Small business tax deductions decrease your taxable income. This means more of the money you earn stays in your pocket. You can deduct your business’s expenses throughout the year from your taxable income.
Some expenses are obviously not deductible (e.g., you can’t claim your dog as a dependent). But sometimes, the line between a valid small business tax write-off and a “that’s so wrong” deduction gets blurry.
Small business tax deductions
To help you out, here are seven deductible expenses to look for in your accounting for small business.
1. Home office deduction
You can deduct costs associated with the parts of your home that are dedicated to your business. Costs besides your office might include your rent, insurance, and utilities. Only claim the portions of your home used solely for business operations.
Space in your home must be regular and exclusive to business operations. It also needs to be the primary place you operate your business from.
To write off home office costs, allocate the expenses using one of two options. If you use the regular method, you claim the percentage of all your home’s expenses that you use for your business.
You can also allocate expenses with the simplified method. Deduct $5 per square foot of your home office. You can deduct up to 300 square feet (or $1,500).
Don’t: Claim your entire home as a deduction.
Chances are, you don’t fill out paperwork in your bathroom. Personal expenses, including the costs of your living space, are never tax deductible.
2. Business use of a car deduction
Do: Deduct the business use of your car.
If you use your car for every aspect of your life, be sure to only claim the use related to your business.
You can deduct business use of your car with two different methods. To use the actual expense method, you need to add up all the costs associated with your car (e.g., gas, tires, insurance) for the portion of use dedicated to your business operations.
If you choose to use the standard mileage rate, a certain amount of money for each business-related mile you drive. The business mileage allowances change each year, so check with the IRS before deducting.
Don’t: Claim business use of your car for your commute to and from work.
Some car-related expenses are not deductible, even if they are for business use. For example, you cannot claim your commute to and from work. You also cannot write off your own parking fees or traffic tickets.
3. Travel deduction
Do: Write off travel expenses for business-related trips.
Travel costs (e.g., airfare, hotel charges) fall under business expense deductions. Business expenses must be ordinary, necessary, and reasonable. Before you deduct travel costs, be sure they meet this criteria.
Don’t: Write off your personal vacation that had nothing to do with operating your business.
You cannot deduct travel expenses when you are not traveling for business. Even if you come up with a new product idea at the local all-you-can-eat buffet, your beach vacation is not a tax deduction.
4. Employee expense deduction
Do: Deduct applicable employee expenses.
You can write off employee wages you paid throughout the year. You can also deduct employer contributions you made to employee benefits.
Don’t: Claim more than the 2% rule on employee expenses.
Employee costs are allowable business expenses that fall under miscellaneous deductions. According to the IRS, you can claim expenses that are more than 2% of your adjusted gross income. If your expenses are less than this number, you can’t deduct them.
5. Charitable contribution deduction
Do: Write off charitable donations you made.
The IRS sets limits for deducting charitable donations to a qualified tax-exempt business. In most cases, you may deduct your donations using the 50% limit. The amount you write off must be less than 50% of your adjusted gross income.
Depending on what the type of property you give and the organization you donate to, your deduction may be limited by 30% of your adjusted gross income.
Corporations cannot claim more than 10% of taxable income for charitable donations.
Don’t: Deduct income you could’ve made while you volunteered time for charity.
You could lose out on sales if you cancel a meeting with a client or close shop for a day to do volunteer work. You cannot estimate the money you might have made and write it off. The IRS only deducts expenses that you actually, and already, incurred.
6. Business bad debt deduction
Do: Deduct business bad debt expenses.
Did you sell to a customer on credit and try unsuccessfully to collect the owed money? At some point, you know there is no chance you will ever see payment. That is when accounts receivable turn into bad business debts. The debt has become worthless (almost).
You can write off business bad debts as small business tax deductions. However, you must prove to the IRS that you have taken reasonable steps to collect the debt.
Don’t: Write off a sales’ expected earnings as bad debt if no expense has been incurred.
You can end up with a bad debt only if you actually handed over a product to (or finished a service for) your customer, with the expectation that the customer would pay you later. If the customer never received your good or service, there is no bad debt.
For example, let’s say you own a printing company. A customer wants to hire you to print a logo on 500 tee shirts, and you tell him it will cost $750.
He calls later to tell you he decided to work with another company. You have not spent any money to begin printing the shirts, and the customer doesn’t owe you anything. You cannot claim the $750 you missed out on as bad business debt.
7. Legal and professional fee deduction
Do: Claim legal or professional fees related to your business.
You can deduct legal and professional fees (e.g., from an accountant) that are ordinary, necessary, and directly related to your business. Small business owners can deduct fees associated with trying to collect money.
For example, if you took a customer who refused to pay you to court, you could receive a tax deduction for your legal fees.
Don’t: Deduct personal legal or professional fees.
Personal legal fees are not deductible. You cannot deduct fees associated with writing your will, a divorce, or a criminal dispute.
Before claiming a tax deduction…
The IRS sets guidelines for tax deductions. The list above is not exhaustive. For example, for qualifying tangible property, you may even be able to claim a deduction through a safe harbor election or Section 179.
You must follow the rules carefully and keep accurate records of your expenses. Be sure to consult with a tax professional before you deduct expenses.
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This article has been updated from its original publication date of January 21, 2016.This is not intended as legal advice; for more information, please click here.