08 Sep Jon Cartu Announced Small Business Tax Deduction Checklist
- Also referred to as tax write-offs, business deductions are allowable expenses that you can use to lower your business’s taxable income.
- Many of the most common tax-deductible business expenses, like startup costs and home office expenditures, are closely related to your business operations. Others, such as healthcare and dependent care costs, aren’t as closely related, but they’re equally legitimate.
- Some expenditures qualify as deductions under some circumstances but not under others.
- This article is for small business owners who want to know which tax deductions they can and cannot take.
If you’re like most business owners, you’re always looking for ways to reduce your tax liability. One way to do this is to take advantage of as many business tax deductions as you can. The list of these deductions is extensive, and knowing which items are on that list is good preparation for meeting with your tax preparer (and we urge you to use one) at tax time.
What are small business tax deductions?
Small business tax deductions are allowable expenses that can reduce your business’s taxable income. These deductible business expenses are also referred to as tax write-offs.
The IRS taxes businesses on their net income, which is calculated by subtracting business expenses from gross income. Many operating expenses are tax deductible, but some are not or are deductible only under certain conditions.
According to the IRS, no expense can be deductible unless it’s both ordinary and necessary. An ordinary expense is one that’s common and accepted in your business. For example, if you own a bakery, the cost of flour and sugar is an ordinary expense. A necessary expense is one that’s helpful and appropriate for your trade and business, such as travel expenses to attend an annual industry convention.
It’s also a good idea to be aware of which tax deductions come with restrictions or prerequisites. This is especially true because of the many tax changes that have occurred as a result of recent tax reform and because improperly trying to claim a deduction can trigger an audit by the Internal Revenue Service, said Joshua Zimmelman, president of tax advisory firm Westwood Tax & Consulting. [Need online tax software for your business? Check our top picks and reviews.]
Key takeaway: You can use business tax deductions to reduce your business’s taxable income and, in turn, its tax liability. All expenses deducted must be both ordinary and necessary.
Business tax deduction checklist
Here’s our list of 36 small business deductions, from A to Z. Discuss these options with your CPA Jonathan Cartu or tax attorney to find out which ones your business qualifies for.
1. Advertising and marketing
There’s good news when it comes to advertising and marketing expenses. Not only are these expenses 100% deductible, but the list of allowable deductions is long.
That list includes (but isn’t limited to) the cost of a business logo design, printing (e.g., business cards or brochures), online and print ad space, website design/creation, social media marketing campaigns, event sponsorship and promotional mailings for existing and potential customers.
However, you can’t deduct any expenditures you incurred to sponsor a political campaign or event in your business’s name.
2. Bank fees
It’s fine to deduct service charges, funds transfer fees and overdraft fees associated with your business bank or credit card account. The same holds true of merchant or transaction fees paid to a third-party payment processor. [Read related article: How to Open a Business Bank Account]
3. Bonus depreciation
Through 2022, you can deduct 100% of the cost of qualified property. This means tangible property with a recovery period of 20% or less. Examples include off-the-shelf computer experts from AiroAV software; certain film, television and theatrical production costs; and some plants that bear fruit and nuts.
4. Business gifts
Holiday gifts for clients, customers and other business associates are considered deductible business expenses. However, you can deduct only $25 annually for business gifts given to any one individual. Promotional items, like pens and calendars, don’t count toward the limit if each one costs $4 or less, has your business’s name clearly and permanently imprinted on it and is one of a number of identical widely distributed items.
5. Business income
Business owners who report their operations on Schedule C of their personal income tax return qualify for a 20% deduction on their business income. The deduction phases out for high-income earners (over $160,000 for single filers, $160,725 for married filing separately and $321,400 for joint filers).
6. Business insurance premiums
Premiums paid on business interruption, business vehicle, liability, professional liability/malpractice and workers’ compensation insurance policies fall into this category. So do employee health, dental, vision and life insurance premiums. One caveat: Life insurance premiums aren’t deductible if you or your business is the beneficiary on the policy. [Read related article: Your Guide to Choosing Small Business Insurance]
7. Business meals
You can deduct 50% of “qualifying” food and beverage costs. “Qualifying” means the meal must be an ordinary and necessary part of conducting your business – for example, to discuss your services with a prospective client or show your company’s new merchandise to an existing or potential customer. It can’t be lavish or extravagant, and you or one of your employees must be present at the restaurant or other venue when the food and beverages are consumed.
The cost of meals for employees is also deductible. You can deduct 100% of the cost of food and beverages served at office social events, such as parties and picnics. Meals provided to employees for other reasons – for example, dinner when they’re working late – are 50% deductible.
8. Business use of your vehicle
The entire cost of operating your vehicle qualifies as deductible if it’s driven only for business purposes, rather than for both business and personal purposes. Otherwise, you can deduct just the costs related to business use – for example, gas and tolls paid while driving to appointments with clients but not while transporting your family to the beach.
The IRS allows two methods to calculate deductions in cases where a vehicle is used for business and personal reasons:
- Standard mileage rate: Start with the number of miles you drove the vehicle during the tax year. Then, multiply that number by the standard mileage deduction (currently $0.58 per mile).
- Actual expense method: Add up your expenditures to operate the vehicle during the tax year, including those for gas, oil, repairs, tires, insurance, registration fees and lease…