Tag Archives: small business taxes

Top Tax Deductions for Small Business

Here is a list of top tax deductions for your small business. Remember to check with a tax professional if you have questions or concerns about your deductions.

  1. Home Office. To calculate how much of the home-related expenses are tax deductible, measure your work area and divide by the square footage of your home. The resulting percentage is the fraction of rent, mortgage, insurance, electricity, housekeeping, etc. that you can claim. Make sure your home office is dedicated to your business work.
  2. Telephone and Internet. Any dedicated services for your business are deductible. If you use your home or personal cell phone for business, you may only deduct the portion used for business purposes.
  3. Auto Maintenance and Mileage. There are two ways to calculate vehicle deductions: standard mileage rate or actual expenses (such as gas and maintenance). Use the method that results in a larger deduction.
  4. Advertising and Marketing. As long as they are directly related to your business, you can deduct the cost of ordinary advertising (business card purchases, yellow page ads, and so on), as well as promotion costs for good publicity (such as sponsoring a local sports team).
  5. Inventory (Cost of Goods Sold). Businesses that manufacture products or purchase them for resale can deduct the cost of goods sold.
  6. Office Supplies. Pens, paper, staples, thumb tacks, etc are deductible. Just keep your receipts!
  7. Bad Debts. Your bad debt is deductible only if the amount owed to you was previously included in gross income.
  8. Education. This includes seminars and trade shows, but don’t forget any magazines, books, CDs and DVDs that are related to your business or industry. They are all 100% tax deductible.
  9. Legal and Professional Fees. Accountants, lawyers and other professional consulting fees are fully deductible.
  10. Travel Expenses. Nearly all business travel expenses are 100% deductible. These include airfare, hotels, and other on-the-road expenses. Eating out on the road is also deductible, but only up to 50%.
  11. Entertaining. Eating out with colleagues on a day-to-day basis is not deductible, but if you bring along a client or prospective client, that meal is 50% deductible. Taking a current or prospective client out for drinks or a show is also 50% deductible, but it has to be within a business setting or take place before or after a business meeting.
  12. Furniture. You can either deduct the entire cost in the year of the purchase or depreciate it over several years.
  13. Office Equipment. That new fax machine, copier, or computer is also 100% deductible. You can take it all in one year or depreciate it.
  14. Depreciation. If you buy property to use in your business, you generally can’t deduct the entire cost in the year of purchase — but you can spread the cost over more than one tax year and deduct part of it each year.
  15. Startup Expenses (Capital Expenses). You can choose to deduct up to $5,000 of startup costs, which include any research costs incurred for creating your business.
  16. Interest. Mortgage interest, finance charges (like credit cards), interest on payment plans, and interest paid on other loans are all 100% deductible.
  17. Software. Boxed or downloaded software are included. With more software being made available as a service, software subscriptions are also tax deductible.
  18. Taxes. Taxes paid in running your business are deductible.
  19. Charitable Contributions. If you contribute $250 or more, and claim the deduction, you need to have a letter from the organization which verifies your donation.
  20. Rent. You can deduct rent as an expense if the rent is for property that you use for your business. However, you can’t deduct the rent if you have even partial equity (or will receive equity) in the property.
  21. Utilities. The water, power, trash, and telephone bills at your office are all 100% deductible as regular business expenses. If you have a phone line that has a mix of business and personal calls, highlight the business calls and deduct only the business related portion of the bill.
  22. Repairs and Maintenance. The cost of repairs to keep your business property and equipment in operating condition is deductible.
  23. Petty Cash and Tips. Just because you didn’t get a receipt doesn’t mean you can’t deduct the cost, but you should have some documentation. It’s as much for you as for a potential audit.
  24. Service Fees. Fees for processing credit cards are 100% deductible.
  25. Licenses. License fees, as well as regulatory fees, are deductible.

Personnel Deductions:

  1. Employees’ Pay. You can deduct the pay you give your employees as long as the pay is in cash, property or services.
  2. Employee Benefits. Benefits like health plans, adoption assistance, educational assistance, and life insurance for your employees are generally tax deductible.
  3. Profit-Sharing or Pension Plans. You can deduct contributions you make to your employees’ SEP, SIMPLE, and other qualified plans.
  4. Insurance Premiums. You can deduct premiums that you pay for credit, liability, malpractice, and workers’ compensation insurance, among others.
  5. Freelancers. If you hire an independent contractor, you can deduct their pay as a business expense.

For more information on small business tax deductibles, check the IRS website.

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Business Taxes

As a small business owner, you need to know your federal tax responsibilities. Understanding and complying with tax requirements is a necessary aspect of doing business.  The IRS.gov website for small businesses provides extensive tax information and online tools and resources.

For additional information refer to IRS Publication 583, Starting a Business and Keeping Records. This publication provides basic federal tax information for people who are starting a business. It also provides information on keeping records and illustrates a record-keeping system.

As we discussed previously, when starting a business you must decide what form of business entity to establish. Your form of business (e.g., sole proprietorship, partnership, LLC) determines what taxes you must pay and how you pay them.

The following are the four general types of business taxes.

  • Income Tax
  • Estimated Taxes
  • Self-Employment Tax
  • Employment Taxes

Income Tax

All businesses except partnerships must file an annual income tax return.  Partnerships file an information return.  The form you use depends on how your business is organized. Refer to Business Structures to find out which returns you must file based on the business entity established.

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year.  An employee usually has income tax withheld from his or her pay.  If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax.  If you are not required to make estimated tax payments, you may pay any tax due when you file your return.

Estimated tax

Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. For additional information, refer to Estimated Taxes.

Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves.  Your payments of SE tax contribute to your coverage under the social security system.  Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Generally, you must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.

  • If your net earnings from self-employment were $400 or more.
  • If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization.

Note: There are Special Rules and Exceptions for aliens, fishing crew members, notary public, State or local government employees, foreign government or international organization employees, etc. For additional information, refer to Self-Employment Tax.

Employment Taxes

When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file.  Employment taxes include the following:

  • Social security and Medicare taxes
  • Federal income tax withholding
  • Federal unemployment (FUTA) tax

For additional information, refer to Employment Taxes for Small Businesses.

This information provides a brief overview from the Internal Revenue Service of issues and decisions involved in owning a small business and avoiding common pitfalls.