Small Business Owners: Don’t Miss These 10 Tax Deductions

As a small business owner, tax season can be a stressful time. With so many forms to fill, expenses to track, and checks to write to the IRS, it can feel overwhelming. However, beneath the bureaucratic onslaught, there is one shining beacon of hope: deductions, deductions, deductions. For small business owners, deductions are a world of plenty.

But the rules around deductions can be nuanced, so it’s important to do your research, talk with an accountant, and use a good tax calendar to stay on track of regulations and deadlines. Here are some of the top deductions that you don’t want to miss.

1. Travel Expenses

When you stay overnight at a hotel while conducting business away from home, that night will be fully tax-deductible. In fact, every night you spend away for business purposes will also be deductible, as will 50% of any meals you eat out (with or without a client in tow), any rental cars and plane tickets, and sometimes even transcription or translation services while traveling abroad.

Thinking of extending your stay for a little vacation time? As long as the purpose of your trip is mainly for business, you can still deduct your travel costs to and from the destination. Make sure to keep good track of your receipts regardless of the total.

2. Auto Expenses

Do you use your car for business? Do you own a company car? Some of the costs associated with gassing up and maintaining that car will be deductible. For 2020, the standard mileage rate for business use of a car is 57.5 cents per mile. Keep track of the exact miles you drive, enter them into your accounting system or hand them to your bookkeeper, and include a detailed description for each recording.

3. Current and Capitalized Expenses

Current expenses are things like rent and electricity bills—those ongoing costs that keep both your office and your business up and running. Capitalized expenses, on the other hand, are expenditures like equipment and vehicles. Current expenses are simply deducted from your business’ yearly gross income, while capitalized expenses must be deducted over a number of years.

Before you file, make sure you know which expenses are considered current or capitalized. A general rule of thumb is this: if an item has a shelf life of longer than one year, it’s capitalized. Confusing? Maybe, but understanding these distinctions and filing accordingly will be well worth the effort in the end.

4. Software and Subscriptions

Computer and software expenses can be cited as expenses up front using the Section 179 election, just like magazine subscriptions. This is a recent update, so if you’ve been depreciating the cost of computer software over three years, now is the time to update your records.

5. Health Care Costs

Though exact amounts and procedures will differ based on the type of business filing you have, many health care costs are deductible for small business owners. For proprietorships, health insurance premiums are 100% deductible on Form 1040 as an adjustment to income, though that deduction can’t be more than your business’ net profit, and the deduction is void if you’re eligible for any other kind of health coverage—including those of your employed spouse. However, if your spouse worked for your business, then their premiums are also fully deductible.

Things will be a little different if you’re filed as a C-Corporation. In this case, health care costs, including out-of-pocket expenses, are deductible as a business expense under a health reimbursement arrangement.

6. Bad Debts

If you’ve got a bad debt on your rolls, it may be deductible, but only for accrual basis rather than cash basis taxpayers. If an accrual basis taxpayer has billed for their goods and services, they may write off as a bad debt any amounts not collected. A cash basis taxpayer may not write off uncollected fees for services or goods, but may write off the cost of the goods that were not paid for.

Unfortunately, this applies only to goods, not to services, which are a lot more difficult to quantify.

7. Home Office Deductions

If you work from home, you can deduct for depreciation, utilities, insurance premiums, mortgage interest and repairs. However, the deduction counts only for that space, and you must use the area regularly and exclusively for business. The rules around this deduction are strict, so learn them well before filing incorrectly.

8. Business and Professional Fees

If you’ve bought business books, paid any fees to lawyers, tax professionals, and more, and their service is clearly related to this year’s activities, these all qualify as deductions.

9. Retirement Contributions

If you’re self-employed and contribute to a SEP-IRA or Keogh, these can all be deducted on your personal income tax return. Some plans must be established prior to the end of the year.

10. Phone Calls

Business-related phone calls are fully deductible, even if you conduct them on your personal cell phone or home phone. Just keep good records that separate the business calls from the personal ones.

In conclusion, when tax season comes around, there’s a lot for small business owners to think about, and just as many deductions to benefit from as well. Do your research, keep abreast of the latest regulations, and contact a good accountant early in the year to get it done right. Don’t wait until the last minute or you may miss out!