Types of Deductible Expenses
A tax deduction, commonly referred to as a write-off, is a business expense that can be deducted from your taxable income. This is because there are various deductions listed in the US tax code that can minimize your business tax financial strain.
Below are 20 common business expenses that you may be able to deduct to maximize your small business profits:
Self-employed individuals, including independent contractors, freelancers, and business owners, are responsible for paying both income and self-employment taxes on their income.That being said, if you’re self-employed, you can write off half of your self-employment tax as an income tax deduction.
Startup Business Expenses
If you have $50,000 or less in startup costs and are in your first year of business, the IRS allows you to deduct $5,000 in startup costs and $5,000 in organization costs from your taxes. This deduction does not apply if you have more than $55,000 in startup costs.
Any expenses directed toward advertising, marketing, and/or promotions are deductible expenses. This includes but is not limited to logo creation, printing business cards, website updates, printing costs, and social media marketing. Some businesses also use large advertising mediums like billboards and television commercials.
Business insurance includes any kind of protection required to run a business safely. Though the insurance varies based on business type, there are several premiums you can deduct. They include policies such as property coverage, employee health insurance, liability insurance, property coverages, and employee compensation. (Related Article: Business Insurance)
Any courses or forms of training used to acquire new skills or certification for your business can be a deductible expense. This can include books and research materials that assist with professional development.
For the cost to be deductible, your education must be aimed at improving skills or maintaining your job, salary, or status.
Business Loan Interest and Bank Fees
You can deduct the costs on interest charged on a business loan, including interest rates, monthly service fees, business banking overdraft costs, and payment processing fees, which helps you pay less during the tax season. Those with business credit card loans can also deduct the fees and interests.
If you bring in new or secondhand business equipment, you can enjoy the tax-saving technique called bonus depreciation. This allows you to write off the entire cost of the equipment over the years of ownership.
In addition, you can also claim a portion of the bonus depreciation for your business equipment. For instance, you can claim 15% of the cost of machinery purchased in 2012 each year up to the current date. (Related Reading: Capex vs Business Expenses)
Home Office Expenses
You can take advantage of the home office deduction that results from the cost incurred for business purposes. This includes rent, utilities, repairs, maintenance, cleaning, and any other expense associated with the office space.
You can compute home office deductions by calculating the cost, multiplying by the area's square footage, and subtracting the value from the total. Conversely, you can deploy the IRS option where you deduct $5 per square foot of the office space for a maximum of 300 feet. (Related Reading: How to Start a Small Business from Home)
Legal and Professional Fees
These are legal and professional fees that are garnered from services rendered by experts in direct relation to your business, including lawyers, bookkeepers, tax professionals, and accountants. (Review: Best Accounting Software)
Travel Business Expense
https://howtostartanllc.com/business-credit/net-30-vendors-to-build-business-creditWrite-offs can enable self-employed people to deduct travel expenses for their businesses, including but not limited to airfare, business meals, lodging, and local travel.
The IRS defines travel expenses as a business trip outside your tax home, overnight, and for business roles. There are also some restrictions that are stipulated for international travel.
Office Supplies and Services
Generally speaking, office supplies refer to those that are used to run day-to-day office activities, such as papers, pens, sticky notes, ink, among others. Some offices also have printing, postage, and delivery services which may elevate business tax.
Small business owners can deduct the entire office expense by using write-offs on the cost incurred on the incidental materials and supplies. (Pro Tip: Use net-30 vendors for purchasing office supplies to help build business credit)
Business Car Usage
A portion of the costs associated with business car utilization is deductible every tax year, including mileage and other operating costs for cars, trucks, and other commercial vehicles.
If you incorporate business and personal utilization, only the business costs will be eligible for the tax deductions. In 2020, 57.5 cents were deductible for mileage, which was 0.5 cents less than 2019 (Related Reading: What Are Tax-Deductible Business Expenses)
Write-offs also apply to mortgage interests which can positively impact your tax deductions. This will help you take utmost advantage of your tax deduction along with loan interest deduction.
The amount you can deduct depends on a certain minimum amount of loan acquired. According to the Tax Cuts and Jobs Act, the implemented tax reform law indicates that you can be eligible for a deduction if your loan is valued at up to $750,000.
Business tax deductions can also stretch to cover medical expenses. If your total healthcare costs in a tax year surpass 7.5% of your adjusted gross income, you can deduct costs as you file your tax return in the stated tax time.
That being said, though most medical expenses are deductible, others, such as cosmetics, toiletries, cosmetic surgery, and over-the-counter drugs other than insulin, are not deductible.
