Small Business Tax Deductions Checklist
Deductions reduce your taxable income, which in turn reduces the amount of taxes you owe. There are deductions available for all types of startups and small businesses. Here are a few of the most common small business tax deductions.
They say death and taxes are the only certainties in life. For the most part, death is beyond our control. Taxes, on the other hand, are something we can not only predict, but also manage. As a startup, taxes could be one of your biggest expenses. If you can reduce your tax burden, you can protect your cash flow and extend your runway. If you fail to implement a tax strategy, taxes could erode your profitability and threaten your business’s viability.
Fortunately, you can take advantage of a wide range of small business tax deductions to minimize your tax burden. Deductions reduce your taxable income, which in turn reduces the amount of taxes you owe. There are deductions available for all types of startups and small businesses, and they cover nearly every type of business expense.
Below is a sampling of some of the most commonly-used small business tax deductions. It’s always helpful to rely on a knowledgeable and experienced tax professional to implement your strategy. However, even if you aren’t working with a professional, you can keep track of these expenses so you can maximize your deductions when you file your return.
The 2019 Tax Cuts and Jobs Act created a new deduction for most small business owners. It’s an automatic 20% deduction on all income that “passes through” from their Schedule C to their 1040. That qualifies most sole proprietors and owners of LLCs and S-Corps. There are some exceptions for individuals who work in accounting, law, consulting, and other businesses.
Startup Salaries & Wages
Do you have employees? Or do you pay contractors for work? If so, those wages are generally tax-deductible. You also may be able to deduct costs related to employee benefits, such as insurance, retirement plans, and more.
Home Office Taxes
It used to be that nearly anyone could deduct their home office as an expense. The 2018 tax law changed the deduction so it is only applicable to those who fill out a Schedule C, which generally includes sole proprietors and single-owner LLCs.
If you fill out a Schedule C, you can likely take advantage of the home office deduction. However, remember that you can only deduct the portion of your home that is dedicated to your business. Measure the square footage of your work area and divide it by the square footage of your entire home. You can then deduct that percentage of your total housing costs, which include mortgage or rent, utilities, and more.
Startup Tax Software
Nearly every business function is performed using software these days. Your business likely owns several different types of software, perhaps for contact management, accounting, or even production.
Did you know you can deduct the cost of that software? The deduction is available under Section 179. The only rules are that the software can be custom to your business and it must be “off-the-shelf,” or available to the general public. If it meets those requirements, you can deduct some or all of the cost.
Do you and your employees have to drive for business purposes? If so, you can deduct that mileage as an expense. The standard mileage rate in 2019 is 58 cents. Be sure to use a tracking app to keep track of your mileage throughout the year.
When you’re an employee, your employer pays for half of your Social Security and Medicare taxes. That’s not the case, though, when you’re the employer. If you’re self-employed, you have to cover all of your payroll taxes. If you have employees, you also cover half of their payroll taxes.
Fortunately, you can deduct those taxes and reduce your taxable income. A tax professional can help you determine just how much you can deduct.
Cell Phone Bill
Do you use your cell phone to run your business? If you’re like nearly every other entrepreneur, the answer is almost certainly yes. You can deduct a portion of your cell phone bill as a business expense.
The key is to estimate how much of your phone use is dedicated to business. You can then deduct that portion of your bill. For example, if you 30% of your phone use is business-related, you can deduct 30% of your monthly cell phone costs.
Advertising & Promotion
Do you spend money on social media, advertising and other types of promotion? If so, you may be able to deduct those costs. Expenses dedicated to the growth of your business, like advertising and marketing, are usually deductible expenses. Again, a tax professional can help you determine which marketing expenses can be deducted and which cannot.
The 2018 tax law changed the way meals and entertainment can be deducted. While the specific rules can be complex, the general guideline is that meals are still deductible as long as the meal is ordinary and necessary and not lavish. The percentage of the cost that is deductible depends on who is present for the meal and the meal’s purpose.
There has been a change to entertainment. While you can deduct a meal that is provided during the course of a client entertainment event, you can’t deduct the cost of the entertainment itself. In recent guidance, the IRS used a baseball game as an example. The cost of hot dogs for a customer would be deductible. The cost of the baseball game tickets (ie, the entertainment) would not.
Small Business Tax Deductions: Worth the Effort
The best way to maximize your deductions is to have a game plan. An experienced accounting partner can help you develop a strategy and maximize your deductions throughout the year. Our team at airCFO can help you identify the appropriate deductions for your business and minimize your tax burden. Let’s connect today and start the conversation.