The tax season is just one month away. Already feeling that you have a large bill due this year? Well, that means your business is doing great! Perhaps, it also means that you missed out on some attractive tax deductions for small businesses?
Let’s fix that, shall we? But first, let’s recap some tax basics before moving on to the tax deductions list.
What are Tax Deductions?
Arguably, tax deductions are the only tax topic generating at least some excitement among business owners. In short, a tax deduction is a certain financial number a tax authority (IRS in the US) allows you to subtract from your adjusted gross income. This deduction lowers your taxable income and your tax bill. Sweet, right?
Wait, What is a Tax Credit Then?
A tax credit as another reduction you can use to minimize your tax bill. It is a dollar-for-dollar “discount” you can receive depending on your personal circumstances. For example, you owe $1,000 in taxes, but you qualify for a $500 tax credit. So the total sum to pay would be $500.
There are several types of tax credits you can claim:
- Child and dependent care credit. You can get you a credit equal to 20%-35% of up to $3,000 of child care and similar costs for a child under 13, a dependent spouse, or another incapacitated dependent in your household.
- Earned income credit. This tax credit can secure you a reduction between $3,461 and $6,431 in 2018 tax year depending on how many kids you have, your marital status and your household income.
- New family leave tax credit. For the 2018 tax year, your business can receive a tax credit for providing employees with family leave benefits. However, this credit is only available for 2018 and 2019.
- Work Opportunity Tax Credit (WOTC): this tax credit ranging between $1,200 and $9,600 is granted to employers hiring people who have faced significant barriers to employment (e.g. veterans, long-term unemployed individuals etc).
- Electric Vehicle Tax Credit. If you have purchased a “green” work vehicle, you can qualify for a tax credit.
To learn more about all the tax credits you can claim as a small business owner, check the IRS website (or your local tax authority).
Tax Deduction vs. Tax Credit Comparison
Depending on your income, a tax credit applied towards your bill can make a bigger impact than tax deductions. Though the latter, when filed smartly, can also nearly trim your bill.
|A $5,000 tax deduction…||…or a $5,000 tax credit?|
|Adjusted Gross Income||$100,000||$100,000|
|Minus tax deductions||($10,000)|
|Minus tax credit||($10,000)|
|Your tax bill||$22,500||$15,000|
How Do Tax Deductions Work?
The process of claiming tax deductions is rather straightforward. As the first step of preparing for the tax season, you will need to calculate your total gross business income. To get your number, you will need to prep the next documents:
When you download and fill in the tax forms, you will notice another line before you are prompted to calculate your taxable income – tax deductions. Here you can list up a lot of expenses that are qualified as tax deductions. Note: in order to apply for those you will be asked to prove the fees and costs. So keep all your receipts at hand!
A Big List List Of Tax Deductions 2018 for SMEs
Now the fun part begins! The following list highlights some of the common tax deductions and lesser known ones small business owners and self-employed folks can benefit from.
Quick disclaimer: we advise you always consult with a tax professional/accountant when applying for these deductions. Not all of the small business tax deductions provided here may be applicable to your business. So always double check the information with an expert or your local tax authority.
1. Accounting, Legal and Consulting Fees
The IRS states that you can deduct legal and professional fees that are charged by accountants for providing ordinary and necessary services for your business. But you cannot claim back legal fees paid to acquire a business asset.
You can also deduct tax preparation fee charged by accountants for prepping your business tax forms.
2. Bank/Payment Processing Fees
As long as those are related to your business account/payments, they count as legitimate tax deductions.
3. Advertising and Marketing Fees
Paid someone to set up a new after sales email campaign for your e-shop? Purchased Facebook Ads credits? Printed leaflets? All of these expenses can be deducted from your tax bill as long as you provide valid receipts.
4. Business Use of Your Home
If you run a home-based business, you can deduct your home office running costs. However, you can only claim the expenses for a part of your home that you exclusively use for business. For example, if you have a dedicated room in your house where you work all day long, meet with clients and no one else in your family is allowed to come and “play” there, you can claim the portion of your utilities as a deduction.
