This year alone, 71% of small-business owners reported an increase in expenses for supplies and services of at least 20%. According to a Business.org proprietary survey conducted via Pollfish, 92% of small-business owners reported that the cost of supplies and services required to operate their businesses has increased since the pandemic's start.
Entrepreneurs have experienced the most intense pangs of rising inflation in thirty years, as evidenced by the surging cost of doing business. One option to boost your bottom line is to reduce your tax burden by utilizing the tax deductions that the IRS has made available to businesses.
There are ordinary and necessary business expenditures that you can deduct from your taxes which drops your taxable income. To illustrate, let's say a company earns $200 in sales and pays $60 in wages to make that sale happen. The company's taxable income is $200 minus $60, or $140. Therefore, the company pays tax on the income or profit of $140 rather than $200. Here are 11 tax-deductible avenues for your small business.
1. Phone and Internet Expenses
You can only deduct part of the cost of your cell phone if you use it for personal reasons. But if you buy a separate cell phone and plan for business use only, you can deduct the full cost from your taxes. If you use your phone for work more than 90% of the time, you can write off all of its costs.
2. Advertising Expenses
The law permits tax deductions for related costs to encourage businesses to invest in customer acquisition and retention. These costs should be standard practice for businesses in your field. Small businesses can't deduct amounts they pay for lobbying, which includes ads placed in a convention program of a political party.
3. Travel Expenses
All expenses incurred while on a legitimate business trip are fully deductible. The trip must take you away from your regular place of business, last significantly longer than a typical workday, and necessitate sleeping or resting to fulfill your job requirements. Furthermore, your international business travel costs may be tax deductible if you devote less than 25 percent of your time to leisure activities.
The following are examples of business travel deductions:
- Baggage fees
- Laundry and dry cleaning during your trip
- Rental car costs
- Hotel and Airbnb costs
- Plane, train, car rental, and bus tickets between your home and your business destination
- 50% of eligible business meals
- 50% of meals while traveling to and from your destination
4. Home Office Expenses
One of the most common tax breaks that small businesses can maximize is the home office expense. So much so that the IRS recognized the need for a less complicated method to calculate the 2023 home office deduction (Revenue Procedure 2013).
Currently, you can use either the simplified or standard deduction methods. Using the standard option, you must calculate the percentage of your home used for business before applying it to your mortgage interest, utility costs, and insurance premiums.
Alternatively, with the simplified method, you can deduct up to 300 square feet of home office space or $1,500. You can claim the deduction as a homeowner or renter and for any home where you live, including a detached garage. This doesn't apply to a hotel or temporary lodging.
You can deduct your policy premiums if those policies benefit the business and serve a business purpose. For instance, a self-employed business owner may deduct the total cost of their premium based on the following 2022 age-based eligible premium amounts.
- Age 40 and below $450
- Age 41-50 $850
- Age 51-60 $1690
- Age 61-70 $4510
- Age 71 and over $5640
Likewise, deductibles apply to commercial auto policies covering liability and property damage caused by accidents involving company-owned vehicles. You cannot combine this deduction with the mileage one; therefore, you must choose between the two. Also, you can't write off the cost of some insurance premiums, like disability and loan protection insurance.
6. Vehicle-Related Expenses
All the costs of owning and maintaining a car used only for business are tax-deductible. You can only deduct the portion of the car's price directly related to its business use if it is used for both business and pleasure. Miles driven for work can be written off using either the actual expense method or the standard mileage rate.
The quantity of business miles you travel is multiplied by the amount per mile the IRS allotted to get your standard mileage rate. You could also keep tabs on all the expenses related to your car, including gas, insurance, registration, depreciation, and repairs. This allows you to use the actual expense method, where you multiply the percentage of business use by the actual cost of your car to get your deduction.
Therefore, if you spent $1,000 on your vehicle and used 20% of it for work, you would multiply $1000 by 20% to get a deductible expense of only $200.
7. Education Expenses
Expenses related to furthering your education may be tax deductible if doing so is mandated by the government or if doing so is necessary to maintain or enhance your business skills related to your niche or industry. Even if it meets one or both of those tests, you cannot deduct the cost of education that qualifies you for a new trade or business or helps you meet the minimum requirements for your business.
8. Self-Employment Taxes
You must pay both the employer and employee portions of Social Security and Medicare taxes if you are self-employed, for a total tax rate of 15.3% of net earnings.
Even so, one can deduct the amount of your self-employment tax that matches what an employer would pay from your adjusted gross income. You can write off half of the self-employment tax employer portion because the IRS views it as a business expense.
9. Rent and Depreciation on Equipment and Machinery
Rent for office machines and equipment is tax deductible. You can claim machinery and tools for depreciation as well. These costs, however, are amortized over time and thus become a deduction.
You can take advantage of the Section 179 deduction, which allows businesses to deduct up to $1,020,000 in costs for assets placed in service during the tax year. All software you buy or download for your business is tax deductible. You can deduct these costs on Schedule C of your tax return.
If you borrow money from a bank or other lending institution for your small company, the money you receive will be subject to interest payments. The interest you pay on a loan used for business purposes is usually wholly tax deductible.
For a business owner to qualify for this deduction, there must be a “debtor/creditor” relationship between the owner and the lender. This rules out borrowing money from close personal connections instead of going to a bank.
11. Charitable Contributions
Company-sponsored donations to nonprofits qualify for a tax deduction in their entirety. However, expenses like this shouldn't be more than half of their yearly adjusted gross income (AGI). Limits of 20%, 30%, or 50% may be imposed in certain circumstances.
Depending on the nature of your company, you'll need to use a specific form to account for your deduction. In most cases, Schedule A is where you should put your business deductions on your tax return.
Optimize Your Business's Tax Deductions
Businesses should keep careful records of all their expenses and organize their receipts to maximize the benefit of tax deductions. By taking advantage of all the available deductions, businesses can lower their tax bill and keep more of their hard-earned profits.
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Amaka Chukwuma is a freelance content writer with a BA in linguistics. As a result of her insatiable curiosity, she writes in various B2C and B2B niches. Her favorite subject matter, however, is in the financial, health, and technological niches. She has contributed to publications like ButtonwoodTree and FinanceBuzz in the past. In addition to ghostwriting for brands like Welovenocode, Noah and Zoey, and Ohcleo, amongst others. You can connect with her on Linkedin and Twitter.