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Top 10 Business Tax Deductions and How to Apply Them

For many business owners, standard tax deductions like rent and major purchases receive the most attention; but, there are some lesser-known expenses you can take advantage of to reduce your tax liability and maybe even increase your chance of a refund.

A tax deduction (also known as a “tax write-off”) is the ability to subtract business expenses that you incurred throughout the year from your overall taxable business income.  While these deductions allow you to pay a reduced tax bill; you have to be sure the expenses align with the IRS’ criteria.

  1. Interest -Credit card interest accrued from actual business purchases made with your business credit card (or a personal card that is used exclusively for business expenses)
  2. Qualified Business Expenses – Business structures that are eligible for the qualified business income deduction are “pass through entities” including sole proprietorships, partnerships, S corporations and limited liability companies (LLCs). Qualified Business Expenses are expenses that are necessary and customary for your industry. This can include common business expenses love rent and internet access or more specified industry cost like oil and wiper tire inventory for the owner of auto repair shop. As provide for by the Tax Cuts and Jobs Act, small business owners can deduct the first 20% of their profits as a “Qualified Business Income” deduction. There are maximum on income however, single filers can have a maximum of $160,700 in annual revenue, while joint filers can have up to $321,400.  
  3. Startup Costs – To encourage new businesses, the IRS offers a $5,000 deduction for start-up expenses. These include the costs and investments involved in getting your business off the ground. Expenses like marketing, textiles, travel costs to suppliers and customers can be claimed. There’s a full list of eligible deductions on the IRS website.
  4. Your Car/Travel/Food/Entertaining – New business owners can spend a lot of time driving, thankfully, at the end of the year, you can calculate the number of miles you put on your car and multiply that by the IRS’ standard mileage rate of 57.5 cents per mile and deduct the total. Be sure to maintain an accurate mileage log as you may be required to produce it should the IRS inquire. You can also deduct care expenses, like gas, licensing, repairs, tolls, and parking. Please note, driving to and from work does not count as a business expense. Travel expenses, like hotels and flights, food (up to 50%) as well as entertaining customer or potential investors can all qualify for deduction. Remember though you cannot deduct travel expenses for family or friends traveling with you unless they are employees.  
  5. Memberships/Continue Education – Many businesses require some type of expertise or licensure. Fortunately, you may be able to deduct the cost of professional licenses, memberships, and continuing education. If you go a conference, professional development classes, or take a course to improve your skills, these costs are deductible. In some case, even magazine subscriptions can qualify. Also, the IRS carves out deduction exceptions for memberships to bar and medical associations as well as real estate boards.
  6. Outside Services– Attorney and accounting fees, equipment rentals from vendors, and most contract services can be deducted.
  7. Insurance – Sole proprietorships can claim the full cost of their health insurance premiums. This includes premiums spouses and children under the age of 27 by the end of the year. Unfortunately, out-of-pocket medical costs are not deductible but if your medical expenses exceed 7.5% of your gross income that cost would qualify.  
  8. Home Offices – Business owners who work from home are allowed to deduct at least some of the cost for their home office. The generally acceptable calculation is as follows: For a home office that is 300 square feet or less, the IRS permits a deduction of $5 per square foot up to a maximum of $1,500.
  9. Retirement – You are able to deduct half of the first $1,000 you spend to set up your 401(k) or other qualified retirement plan. In addition to this deduction, sole proprietors have until April 15 add funds to their personal retirement accounts and are permitted to defer some of that income as a business expense.
  10. Self-Employment Taxes – One interesting deduction is the self-employment tax deduction. The self-employment tax rate is 15.3% of net earnings. That rate is the combination of the 12.4% Social Security tax and the 2.9% Medicare tax on a business’ net earnings. The IRS permits a 50% deduction of your self-employment tax on your income taxes.

Understanding your taxes and applicable deductions can be confusing and intimidating. Even seasoned tax professionals get tripped up with the IRS’ many rules and constant changes. For that reason, it is highly recommended that you work with someone who is familiar with business taxes to establish the best approach. Fortunately, Capital Partners Law can help. Contact us today.

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This article is for informational purposes only. It does not create an attorney-client relationship with any reader nor should it be construed as legal advice. If you need legal advice, please contact our firm.