Rent spent on office space (or the cost spent on space occupied by office equipment if you work from home) may be considered for tax deductions. Even spaces that you rent out occasionally for work purposes can be considered write-offs.
Business equipment that is required for certain small business services can be rented rather than purchased (e.g., construction equipment, power tools, etc.). Such rentals can be considered a deduction. (Personal equipment is excluded from this deduction.)
Such equipment comes with additional costs such as liability insurance and money spent on renting it. The insurance cost is meant to offer security to the equipment owner, and such costs are deductible to reduce business expenses.
Cost of Goods Sold
This entails the money paid on the physical items that you sell. The cost of goods sold may cover funds on raw material, packaging, and other production-related funds. For example, you can spend $20 to purchase a commodity and sell it on your website. The $20 that you initially paid for purchasing the commodity is viable for a tax deduction on goods sold.
LLC tax deductions also cover an individual's retirement savings. Being a self-employed person requires you to manage your retirement benefits by yourself, but people with an IRA account can deduct their annual contributions as they file their tax returns.
Charity and Gifts
Deductions on donations and gifts that are given to colleagues or clients can apply towards up to 60% of your adjusted gross income.
That being said, deductions are not granted on every charity expense, as some do not qualify for tax deductions. The IRS states that an individual can only be deducted $25 per person in yearly gifts.
Based on the activities that your business performs, there is a wide array of utilities that could be required. Some primary deductions can include the internet, electricity, water, and garbage disposal.
How to Minimize Your Taxable Income
First-time self-employed investors may face several tax burdens when starting their new business. Below are some saving techniques that could help maximize your profits at tax time.
Utilize Above-the-Line Deductions
There are two variations of tax deductions: above-the-line and below-the-line deductions (the “line” being your adjusted gross income in tax filing). Above-the-line deductions are considered robust as they reciprocate an overall lower deduction prior to claiming the others.
Pay Taxes On Time
Self-employed individuals are mandated by the IRS to pay their designated taxes quarterly. Fail to comply and you will be subjected to penalties and potentially high fines.
A paycheck calculator can be an effective starting point to execute timely tax payments. It helps you discover the quarterly amount required to pay. In addition, it also helps you discover a deductible itemized list.
Save Funds for the Tax Season
Despite having paid the required quarterly payments on time, it is recommended that you set funds aside for tax filing. It is attributed to the fact that you are making payments in reference to the previous year's estimates.
This is because if you make more income than the previous year, you may find yourself owing more to the IRS during tax filing. Hence, setting money aside will ensure that you don't bang heads with the IRS.
Know What Taxes You Need to Pay, and When
In addition to both federal and state income taxes, you may also need to file state-specific business taxes. For example, some states levy a business privilege tax or franchise tax on certain business structures, including LLCs. These can be flat rates or dependent on your business’s profits.
Incorporate Your Business
You can change your business status from an unincorporated business structure like sole proprietorship or partnership to an incorporated structure like an LLC or corporation. Not only will it provide you with limited liability protection, but it can also provide tax benefits.
Outsource for Help
Tax filing can be complicated when executed solely. You can talk to tax professionals if you run a small business or you have recently received tax filing.
Business activities are subjected to numerous tax deductions from costs such as licenses, self-employment tax, capital expense, professional liability insurance, office, and travel costs, to name a few.
Incorporating this cheat sheet when filing tax returns can help you save your business money. Timely payment of taxes, utilizing above-the-line deductions, payment of state and federal taxes, and seeking external tax professional help can attenuate the taxable amount.
Frequently Asked Questions
What expenses can you write off as an LLC?
There is a long list of expenses that you can deduct as an LLC. Some of the main operating costs that can be deducted include startup costs, supplies, business taxes, office costs, salaries, travel costs, and rent costs.
Can an LLC write off food expenses?
Yes, food expenses are deemed as deductible costs. This will only happen if the meals are with a business contact and aren't “lavish or extravagant.” You can cut 50% of the business meals costs or 100% based on the temporary 2021/2022 exception.
How do you write off a car as a business expense?
If you use your own car for business purposes, you can incorporate it as a business expense on your cheat sheet. In addition, if you lease a car for business use, you can indicate the percentage of business functions it serves for your business on the cheat sheet.
Can an LLC deduct expenses without an income?
There are certain thresholds that the IRS has put in place to determine whether you can deduct costs without earnings based on whether you have a true business or if it’s considered just a hobby.
What if my LLC only has expenses?
When an LLC has one member, the IRS considers it a disregarded entity for federal income tax purposes. The single-member LLC member reports income on their personal income tax return. The LLC is also required to file Form 8832 with the IRS to designate itself as a disregarded entity.