But if the same room serves as a guest bedroom, kids playground or whatsoever while you work somewhere else (e.g. at the client’s sight), you cannot claim it as a deduction.
There are two exceptions to this “exclusive use” rule. You don’t have to meet this criterion if you use part of your home for the following:
- For inventory or product samples storage.
- As a daycare facility.
If you qualify, there are two ways to file for home-based business deductions, you can apply using the simplified or regular option.
5. Business Travel
When your line of work takes you away from your tax home (the geo area where you are registered as a taxpayer), you are allowed to claim the following deductions:
- Transportation to the work destination and back: airfare, train, bus and car.
- Baggage and shipping: deduct the costs of sending baggage or shipping work-related materials (e.g. stand displays) to your destination.
- On-site transportation: Taxi and other fares for getting to/from the airport at your destination and traveling around while you away from your home.
You can also deduct the cost of your accommodation (hotel, Airbnb, rental) for your business trip and also deduct around 50% of your meal expenses during that trip.
And here are some other cool things you can deduct during a business trip:
- Dry cleaning and laundry
- Cost of business calls.
- Tips added to any expenses on this list.
6. Discounts to Customers
Dispatched a bunch of “thank you for your order” letters to your most loyal customers with some hefty discounts? Or made a lavish discount to some savvy bargain hunter the other day? Well, both of these can be deducted from your tax bill. But those discounts will have to be properly documented in your books.
- Cash discounts: these should be either deducted from purchases or you should credit the cash discount to a discount income account.
- Trade discounts: these discounts are not usually written into the invoice or charged to the customer. Trade discounts should not be entered on your books of account. Instead, add the net amount as the cost of the merchandise purchased.
7. Employee/Contractor Wages + Employee Benefits
Apart from the wages, you can also deduct additional types of payment made to your employees:
- Annual bonuses and cash awards.
- Employee education expenses.
- Loans or advances you do not expect the employee to repay if they are for personal services actually performed.
- Sick pay.
- Vacation allowance.
- Reimbursements for employee business expenses.
Also, there’s a special category called “fringe benefits” – a special form of non-dollar compensation for providing certain services. Fringe benefits can include:
- Meals and lodging (e.g. provided to temp contractors)
- Benefits under qualified employee benefit programs.
- The use of a business vehicle.
- Discounts on property or services.
8. Car Expenses
If you have a dedicated business vehicle or can prove that you were using a personal car for business, you can claim back the following expenses:
- Parking and tolls fees
- Lease payments
- Registration and licenses.
9. Business Insurance
You can claim back premiums for the next types of insurance products:
- Liability insurance
- Malpractice insurance
- Credit insurance that covers losses from business bad debts.
- Insurance for natural disasters.
- Workers’ compensation insurance
- Car insurance for business vehicles
- Life insurance covering your employees
- Overhead insurance that will cover business overhead expenses if you cannot work for long periods of time due to a disability caused by your injury or sickness.
Other Small Business Tax Deductions To Claim
- Charity contributions and business donations to other organizations
- Licenses and regulatory fees.
- Bad debts that you cannot collect
- Subscriptions to trade or professional publications.
- Misc supplies and materials you need for your biz.
- Penalties and fines you pay for late performance or nonperformance of a contract.
- Commissions to 3rd parties assisting you with sales.
- Entertainment for customers and clients (to a modest extent)
- Freight or shipping costs
- Maintenance fees
- Mortgage interest on the business property
- Taxes – surprisingly you are allowed to deduct various federal, state, local, and foreign taxes directly attributable to your business. These include sales tax, employment and self-employment taxes, real estate and personal property taxes, fuel taxes.
What Kind of Expenses You Cannot Deduct?
Let’s wrap this up with a quick list of no-nos when it comes to tax deductions:
- Any type of personal/family living expenses
- Lobbying expenses or political contributions
- Any type of fines or penalties you are bound to pay to a government agency.
- Demolition expenses or losses.
- Membership fees to business, social, athletic, luncheon, airline, and hotel clubs.
- Improvements to personal property.
Photo by Negative Space