quote, reduce your tax burden, and maximize your profits.