7 Business Tax Deductions Every Business Owner Should Know
Multiple unavoidable expenses come with running a business. Even so, the I.R.S provides several avenues to reduce your taxable income. For savvy entities, Business tax deductions are a foolproof way to reduce the income tax and boosts savings significantly.
But do you know which expenses are deductible? This post will cover the seven business tax deductions accessible to sole proprietors and other entity types.
Note, some are deductible expenses small business owners can include on their distinctive tax returns.
What Expenses Qualify for Business Tax Deductions?
The I.R.S. tax provisions allow you to deduct an expense if:
- It is ordinary and necessary
- It is a sensible figure
- It is a business-related expense
Note that ordinary and necessary business expenses don’t need to be a life or death situation. Rather you must show these costs are related to your business operations. Let’s say you use your laptop to make both work and personal calls. Here, you may deduct this business-related expense.
Finally, when talking about a reasonable figure, this means being cautious on amounts may seem lavish. For this reason, you must be careful about entertainment and meal deductible expenses. Remember, deductions that exceed your taxable income will appear shifty and increase the likelihood of an I.R.S. audit.
The Top 7 Business Tax Deductions
Hiring a tax professional to handle your business tax returns is good practice. However, it is crucial to know the main deductible expenses for good recordkeeping.
Vehicle expense deductions
If your car is sorely for business purposes, you may deduct the expenses related to its everyday operations. However, if your vehicle covers personal and work-related travel, you can only deduct the company-related travel costs. Two methods for calculating these benefits exist.
- Actual expense. You’ll need to figure out all the car-related expenses, including insurance, gas, and lease remittances.
- Standard mileage rate. To arrive at the deductible cost, you’ll need to multiply the distance covered during work trips by the standard mileage rate. The 2021 I.R.S. standard mileage rate is 56 cents per mile.
Home office costs deductions
Two ways let you deduct costs related to your home office.
- Simplified approach. With this method, you may deduct up to 300 square feet at 5 USD for each square foot.
- Standard approach. To determine the deductible expenses, you must evaluate all relevant home office-related costs, such as real estate taxes, rent, and H.O.A. fees.
That’s not all, to be eligible for the home office deduction, you must meet these two requirements.
- Your home office must be your primary location for work.
- Routine and exclusive utilization – Your home office should strictly be for work-related tasks and have clear boundaries to meet this requirement. We recommend having photo evidence and attaching it to your documentation when filing tax returns.
Travel costs reductions
Business travel expenses are deductible if the trip was away from your tax area. Your tax area is the city your business operates in, no matter where you live. Some of the common costs eligible for deductions include:
- Parking fees
- Dry cleaning during a work trip
- Meals and hotel expenses
- Work calls
- Air, road, and train travel
The I.R.S. allows you to deduct premiums related to your business insurance. These deductible costs include:
- Auto insurance
- Property coverage
- Employee group insurance
- Workers’ compensation
- Business interruption coverage
Legal fees and business books deductions
Business books expenses tend to fall under small business tax deductions since many of these groups can’t hire tax consultants and attorneys.
As for the businesses that can hire a C.P.A. firm or lawyer, the amount they charge for their services is deductible if they are business-related. So, if you hired a lawyer when writing your will, the only deductible costs are those concerning work.
The depreciation regulations surrounding company assets require you to calculate deductions for every year of use rather than apply for one-off tax breaks. However, if you want to deduct the entire cost at once, you must meet the following requirements.
- De minimis safe harbor. Under this I.R.S. election, businesses without an applicable financial statement can deduct up to 2500 USD.
- Section 179 deduction lets businesses deduct property expenses below $1,040,000.
- Bonus depreciation. With the bonus depreciation, businesses can deduct the entire cost of business electronics and other assets.
- Personal tax deductions
The I.R.S. provisions allow for tax write-offs for specific personal expenses.
- Charitable contributions – Limited liability companies and sole proprietorships can only claim charitable deductions if they file such expenses under philanthropic gifts. The receiving organization must meet section 170(c) of I.R.S. qualifications.
- Dependents costs – According to I.R.S. publication 503, a business owner may qualify for the child and dependent care expense deductions if they meet specific requirements. Here, your child must be below 13yrs. If it’s a spouse, you must prove that you catered for their physical and mental needs and lived with them for over six months.
- Retirement plan contributions – While your workers’ contributions fall under business expenses, individual retirement expenses are only deductible under form 1040. Besides that, your retirement plan will influence the deductible amount.
- Health insurance – The I.R.S. provisions allow business owners to deduct out-of-pocket health care expenses such as prescriptions. For a sole proprietor, you can deduct premiums for your spouse under form 1040.
You now know the deductible expenses that can help you get a tax break. Working with a business advisor ensures you don’t miss out on yearly deductions and guarantees that all entries are legal. If you’ve been looking for a tax professional, look no further than F.M.A., C.P.A., a licensed C.P.A. firm.
Contact FMA CPA to learn More about Business Tax Deductions
FMA CPA offers a wide array of business tax services, including accounting, bookkeeping, business advisory services, and estate planning. We’ll help you find and implement tax deductions to help you save capital when it’s tax time. Have any more questions? Feel free to reach us at 727-530-0036.