It’s important to know the best tax deductions for your business. You can deduct the cost of many things as a small business. For example, for your business, you can deduct expenses related to your home office, such as a portion of your rent and utilities, office supplies, automotive expenses, insurance, business-related travel expenses, and meals.
Tax deductions work differently than tax credits. Tax deductions reduce your taxable income; tax credits reduce your tax bill. If you can take a tax credit, they are more beneficial, but you are only able to take credits if you qualify for. If you try to incorrectly take tax credits or tax deductions, you may trigger an audit and have to pay back taxes.
Some tax deductions are fully deductible, meaning you can write off the total amount of your expenses; others are only partially deductible. It’s important to work with a qualified tax professional when taking tax credits or tax deductions.
What are Tax Deductions?
Tax deductions lower a taxpayer’s tax liability by lowering his or her taxable income, according to Investopedia. Typically, tax deductions allow taxpayers to deduct the costs or expenses they incurred in specific areas and subtract this amount from their gross income.
A few examples of tax deductions include:
- Retirement Plan Deductions
- Real Estate Tax Deductions
- Bad Debt Deductions
- Mortgage Interest Deduction
- Home Office Deduction
If you are a small business owner or independent contractor, you would be able to deduct expenses if they qualify for tax deductions from your business income.
How Do Tax Deductions Work?
For most small business tax deductions, you are required to itemize your tax deductions if you want to take full advantage of them. This means you cannot take the standard deduction. The standard deduction is a fixed amount that changes every year due to inflation.
For the tax year 2020, the standard deduction is $12,400 for individual taxpayers and $24,800 for married couples filing a joint tax return. For Head of Household taxpayers, the standard deduction is $18,650.
This means if you had $20,000 in qualified tax itemized deductions, you would want to itemize, regardless of your filing status. However, if you are an individual taxpayer and your business tax deductions equaled less than $12,400, you should take the standard deduction because it’s worth more than the itemized deductions you have.
What are the Most Popular Tax Deductions for Businesses?
If you have traveled for business purposes, you may be able to deduct your travel expenses. You must be traveling for business; you cannot deduct personal trips.
According to the IRS, travel expenses are the ordinary and necessary expenses related to traveling away from your home for your business or profession. You are not permitted to deduct any expenses that are lavish or extravagant or that are made for personal purposes.
It’s a smart idea to keep all documentation of your business trip. This means you should organize your receipts, mileage logs, and any other proof of your business trip. This way, if the IRS comes knocking on your door, you will have the right documentation to support your tax deduction.
Read more about business travel under our frequently asked questions section of our website.
When you are traveling for business, you are allowed to deduct 50% of your expenses, provided they occur while you are on a business trip. You are no longer allowed to deduct entertainment expenses. The tax changes that occurred in 2018 changed that.
Tax reform also did away with deductions for the expenses relating to sporting events, such as those for skybox expenses, transportation to and from sporting events, and tickets to sporting events.
Read more about the tax law that eliminated the entertainment deduction on the IRS’s website on their page, IRS Issues Guidance on the Tax Cuts and Jobs Acts.
If you have automotive expenses that are related to your business, you may be able to deduct those. There are two ways you can possibly deduct this expense. You can either use the standard mileage rate or the actual business-related expenses.
So, if you decide to take the standard mileage rate, you’ll want to add up all your business miles and multiply the total by the IRS’s standard mileage rate. That will be the amount of your deduction. Check out our tax rates for the latest standard mileage rate for this tax year.
If you take the actual business-related expenses, you will total up your business-related gasoline and maintenance receipts, insurance forms, and maintenance reports – anything that can prove your expenses. You should make sure the proof has the date, name of the company, and amount you spent.
- Advertising and Marketing
- Office Supplies
If you run an office or even work from home, you probably incur many office expenses, including office supplies and equipment. Your paper for your printer, your ink, your pens, and your notebooks are all considered to be office supplies. These are deductible on your annual tax return.
If you incurred expenses related to running your business, like computer software or spelling and grammar programs, these are deductible on your taxes when you incurred the expenses. If you purchased a box of paper that will take you five years to use, you could take a portion of the box of paper as a deductible expense.
Sole proprietors and other LLCs will want to deduct their office supplies on IRS Schedule C: Profit or Loss from Business.
Partnerships and other LLCs will use IRS Form 1065: U. S. Return for Partnerships for other deductions. You will need to attach a separate page listing your expenses out.
Corporations use IRS Form 1120: U. S. Corporation Income Tax Return, listing the other deductions on a separate sheet of paper.
For more information on business expenses, check out IRS Publication 535: Business Expenses.
- Rent and Utilities
The price of renting the office space or building where you are conducting business is a deductible expense. Only the portion that is used for business is relevant for tax purposes. If your home has an office in it, you may be able to take the home office deduction and deduct a portion of your rent or mortgage.
The water and electrical bills you have in relation to your business are also deductible expenses. If you take the home office deduction, you are only allowed a portion of the expense as your deduction. Since your home office only takes up a portion of your home, it makes sense that you could only deduct a portion of your total utility bills.
For more information on this topic, check out the IRS’s Deducting Business Expenses.
- Insurance and Legal Fees
If you have begun a new business, you will want to have proper legal protection and insurance; it’s important that you are protected no matter what. The expenses you incur for these things are also deductible. Business-related fees and insurance premiums are deductible. Any deductible expenses must be required and ordinary for your business.
You cannot deduct federal income taxes on your annual tax return, but you can write off state and local taxes, sales taxes, personal property taxes, and real estate taxes, up to $10,000. A few other taxes you are able to take as deductions include a portion of your self-employment taxes, excise taxes, franchise taxes, and occupational taxes.
If you are self-employed and would like more information for freelancers and those earning a side hustle (extra money on the side), check out our complete guide to self-employment; it has everything you need to know about being self-employed and paying taxes.
We recommend hiring a qualified tax consultant who knows about tax law and the rules and regulations expected of them. It’s a smart idea to have someone qualified to do your taxes for you, especially if you plan to take tax credits or tax deductions because they can be tricky. Learn more about why you should hire someone to do your taxes this year.
If you do decide to hire a tax accountant, you should know all about the different types of tax professionals. Some are only qualified to do your annual tax return for you, while others can represent you in the event of an audit. If you do agree to work with a tax professional, understand what you are getting into by requesting a free tax consultation.
At Borshoff Consulting, we are qualified to represent you in the event of an audit and work hard to make sure you are covered with the IRS. If you are expecting an IRS audit and need help, please reach out today so that we can best serve you with your situation.
We also offer business consultations for small to medium-sized businesses. Make sure you contact us today to find out how we can best help you in your financial endeavors. You can trust Indiana’s tax expert to steer you in the right direction!