Parents never appreciate their children more than at tax time.
OK, that’s a bad joke, especially for small business owners who can take advantage of literally dozens of tax deductions (more than the standard deduction for children).
Do you know if you are taking advantage of all the tax breaks available to you? Don’t worry, we’ve got you covered. Here are the 9 biggest tax deductions every small business should be taking advantage of to save the most money.
So, are you ready? Let’s get started.
The 9 Biggest Tax Deductions for Small Businesses
The IRS allows for dozens of business write-offs. These are the top 9 tax breaks available to benefit from in 2018.
Vehicle and Mileage Tax Benefit
Do you use your car for business? If you do, either exclusively or just some of the time, you qualify for some tax deductions.
You know the IRS loves records, so keep a log of your mileage. Every time you drive, keep track of your miles, tolls and even parking costs.
The IRS currently allows you to claim 54.5 cents per mile.
You have a choice to take either take the standard mileage deduction or the actual cost of driving the car including gas, repairs, and insurance.
Just remember, if you use your vehicle for both personal and business purposes, then you must determine the percentage of time you use the vehicle strictly for business and only claim that percentage on your taxes.
So if your vehicle costs you $15,000 per year with lease payments, repairs, and insurance but you only use the vehicle 50% of the time, you would only deduct $7,500 on your taxes.
One of the best tips to build sustainable wealth is to make office expenses out of personal expenses. Deducting a home office is one of the biggest tax deductions you can claim. The key is to make sure your office space is exclusively used for your business.
Whether your office is a dedicated room in your home or a corner desk in your bedroom, measure the space you’ve designated for business use.
Figure out the fraction of your business space against your home’s total square footage and use that percentage to determine your tax deduction.
Example: Let’s say you have a 2000 square foot home with a dedicated home office which is 200 square feet. That’s 10% of your total home’s space. In this case, you would be eligible to claim 10% of your home-related business costs, including rent, insurance, and electricity.
Depreciation is simply a tax strategy businesses use to write off their investments and large purchases in regular payments over several years. The new tax legislation allows you to claim up to 100% of an item’s cost. This is known as bonus depreciation.
Even more popular among business owners is Section 179 expensing, which simply means the complete depreciation can be claimed in one year rather than stretched out over multiple years.
According to a recent survey, the number one deduction small business owners claim is Section 179 expensing. It’s important to note that Section 179 can only be exercised for “tangible property” which is used at least 50% of the time.
Tangible property, by IRS standards, applies to purchases such as computers, equipment, office furniture, and even computer software. Under Section 179, you can’t claim, among other things, land, buildings, inventory and patents and copyrights, as tangible property.
Travel expenses are some of the best small business tax exemptions. The IRS is particularly generous to business travelers, allowing 100% tax deduction for your airfare, hotel, car rental, and any other expenses while you’re away.
Your meals are only 50% deductible, so take that into account when you’re on the road. Just remember, once you get home, meals are not deductible, unless you bring a client with you. In that case, you can deduct 50% of the meal cost.
You can claim the business-related miles you drive during the course of your day, whether you are at home or on the road. However, your daily drive to and from the office is not eligible for a tax break.
Office Equipment and Supplies
Some of the biggest tax deductions are found right there in your office. Equipment such as computers and copiers are fully deductible, which you can claim all at once or depreciate over five years. The same benefit applies to any office furniture you purchase, except the depreciation is spread over 7 years.
Even your computer software and subscriptions are allowable tax breaks, completely deductible for the year they are purchased. As with all tax write-offs you wish to claim, save those receipts in a safe place just in case you need them.
Here’s great news for all small business owners making insurance payment for business, malpractice, flood, and cyber liability. You can completely write off these expenses in full.
What about health insurance?
Health insurance is also 100% deductible, with two qualifiers.
- A tax credit (better than a deductible because it is directly subtracted from earnings) of up to 50% of employer-paid premiums can be claimed by small business owners who qualify.
- If you are self-employed or own more than 2% of an S corporation, you must deduct the premiums on your personal tax return, not on your business itemizations.
Higher Business Income Deduction
New tax rules effective through 2025 will allow many small business owners a significant tax deduction of 20% on qualified business income. To take advantage of this new benefit, you must earn less than $157,000 as an individual, or under $315,000 if you file your taxes jointly with your spouse.
This tax break applies to “pass-through” business income for partnerships, LLCs, S corporations and sole proprietorships.
Advertising and Marketing
Like other business-related expenses, advertising and marketing costs are excellent deductions you can take as a small business owner. From business cards to Facebook ads to trade show swag, the cost of promoting your business can be written off.
Advertising and marketing are often among the largest expenses in a company’s budget, and as such, they are two of the biggest tax deductions you can benefit from.
Retirement and Social Security
As any financial planner will tell you, it’s never too early to save for the future. Luckily, the tax code allows for generous retirement and social security deductions to help you do just that.
Small business owners and self-employed individuals can deduct their contribution to their SEP IRA or Keogh on their personal income tax return.
Social Security tax benefits are a little trickier, but very beneficial nonetheless. You’ll have to pay double the Social Security as an employee would, but you can deduct half of the contribution on your tax form.
The Bottom Line
These benefits are some of the biggest tax deductions you absolutely need to take advantage of.
Tax law is notoriously complex so it’s only natural if you find some of these small business tax breaks a little confusing. If that’s you, please don’t hesitate to contact us and we’ll break it down for you in plain English.
We’re here to help and we get excited about helping business owners take advantage of all the tax deductions the IRS allows.