Unavoidable Business Tax Deductions: Learn How to Claim?

What is a Tax Deduction?

A tax deduction (also known as “tax write-off”) refers to an expense that you can deduct from your taxable income. It lowers your taxable income, which means you pay a smaller amount of tax.

However, the expenses should comply with IRS rules. The Internal Revenue Service publishes a list of credits and deductions for all companies. Taxable income does not apply to all businesses.

Let’s understand the tax deduction through real-life scenarios. Suppose a SaaS company reported an annual income of $100,000.
Along with that, it also reported general expenses as follows:

• Wages: $2,000
• Marketing: $3,000
• Insurance: $3,000

Total expenses include $2,000 + $3,000 + $3,000 = $8,000

Calculating the taxable income = $120,000 – $8,000 = $112,000

A Checklist of 20 Small Business Tax Deductions That You Cannot Ignore

1. Necessary Office Supplies

Office supplies such as pens, printer ink, paper, furniture, and other necessary stationery items are a major expense. Business owners need to keep records of all these expenses to support them during an audit. They can easily deduct these expenses from the company’s total income, reducing the tax burden.

Here to note that you must maintain the receipt for every office supply purchase. This helps you easily track your expenses. But it should be purely for office purposes.

2. Home Office Deduction

Since the COVID-19 pandemic, there has been growing interest in remote work culture in the business world. That’s what pushes business owners to operate their businesses from home, and it also falls under business tax deductions.

However, the IRS applies limitations on such deductions. Business owners must use the space solely for business operations and not share it with others.

3. Corporate Meals

Dining expenses are common in business and, fortunately, are deductible. However, the meeting should be conducted for business purposes. The expense is non-deductible if the gathering doesn’t include any business discussion. Professionals should record the date, time, and price of the dining to deduct business meal expenses.

Under IRS policy, food is limited to 50% of the cost and must be neither lavish nor extravagant. Also, the business owner and employees must be present when the food and beverages are served.

The meal should be from the restaurant. Packaged food and snacks that are ready to eat at the grocery store do not qualify for the deduction.

4. Business Tours

As a business owner, when you take the business on the road, it is subject to the business tax deduction. The major business travel expenses are hotels, rental cars, taxis, and baggage fees. All of these are covered in the tax deduction. Meals during the business tour are also subject to tax deduction.

Lavish, extravagant travel is not acceptable for business tax deductions. Additionally, visiting another area of your own city for business purposes is not considered a business tour. Your travel expenses to another city for business purposes are only deductible. Therefore, you must maintain all the receipts as proof of expenses.

5. Employees’ Wages and Perks

It is one of the largest tax write-offs for any small business. The salaries and other benefits you offer to employees are fully deductible under the business tax deduction. However, it is not applicable to sole proprietors, LLCs, or partnership-based businesses.

If you are managing a C-corporation or an S-corporation and working as an employee, then W-2 wages are deductible.

All the perks and benefits you provide to your employees are counted as deductible expenses. Paid time off, retirement plan contributions, health insurance premiums & reimbursements for employee business expenses come under this category. You must maintain accurate payroll records.

6. Business Insurance Premiums

The amount of your business insurance premium is fully deductible from the business tax. Various insurance policies, such as general liability, workers’ compensation insurance, commercial property, and cyber liability, fall under this category.

• General liability insurance
• Professional liability insurance
• Commercial property insurance
• Business interruption insurance
• Cyber insurance
• Worker compensation insurance
• Commercial auto insurance
• Unemployment insurance
• Health and life insurance

7. Office Rental Expenditure

Small business owners generally use the leased space to conduct business operations. Such professionals can easily claim small business deductions for these rental expenses. Additionally, the cost of rent for the business parking garage is also allowable.

Here, keep in mind that the claim applies only to the space outside your home or apartment. If you work from home and pay rent for it, it will qualify for the home office deduction.

