Running a small business can bring many deductions that can allow for significantly lower tax bills. But sometimes potential deductions are overlooked because they are not your standard deductions you would think of. Below are ten common expenses that can potentially be deducted under your business.
- Educational Expenses: This one can be tricky. The education you receive must be in order to maintain your current skills or to improve on your skills related to your business. Also falling under the education deduction can be your subscriptions to informative magazines or newspapers that help you with your businesses.
- Entertainment Expenses: Entertainment expenses are only 50% tax deductible. In order for an entertainment expense to qualify as a deduction, the entertainment provided must be directly related or associated with the business. Be careful with this one, though. This is one of the most common IRS audit flags if the IRS thinks this deduction is being abused. It is a good idea to save all entertainment-related receipts and make a note about the exact business purpose they served.
- Vehicle Expenses: If you use your vehicle for business expenses you have the choice of using two different methods to find the appropriate deduction. The first method is the standard mileage rate that the IRS allows. Using the standard mileage rate allows you to deduct a certain amount per mile the vehicle was used for business purposes. The second method is the actual expense method. The actual expense method you can deduct all of the actual vehicle expenses. It is a good idea to keep all receipts and expenses related to the vehicle and do a comparison at the end of the year to see which method gives you the largest deduction.
- Travel Expenses: Any expenses incurred during traveling can be deducted, as long as the primary purpose of the trip was for business. These expenses can include car rentals, plane tickets, food, phone calls, and any other expenses that were incurred because of your travels.
- Relocation Expenses: If you are moving because of your business then you will be entitled to some deductions. It is required that your new location would create at least an additional 50 mile commute between your new work location and old home in order for the expenses to be allowed as a deduction. It is also required that you must work at least 78 weeks in the following 2 years after you move in order to claim this deduction.
- Expenses relating to starting the business: The expenses incurred prior to opening the “business doors” can be deducted. These expenses are different from normal ongoing expenses and are considered a capital expense. You are allowed to deduct $5,000 the first year you are in business and the remainder must be deducted in equal amounts over the following 15 years.
- Bad Debt Expenses: If you loaned money to clients, suppliers, employees, or anyone else that you do business with whom never paid you back, it is possible to get a deduction for that. In order for the bad debt to be written off, the bad debt must have been a legal obligation for debtor to pay you the money that is owed, you must prove that you attempted to collect the debt, and you must sustained a loss because of the bad debt.
- Tax Preparation: All tax preparation and accounting costs that are related to the business are tax deductible. This should give you more of an incentive to use a tax professional to help with your tax filings since it is 100% tax deductible for your business. It is always good to have an experienced tax professional look over your expenses and deductions prior to filing. Many deductions can be complicated and it is important they are taken the right way in order to reduce your audit risk.
- Home Office Deduction: This deduction can be a bit complicated. Typically to receive this deduction your home office is supposed to be your main place of business, or you use it to meet with customers or clients. In order to get the deduction you must have a specific area of the house that is used only to perform your business activities. If that area that you conduct business activities is used for other purposes as well, then it is not allowed as a deduction. Once it is determined that you can take this deduction, you can only take a deduction based on the percentage of your home used for your business. The best way to do this is to measure the square footage of the room that is devoted to your business and find what percentage that is of your total home.
- Communications Expenses: If you have a cell phone, land line, or Internet service that is used solely for businesses, those are an easy 100% deduction. If the phone and Internet is for both business and personal use, then things can get a bit complicated, but you will still be allowed to take a deduction by prorating the portion used for business.
Having a small business opens the door to many deductions that most individuals are not allowed to take. The key to getting the most out of these deductions is by understanding which ones apply to you and implementing them properly. If you fail to report one of these deductions, you can be sure the IRS will not notify you about it. As a small business owner, it is important to do your research or to hire an experienced tax professional to ensure you take the maximum deductions allowed for your business.