Bump up tax savings: 4 types of deductions every small business owner should know
There’s an old saying about the inevitability of taxes. While there’s no way to escape your tax bill completely, there are some common deductions every small business owner should consider to help take the edge off that annual burden.
Taking business deductions can help small business owners reduce their tax bills. However, deductions aren’t exactly a magic wand. Take too many too freely and the IRS may become suspicious enough to start an audit. On the other hand, millions of entrepreneurs miss out on common deductions each year. Sometimes they didn’t know about them, or their bookkeeping couldn’t account for the expenses.
The best practice is to start early. Set up good bookkeeping practices and keep accurate records of your cash flow. That way, when it’s time to file, you can confidently claim deductions. You'll know you’ve got the receipts to back up your expenses. It’ll mean peace of mind for you and savings for your bottom line.
Even with great recordkeeping, business owners might not save as much money as they could. They might not realize what types of business expenses are tax-deductible. When entrepreneurs create a tax-deductible expenses list, they could forget some common business write-offs.
Missed business deductions mean missed opportunities to reduce your tax burden. Looking to maximize savings? Then consider these business expense deductions that every small business owner should know.
#1 - Advertising dollars
Getting the word out about your business is vital and tax-deductible. Today, marketing covers a broad array of initiatives. You don’t have to simply run a local commercial or rent billboard space. Advertising includes web and real-world activities.
For example, you may hire a freelancer to design business cards or redesign your logo. Some businesses still send "thank you" notes to customers. This strategy could work for you, too. Or you may take potential clients out to lunch. All of these activities count as investing advertising dollars into your business.
Consider these other common marketing strategies:
- Purchasing search engine ads
- Creating brochures or catalogs
- Redesigning an outdated website
- Sponsoring an event
- Buying ads in print publications
- Serving as a sponsor for an event
- Running organic and paid social media campaigns
- Participating in an event for advertising purposes
Take advantage of write-offs for your advertising and marketing dollars at tax time. Just about any effort you make to spread the word about your business counts as marketing and advertising. As long as you can account for the expense, you can probably claim it as a business deduction.
#2 - Employee necessities
Your employees keep your business running. To do that, you need to give them what they need to get their job done efficiently and effectively. Just about everything you provide, from equipment to benefits, you can write off at tax time.
Any salary or benefits that you paid to your employees are tax-deductible. These employees must have actually worked for you and can't be partners or LLC members of your company. If you offer a qualifying retirement plan, your employer contributions are deductible. Did you hire independent contractors or freelancers? The cost of their labor can reduce what you owe in taxes.
Of course, office space and equipment can be written off too. The cost of your rent and the utilities for the space where you all work is tax-deductible. Any office furniture you’ve purchased can be considered business expenses. Office supplies, from staples to pens and paper, are all deductions.
Even food can be written off. You might order dinner for your team who's working late or host a company outing. In either case, the cost of the food is a tax deduction. Having snacks and beverages on hand for your employees is also a write-off. Lunch meetings can also be qualifying expenses. You can also give employees gifts, up to $25.00 per year, per employee. As always, just be sure to document and account for all of these purchases.
| As a rule, if an expense is ordinary and necessary for your business, it might be tax-deductible.
#3 - Fees
In certain circumstances, various types of fees can be small business tax deductions. Some typical write-offs are any fees from legal or accounting professionals you hire for your business. Online sellers that use PayPal, Stripe, or similar services can track transaction fees, which are also deductible.
While it’s not exactly a tax loophole, you can write off a bit of your business credit card bill. Specifically, if you have a credit card that’s used for business, you can claim any regular fees you’re charged. These fees include annual or monthly fees, overdraft fees, and transaction fees. Any interest charged on a business purchase may also be tax-deductible.
Fees can also apply to software subscriptions. Remember those solid bookkeeping practices you invested in to track all of your business expenses? Many bookkeeping methods include automating tracking cash flow with intuitive accounting software, If you use accounting software, you can claim a deduction for the subscription fees you pay to use that platform. Any other software you need to run your business may also qualify as a write-off. Even trade publications that you subscribe to could be tax-deductible if they're relevant to your business.
#4 - Cost of doing business
There are some charges throughout the course of business that could be potential methods for lowering your tax bills. These could include routine expenses like business license filings to the depreciation of business equipment. If you’ve taken out a business loan, the interest you pay on that loan is usually tax-deductible. There are some restrictions. You have to be the business owner and be liable for the debt. You also have to be working with a traditional lender. If all of those factors apply, then you can claim the interest.
Similarly, if your business has lost money due to bad debt, then you can claim those losses as tax deductions. The catch is that the loan has to have been for business not for personal reasons. In fact, you will generally have to provide proof that these were business related. Examples of bad debt might include business loan guarantees, credit sales to clients, or loaning money to a distributor, vendor, or supplier.
Travel is another topic that gets a lot of attention for deductions. Be sure not to leave any dollars on the table in this category. It’s pretty common knowledge that the IRS has a standard rate for mileage. Businesses can track miles to deduct as expenses from their bottom line. There are more opportunities when you travel outside the city where you primarily do business. You can claim a plethora of expenses. These include meals and lodging to parking and transportation costs. The trick is determining if your loyalty programs for your favorite hotel chain or your point-accumulating credit card will save you more than your year-end tax savings.
A tax-deductible expense list for your business
Knowing what to look for when you’re listing your business expenses is half of the challenge. In fact, we explore that very fact in our webinar, The 5 Most Overlooked Tax Deductions for Content Creators.
Getting the most out of those deductions doesn’t start with just being aware they exist. Once you know what to look for, you have to document and keep your receipts. Recording the frequent or typical fees and payments that keep your business running is an important first step.
Many small business tax deductions are simply expenses that are ordinary and necessary. Keeping receipts, monitoring your cash flow, and staying on top of your deadlines can go a long way to saving you money on your tax bill.