An entrepreneur’s guide to small business tax deductions
Every person in this country has had some familiarity with both federal and state taxes. The mission of the IRS is to “provide America’s taxpayers top quality service by helping them understand and meet tax responsibilities and by applying the tax with integrity and fairness to all.” This is why we must file taxes annually on our income each year. If you think about it, taxes can be thought of as sort of a symbiotic relationship. One taxpayer’s expense is another’s income; Payroll is an expense to a business contributing towards the income to an individual.
Individual filers are limited to a small number of legal types of expenses they can deduct such as home ownership, charitable contributions, and certain medical expenses. However, deductions for business expenses encompass a much wider range of categories that may apply toward business tax filings.
This brings us to tax deductions
Tax-deductible business expenses offer a great way for businesses to reduce their tax liability, especially for early-stage companies that are in spending mode–as a way to aggressively scale each year. This is why a tax strategy is so key to consider when choosing your business’s accounting method: accrual or cash. Cash basis taxpayers have leeway to determine the timing of their income and expense for each calendar year while accrual basis taxpayers may have the ability to accelerate expense and defer their income.
As a sidenote: this is just part of what you should consider when selecting your business’s accounting method. Need help?
Tip: Tax deductions are valid business expenses that you claim on your taxes. Claiming deductions saves you money by reducing your taxable income so you pay less in taxes to the government.
This article provides answers to the basic questions entrepreneurs have about small business tax deductions.
What small business expenses are actually deductible?
The IRS rules in regards to tax laws require business expenses to be ordinary (which means common or accepted in your trade or business) and necessary (being helpful and appropriate for your trade or business) to be considered deductible.
Another critical point that the laws emphasize is how you must keep the expenses you deduct as a business separate from your personal expenses. As a business owner, you’ll have capital expenses that help you run your business, and your cost of goods sold, which are any expenses that are used in the manufacture or operations of the goods you sell.
Here are 35 deductions (from a list of many) that a small business owner can take advantage of :
- Accounting fees
- Advertising & marketing
- Bad debts that you cannot collect
- Banking fees
- Board meetings
- Building repairs and maintenance
- Business association membership dues
- Business travel (here’s what you need to know!)
- Conventions and trade shows
- Credit card convenience fees
- Charitable deductions made for a business purpose
- Discounts to customers
- Eating out while you’re traveling for business
- Education and training for your employees
- Employee wages
- Employee benefits
- Entertainment for customers and clients
- Equipment repairs
- Group insurance
- Franchise fees
- Health insurance
- Mortgage interest on business property
- Office supplies and expenses
- Payroll taxes for employees, including Social Security, Medicare taxes and unemployment taxes
- Pension plans
- Taxes (amazingly, taxes incurred in running your business are deductible)
- Real estate-related expenses
- Research and Development
What you need in order to take deductions
If your growing company is ever faced with an IRS audit, besides having a solid CPA partner in your corner, you are going to need to provide documentation and evidence that expenses are deductible. Here are a few system components that will help;
1) A bookkeeping system
At this point in 2017 it seems a little obvious to even mention it, but every business no matter what size they are should be tracking your income and expenses, which lays the groundwork for your CPA to smoothly prepare taxes, file them and comply with the IRS requirements as well. When it comes to filing taxes, your CPA or tax accountant will ask for up-to-date balance sheet and income statement as well as your capital-asset activities for the year (which includes buying, selling or disposing of capital assets during that year). Out of the many accounting solutions, the best cloud based bookkeeping ones, give you concrete data to make the business decisions on your taxes.
2) Receipts and records documenting expenses
Record keeping is a must. Whether you store and categorize these digitally or are still using the old filing cabinet method, your CPA will thank you, for maintaining detailed context for every deduction you are claiming.
3) Certain expenses require specific records
Remember this point, sometimes concerning the IRS, a receipt is not always sufficient. Deducting the use of a personal car for business purposes is one example where you will need more information to back up your deduction. It is recommended if you want to uses this deduction, to have you and your employees track your mileage based on business vs. personal in a log or use one of the recent apps that have come out on the market: MileIQ, TripLog, or Motus.
Tax Deductions vs. Tax Credits
Now let’s talk about credits versus deductions. Beside deductions, businesses that are performing particular activities that are set forth and chosen by congress to incentivize can qualify for tax credits that provide a dollar for dollar reduction in tax liability. Tax deductions lower your tax liability by reducing taxable income. To determine and file for a tax credit, use this corresponding form from the IRS’s website.
Tax credits provide a greater benefit than deductions. Some activities, like research and development to create a new process or product may qualify for a credit but also have related tax deductions. These research and development costs are either deductible or creditable, but not both.
Claiming both credits and deductions involves detailed record keeping:
“It all starts with keeping your books organized. Taxes are less difficult if you have your accounting squared away.”
Whether you’re hustling to make your 2016 tax deadline or are unsure which expenses you can deduct, using a well-organized bookkeeping solution will be your best bet. Not only will it make it easy for your to reference data if you file on your own, but having ready access to detailed records will also make it easy to solicit help from a tax professional or CPA who will need to understand your business and it’s year-long activities.