When running a small business, owners have to be innovative in finding working capital, which is necessary to help the company operate more efficiently and economically. Unwanted expenses can be a drag on any business. Even worse are unwanted expenses that could’ve been deducted from your taxable profit, but which weren’t. This mean you’ve lost a chance to save your business money.
If you want to lower your taxable profit, you should investigate every way you can legitimately take a tax deduction. By understanding what constitutes a business-related tax deduction, owners can not only save their company money, but they can also provide countless additional benefits.
There are many ways the tax code is designed to help businesses deduct expenses. According to the IRS, to qualify as a deduction, the expense must be both ordinary and necessary in the normal course of business. Expenses used to calculate the cost of goods sold as well as capital and personal expenses do not count as business expenses. According to Bankrate, small businesses are allowed to claim up to $500,000 in business deductions, double the limit set before the Small Business Jobs Act.
Here are some common, yet overlooked, types of business expenses you can deduct from your taxable profit:
Startups – Startups are automatically allowed to deduct a one-shot write-off of $10,000.
Retirement plans – Many retirement plans are designed for you to store away money before taxes.
Equipment – When buying new furniture, equipment and supplies, some small businesses can deduct the full price of the merchandise in the same year they purchased them. Look into you can take advantage of Section 179 of the tax code, since this lets businesses deduct up to $25,000 for new and used equipment. This limit only qualifies for equipment purchased in and put into service by Dec. 31, 2015. If the equipment exceeds $200,000, the Section 179 deduction will be reduced, making the deduction truly for small businesses. Many small business owners are urging congress to increase the Section 179 tax deductions back to the original deduction of up to $500,000.
Professional services – Any money paid to lawyers, tax professionals, or consultants usually qualifies as a deduction, as well as any books, journals or newspapers on conducting business. This is also includes education expenses such as conferences, seminars or classes that help you maintain or improve skills that directly benefit your current position.
Taxes – Any money paid to local or state tax authorities can be listed as an itemized deduction, while real estate taxes, employment taxes and excise taxes are deductible.
Interest – The interest or carrying charges on any credit used to finance business purchases is deductible.
Insurance – You can deduct medical and dental insurance, as well as qualified long-term care premiums. Premiums paid to protect your business can also be deducted, such as fire, storm, theft or accident insurance, in addition to any liability or malpractice insurance.
Automobile – Anytime you use your vehicle for business-related work, you can tally your mileage, parking and tolls. The IRS has a handy guide of standard mileage rates for your convenience.
Home office – If you utilize a home office, you are eligible to deduct the space at up to $5 per square foot.
Food – Meals where employees discuss business functions and operations can also qualify as a deduction, although only half of the cost of the meal may be deducted.
Cellphones – Before the Small Business Jobs Act came into effect in 2010, phones, even cellphones, were listed as property. However, the Act de-listed cellphones as property and recognized the ubiquitous devices as a business expense.
Bad debts – If your company is left with bad debt after a transaction goes awry, you can take a deduction. This only applies in situations for businesses that sell goods, wherein the company was not paid for the cost of goods sold to a client or customer.
Advertising and marketing – The cost to advertise your business or product is deductible. While promotional costs such as sponsorships or gatherings, providing the sponsorship or gathering clearly indicate a business function.
Charities – Regular (C) corporations are allowed to deduct any charitable contributions. While partnerships, limited liability corporations or S corporations pass can make charitable contributions, you claim the deduction on your individual tax return.