8. Business Marketing & Advertising

Marketing and advertising are necessary for a business’s growth. You can write off all the costs you bear for these actions. Whether it’s digital marketing services like PPC, SEO, or social media posts, or traditional marketing like newspaper ads, radio spots, or trade show booths. The tax write-off is applicable to both.

Branded merchandise, such as pens, T-shirts, or tote bags with the logo, is counted as an advertising expenditure. Even website creation and its management also fall under this category.

9. Charitable Contributions

Charitable contributions are also subject to the business tax deductions. In the USA, the tax deduction applies to cash donations and is up to 60% of the donation amount.

If your business structure is an LLC or a sole proprietorship, the charitable write-off applies to the personal taxes as per the IRS rule. You need to claim the donations on Schedule A as itemized deductions. So you’ll only get the benefit if you itemize instead of taking the standard deduction.

As with other deductions, you need to maintain proper receipts and documentation for charitable contributions. A clear and detailed donation contribution simplifies the tax claiming process.

10. Business Bank Fees

Every business has a dedicated business bank account for business transactions. You’ll be surprised to learn that you can deduct the bank’s transaction fees and monthly service fees. Even fees for third-party payment gateways like Square or PayPal are deductible. Most small business tax write-offs are 100% deductible of their business expenses, including interest, with no limitations.

11. Startup Business Expenditure

You can easily claim a 100% deduction of up to $5,000 on all expenditures for a newly opened business. Additionally, the IRS allows another $5,000 of organizational costs for small business owners.

In this case, you should maintain receipts and other records as proof of expenses to track all expenditures you make for your startup. Some of the startup expenses to be qualified are as follows:

• Conference traveling
• Marketing campaign launch
• Working with a business consultant
• Website building
• Attending the training events in the industry

12. Retirement Plan Contributions

Have you ever thought that retirement plans are not only future safeguards but also contribute to small business tax advantages? Yes, it is!

An IRS also allows tax deduction if you opt for retirement contributions. Some common retirement plans that offer tax deductions include the Simplified Employee Pension (SEP) IRA, Solo 401(k), Traditional 401(k), and SIMPLE IRA.

13. Depreciation of Business Assets

Over time, wear and tear can reduce the value of certain things. Business professionals can file Form 4562 to claim up to $1.16 million in losses.

Equipment, vehicles, furniture, machines, or other business property used solely for business purposes are eligible for cost recovery through annual tax deductions. However, there are strict rules for depreciation write-offs.

You can deduct the expenses for computers and cars over five years. Similarly, depreciation can be spread over 7 years for furniture and appliances.

14. Legal and Professional Fees

All the costs incurred in the legal operations of your business are subject to tax deduction. The fees that you pay to accountants, legal advisors, or bookkeepers are also claimable. However, it is subject to claim as long as the services are provided and necessary for the business operations.

If your hired accountant spends some time on your personal accounts and some on your business accounts, differentiate between the two. Only report the fees you paid him for handling business accounts or subtract the business-related fees from the total. Sole proprietors or single-member LLCs use Schedule C for reporting the income and expenses.

15. Independent Contractors

You often hire freelancers or other independent contractors for your business. The amount you pay to those professionals is also tax-deductible. Freelancers like web designers, writers, and virtual assistants charge a fee for their services to your business.

It includes both ongoing contractors and one-time projects. Make sure the contractor is not an employee of your company and that any services they provide are for your business.

Send Form 1099-NEC to contractors and freelancers if you work with them on a regular basis and pay them more than $600 as nonemployee compensation.

16. Business Vehicles

You can easily claim the deduction for vehicle expenses used for business purposes. There can be a 100% deduction when you use the vehicle solely for business. If you use your personal vehicle for business purposes, the deduction will be based on the time you spend driving it. You need to track and submit mileage costs to avail of small business tax advantages.

17. Business Loss and Bad Debt

You are also eligible to claim the reduction during the return for all losses your business faced. There is no fixed limit on write-offs. Likewise, you can also write off the amount your business incurs as bad debt.

