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Common Tax Deductions for Small Business Owners

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January 20, 2020

Running a business is hard work and sometimes the last thing you want to do is try to figure out whether something you bought for your business use is actually deductible or not. Sometimes it seems easier to just put the receipt in a box and tell yourself that you’ll look into it later but then that never happens and you end up losing a valid deduction just because you were unsure. The IRS doesn’t provide an absolute list of yes or no items for us to look through, unfortunately. They do however tell us that items are deductible if they are ordinary and necessary. So, what does that mean? If you purchase a good or service for your business that was necessary to run your business, further your business or sell within your business, it’s likely deductible. If you can’t say with a solid “yes” that the items was necessary or even ordinary, then you may need to do some research. For example, going to get your nails done before you photograph a wedding this weekend is just not going to fly because you can’t really justify it as necessary even if you think you can. The IRS will take a stand and argue that your nails did not need to look pretty to lift that camera and take pictures and they’ll also say that you can get personal use out of it.

There are plenty of expenses that can be deducted though, and I’m going to list and explain some common ones below so you can be sure to claim them.

 

  • Advertising & Marketing 

 

Advertising and Marketing expenses are 100% deductible for your business. Anytime you spend money on ads, social media experts, marketing materials, networking events, sponsorships, web design, etc it is fully deductible. Simply categorize the expense accordingly in your accounting software and you’re good to go!

 

  • Bank and/or Merchant Processing Fees

 

Banks sometimes charge you for foreign transactions, wires or even a monthly account fee and all of those are 100% deductible. Along the same lines, anytime you are charged a fee for processing payments through a merchant like Stripe, Square, etc you can deduct that fee. Simply build the fee into your pricing and then be sure to break down those fees when you receive deposits into your accounting software.

 

  • Education

 

Investing in yourself and therefore in your business is so important. If you take a course, attend a conference or workshop or purchase training that will increase your knowledge or improve your skills then it is 100% deductible. Don’t forget that any travel required in order to attend those trainings is deductible as well. 

 

  • Meals

 

Meal deductions have changed over the years so you have to be careful with this one. We have a detailed post about it that you will want to look at here to be sure you are following the new guidelines. In general, yes, meals are deductible but a lot of scenarios are only going to be 50% deductible and if it falls under entertaining a client instead of meals with a client then it will not be deductible at all.

 

  • Interest

 

If you are paying interest on a loan or a credit card that is specifically for your business, then this interest is deductible. Be sure to record it and break it down properly in your accounting software so you can clearly see how much you have spent on interest.

 

  • Employee Benefits

 

We all know that the wages we pay to an employee are deductible, but what about the benefits they receive? Yes, these are deductible and you should be recording them appropriately in your accounting software. Benefits like health insurance, 401k matching, holiday pay, and general paid time off are all deductible. Here at Steadfast, we also offer benefits like a home office stipend and a cell phone stipend since our employees work remotely and those benefits are deductible to our business as well. 

 

  • Rent

 

If you rent space for your business whether it’s an office, studio or storefront – it’s deductible. Even temporary use of space is deductible like a co-working space or conference room rental. If you work out of your home, you’ll want to view that section below because you can’t just deduct 100% of the rent you pay for your house but you can deduct a portion of it.

 

  • Business Taxes

 

You may have a state franchise or occupational tax that is due each year in order to keep your business registered in your state. If so, these taxes are 100% deductible. Taxes that you have to pay for your personal income are not deductible and you should not pay them from your business account.

 

  • Office Expenses

 

We work in such an online world these days that I know office supply purchases are probably less than they used to be but even still, any supplies you buy for your office, whether at your home or somewhere else are deductible. I know I love a good planner, a cute calculator and a good pen so I’ve definitely got some office expenses I’ll be deducting! 

 

  • Insurance

 

Insurance for your business is 100% deductible. This could be property insurance, liability insurance, even a business owner’s policy is deductible. If you don’t have your business protected, I highly recommend you start looking around for some policies because you may just be thankful you did one day and they are fully deductible anyways.

 

  • Legal and Professional Fees

 

Anytime you engage an attorney or some other type of legal service, you can deduct that. The same goes for professional services such as accountants and bookkeepers, coaches, consultants and more. Whether they are operating as an individual on their own or running their own small business, the fees you pay them are 100% deductible.

 

There are more expenses you could be deducting but hopefully, that list gives you a good idea of some of the things you should be considering and make sure you record them in your accounting software. Below are a few more items you can deduct, but it would be best to speak to a CPA about these because these are usually handled directly on your tax return instead of throughout the year in your bookkeeping. 

 

 

  • Auto Usage

 

If you use your car for business, then you can deduct some of those expenses but you need to be careful. The IRS is very direct on what you can and can’t expense. If you use the car occasionally to meet with a client, go to the store to pick up supplies or for traveling to a conference, you’ll probably just want to use the standard mileage deduction. Your CPA will know all about this and be able to deduct it correctly, you just need to be able to provide the number of miles driven so be sure to keep track of it throughout the year. If you use your car more often, you may benefit from using the actual expense method but you’ll need very detailed records of all expenses related to your vehicle.

 

  • Home Office

 

If you work from your home office, you can deduct the cost it takes to operate from that office. Talk to your CPA about the best method for you. You can either take a standard deduction or use a specific calculation based on the percentage of space your office takes up in your home compared to all the expenses it took to maintain your home throughout the year. Choose one method and stick to it because it’s better to be consistent with it that way when filing your taxes year after year.

 

  • Charitable Contributions

 

Your business is able to make charitable contributions throughout the year; however, if you are a sole proprietor, that contribution will need to flow through to your personal income tax return and be deducted there instead. It’s best to keep track of the contributions and then let your CPA handle how to deduct them.

I hope these common deductions were helpful. If you have any questions about a specific expense, please leave a comment and we’ll be happy to answer. Also, if you read this and realize that you need to get a bookkeeping system in place so you can keep track of all of these deductions, don’t worry – we’ve got you covered. Take our free course, linked below and learn all about how to set up a bookkeeping system for your business. 

 

 

  1. 3 Biggest Tax Mistakes Small Businesses Make and How to Avoid Them - www.steadfastbookkeeping.com

    January 27th, 2020 at 2:39 pm

    […] we see. We recently wrote a post about the common deductions you can take so make sure to check out that post as well and be sure you are tracking all of those deductions. It would be silly to pay more in […]

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