Small business owners can take deductions for a number of expenses that the IRS considers “ordinary and necessary” to conducting a business. Below are some deductions that are sometimes overlooked, that may lower your taxable income and reduce your tax liability.
Health Insurance
Depending on the type of business entity, you may be able to take a self-employed health insurance deduction on your personal return. This can include the cost of insurance you paid not just for your own plan but for your entire family’s insurance costs as well.
Home Office
If you run your business out of your home – without a separate office space elsewhere — you can deduct a percentage of many home-related expenses, including mortgage interest, homeowner’s insurance, property taxes, utilities, home repairs and maintenance. The percentage reflects the portion of your home that is used exclusively for your business. For example, if your home is 2,000 square feet and you use a 400-square foot room exclusively as your office, then 20% of those expenses may be applied toward the home office. The IRS requires this to be an actual dedicated space, so using your laptop on a kitchen table does not count.
Business Startup Costs
If you are launching a new business, some business expenses that are incurred prior to the actual launch may be deductible. These may include market analysis, advertisements, consultant costs and travel expenses.
Wages and Payroll Taxes
You can avoid paying a self-employment tax on your personal return by paying yourself as
an employee in your own business rather than through a distribution or dividend. And, that allows you to pass the payroll tax deduction to the business.
Bad Debt
If you use an accrual method of accounting – meaning you report income as you earn it – you can deduct the amount of a worthless debt. The debt amount must be included in your reported income and you must document the steps you took to collect it. If you use a cash method of accounting – reporting income as you receive it – you generally cannot deduct a bad debt.
Employee Education and Training
Deductible costs you incur for educating and training employees may include workshops, conferences, tradeshows and other expenses, as long as it is a subject directly related to the business.
Advertising and Marketing
Marketing, advertising and other promotional costs that bring in new customers and retain current ones are deductible expenses. In addition to traditional advertising and printed materials, expenses may include media relations, website development, email marketing and even hiring a marketing consultant. In addition, expenses related to goodwill advertising and support of community events to keep the business name before the public may be deductible, as long as there is a reasonable expectation to gain business in the future. However, costs of political or lobbying activities are not deductible.
Travel Expenses
Travel and lodging expenses as well as transportation expenses at the destination (such as taxis or a rental car) are ordinarily deductible at 50% of the expense. You can mix personal and business travel as long as you are clear which days count as business and which as personal. You cannot deduct expenses for family members unless there is a genuine business reason for them to attend.
In general, expenses for entertainment, amusement and recreation are not deductible, even if you are doing them as part of client relations. Business meal costs – where business is discussed – are deductible, but care must be taken not to include the portion of the expense that may be considered entertainment; for example, a meal at an entertainment venue such as a dinner theater is deductible, but not the cost of the entertainment itself.
Your tax accountant can help you identify legitimate business deductions and the record-keeping you will need to justify them.
If you have questions about this featured topic or other accounting and tax related topics, please do not hesitate to contact us at 727-327-1999 OR [email protected].
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