Small business tax deductions & expenses

Working for ourselves brings profit in many levels – personal and financial. But doing the taxes might get complicated based on the type and complexity of your business. And the more tax deductions, legitimate small business tax deductions there are, the less taxes you pay and more money in your pocket. Here are some basic concepts and list of tax deductions you might be eligible for. Use this as a checklist for doing taxes or as discussion points for your accountant or entertainment if you like taxes or just a motivational read to start your business See how much you are missing…

There are two components of small business tax deductions – business expenses and capital expenses.

Business Expenses Tax Deductions

Business expenses are the money you spend for running your company every day – rent you pay for your office space, the money you pay for your employees, etc. These expenses are deductible, most of the time 100%.

Here are some business expenses that you might be able to deduct -

1. Home office deduction : This is a very tricky deduction and some people say it is a sure way of getting an audit. But if you are eligible and if you really do use it for business fulfilling the IRS rules, they an audit fear shouldn’t stop you from taking a legitimate small business tax deduction. The IRS requires you to use your home (or part of your home, it can be your own home or rented)
   • Regularly and exclusively for business – This means if you have your computer in a corner of your bedroom and use it occasionally for business you CANNOT deduct a home office expense. You have to use it ONLY for your business and use it regularly.
   • Principal place of business – You have to show that your home office is your principal place of business. If you conduct business outside of your home but also manage your business from home, you may still be eligible for the deduction as long as it satisfies the rule #1 regular and exclusive use.

More information on Home office deduction can be found here. Generally the home office deduction will include part of your mortgage or rent, mortgage interest, insurance, utilities, repairs, and depreciation.

2. Auto expenses deduction : If you use your car for business, you can deduct some of the cost. There are two ways of claiming the expenses – actual expense method, keep track of all the expenses and deduct all of them. Business standard mileage method, keep track of the miles and you can deduct a certain amount for each mile driven, plus the tolls and parking fees. The 2011 business standard mileage rate is 51c. Please note that if you use your car for business and pleasure, only the business portion of the expenses are deductible, which means, keep meticulous record of how you are using your vehicle.
3. Employee Pay : You can deduct the pay you give your employees and their benefits too. Even if you don’t have employees but outsourced some services for you company (for example, you own an architecture firm and outsourced CAD services) those outsourcing costs are deductible.
4. Retirement Plans : You can deduct the amount you set aside in a proper retirement plan and also the cost of the plans you offer for your employees retirement as part of their benefits.
5. Business interest expenses are deductible if you have a line of credit for your company or the money you borrowed for business activity.
6. Rent & Utilities : If you rent an office and use if for your business (you cannot receive any equity or have title to the property) then the rent and the utilities are deductible as expenses of running your company.
7. Taxes paid : The taxes you paid, federal, state, foreign and local taxes are deductible as you would do in your individual return.
8. Insurance : Business related necessary insurance – liability or any other insurance that are needed for your business is deductible.
9. Education : If you attend a course or a conference to maintain or improve your competency to run your company, the fees is deductible.
10. Subscriptions : Any subscription that are necessary for your trade, like the professional magazines or newspapers, are deductible business expenses.
11. Legal & professional fees : The fees you pay for the lawyers, tax professionals and accountants to keep your business moving smoothly are deductible. If the service is related to the current tax year then it is a straightforward deduction. But if the work will benefit you for years to come, then the deduction must be over the life of the benefit.
12. Business loss and debts : If you sell something to a client, but you were not paid for the goods, then you can deduct the cost of the goods as bad debt. If you own a service based business, the time you devoted for the client who didn’t pay is not deductible, unfair but that is the rule.
13. Business Travel : If you travel for business the cost of the travel including air fare, hotel, rental car, tips, meals, telephone costs and faxes, all of them are deductible.
14. Entertainment : If you are dining with a client and picking up the tab, or entertain prospective customers then 50% of that expense is deductible as long as the entertainment is directly related to business and you are actually doing business in that time or the entertainment is part of the business. Again, keep good records of this expense. If you going out for dinner with a client for example, just write the name of the client, company (if applicable) and a very short purpose of the meeting.
15. Advertising and promotion : For most of the businesses advertising and promotion is vital. Any money you spend on this, bill boards, flyers, business cards… all of them are deductible.
16. Equipment and tools : If you buy trade tools that has life of less than an year then you can deduct that expense as a business expense, if it will be used for a long time, it will be considered as captial expense (read below).
17. Charitable expenses : If your company donates to charity it is deductible as part of business expense (in case of a C corporation) or transferred to your individual tax return (in case of an LLC or partnership).

Capital Expenses : Small Business Tax Deduction

Capital expenses are as the name states, the money you spend on starting up a company, such as purchasing a property or equipment that usually has a life of more than an year. There are two ways of deducting the capital expenses – amortization and depreciation.

Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. It is an allowance for the wear and tear, deterioration, or obsolescence of the property. Where as, Amortization is a method of recovering (deducting) certain capital costs over a fixed period of time. As part of the 2011 tax changes, a lot of depreciable expenses became 100% deductible for the tax years 2010 & 2011.  Read about them in the IRS Small Business Jobs act of 2010.

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