For instance, if the client didn’t pay your invoice, it will be counted as bad debt. Loans to suppliers and credit sales to customers are other sources of such debt.

18. Phone and Internet Expenditure

Telecommunication expenses are another tax write-off for small businesses when you use them solely for business purposes. If you use the phone or the internet for both business and personal purposes, the deduction will be 50% of your monthly bill. You can easily highlight the business calls for clarity.

19. Interest Expense Deduction

The interest that you pay on the business credit card or the business loan is also deductible. Additionally, mortgage interest on commercial property and lines of credit are also covered in this category.

For a credit card, the deduction will be for business purposes only. For instance, if you utilize the credit card 90% for business purposes and 10% for personal use, then interest on business purposes will be subject to tax deduction.

20. Continuous Education & Training

Expenditure on education & training that is purely aimed at business growth is eligible for tax write-off for small businesses.

You can easily claim the tax deduction for the education and training expenses incurred to enhance your skills. Some expenditures include certification costs, network events fees, and trade publication subscriptions.

How to Claim Small Business Tax Deductions?

Depending on the legal entity, your organization needs to claim the tax deduction. That means the claiming form varies according to the business type. The form used for a corporation cannot be used for an LLC, so every business uses the form appropriate to its structure. The following are the major forms to claim the tax reduction:

Form 1120

C- Corporations utilize this form to report their income or losses and claim credits and reductions. These corporations can claim business tax deductions while filing this form with the Internal Revenue Service.

Form 1120-S

Form 1120-S is useful for S-corporations. It reports business revenue, business deductions, depreciation, and credits. This form is crucial for avoiding penalties and maintaining S corporation status.

Form 1065

This form is useful for multi-member LLCs and partnership-based organizations. They report their income and claim deductions on this form to the IRS.

Schedule C (Form 1040)

Sole proprietors and single-member LLCs use this form to report business revenue and expenses. Additionally, net profit and loss are taken into account.

Key Tax Tips You Must Follow for Deducting the Self-employed Expenses

• Always differentiate personal and business finances to enhance clarity.
• Follow only ordinary and necessary business expenses.
• Utilize the standard mileage rate when tracking vehicle expenses.
• Opt for a retirement contribution that can significantly reduce the taxable income.
• Maintain supporting documents, including invoices, receipts, mileage logs, and bank statements.
• Always claim the depreciation on equipment.
• Opt for automation by choosing the right invoicing software, such as Moon Invoice, to manage business finances.
• Seek guidance from professional accountants for a better understanding of and managing the tax.

How Moon Invoice Can Ease Your Business Tax Management?

You can simplify your tax management with Moon Invoice, an AI-powered & globally trusted invoicing tool. Apart from billing, it helps to simplify your tax process by organizing your financial records with high accuracy.

You can easily manage your business expenses in all digital formats while categorizing them. It gives 100% accuracy and speeds up the tracking process. The concept enables users to access real-time reports easily. Thus, you can easily record and track expenses and make your tax deductions super easy.

Due to its multi-tax support, you can easily apply different tax rates such as VAT and sales tax. This simplifies compliance for the local and international businesses.

The platform provides the My Documents option to store and manage all your crucial financial documents in a single, digital location. Thus, it enhances document security and systemizes their handling. This AI-powered platform simplifies online receipt generation with a quick-scanning feature. This further contributes to an easy taxation process.

Overall, Moon Invoice aims to make tax preparation smooth, quick, and fast by offering advanced features and digital concepts.

Final Remarks

Business tax deductions are legal ways to reduce your taxable income. However, one should understand its approach to claims. As a business professional, you must have a clear understanding of the checklist we shared above. Additionally, you must be aware of the correct forms and reporting methods.

Always follow the right way to claim the tax deduction. While it can help you maximize your business cash flow, it can also lead to penalties and losses if not handled properly in accordance with the defined rules.

FAQs on Tax Deductions