Lesson Five
Small Business Deductions
There are so many deductions available to small business owners that it can be overwhelming, but I want you to think about this as the “fun part” of taxes. This is how you save yourself tax money!
In lesson five, we’ll go over:
- How tax deductions help keep money in your pocket.
- Common deductions for small business owners.
- How to calculate some of the trickier deductions.
How Tax Deductions Help Keep Money in Your Pocket
The thing to remember is that if you are spending money on your business for things such as education or in your business for items such as supplies, the expenses are most likely deductible (yay!). Tax deductions reduce your taxable income. Many expenses involved in building and running your business are tax-deductible, which means you can subtract those costs from your taxable income.
The value of your deductions is taken out of your taxable income before you calculate your tax liability. After the deductions, you’ll still owe your typical percentage of taxes on every dollar remaining, so the value of your deductions isn’t actually how much you save. For instance, $5,000 in deductions saves someone in the 22% tax bracket $1,100 in taxes owed.
Lowering your taxable income saves you big bucks when it comes tax time, so it’s important to keep track of your expenses and categorize them carefully throughout the year. Don’t forget to keep your physical or digital receipts like we’ve discussed previously.
Common Deductions for Small Business Owners
Next, I want to offer you a list of deductions commonly used by small business owners along with some notes to help you remember some of the costs that may go into those deductions. If you’d like more detail, you can look at my Ultimate Guide to Tax Deductions.
- Advertising
- Don’t forget: digital marketing, social media marketing, influencer marketing, building and maintaining a website, email marketing, business cards, sponsoring an event, food and entertainment costs at promotional events, listings and promoted listings on retail sites or review sites, swag
- Charitable Contributions (only for S Corps and C Corps)
- Commissions and Fees
- Don’t forget: payment processing fees (PayPal), merchant processing fees (Etsy), bank fees, affiliate payments to third-party marketers, commissions for salespeople
- Contract Labor
- Don’t forget: virtual assistants, second shooters, seasonal hires, freelancers, consultants, business coaches
- Cost of Goods Sold
- Don’t forget: packaging, storage costs, raw materials
- Depreciation and Amortization (for large equipment or assets)
- Don’t forget: computers, printers, larger furniture, cameras, lenses, production equipment, vehicles, customer lists, copyrights, internet domain names, licensing agreements, patents, service contracts, trademarks, trade secrets
- Education and Conference Expenses
- Talk to an accountant about whether or not tuition will qualify for you.
- Don’t forget: e-books, online courses (like this one!), in-person conferences, coaches
- Employee Benefit Programs
- Make sure you talk to an accountant about these.
- Home Office
- Insurance (not health)
- Don’t forget: business liability insurance, event insurance, vehicle insurance for business vehicles
- Interest
- Legal and Professional Services
- Don’t forget: attorney, bookkeeper, accountant, tax professional
- Office Expenses
- Don’t forget: paper and stationery supplies, less-expensive office furniture, small computer equipment, shipping, cleaning services, cleaning supplies
- Rent or Lease
- Don’t forget: event space rental, special equipment rental, storage rental
- Repairs and Maintenance
- Startup Expenses
- Supplies
- Taxes and Licensing
- Don’t forget: business license, professional license, trademark, business formation or renewal, employer portion of payroll taxes
- Travel Expenses
- Don’t forget: taxi fare, airline tickets, hotel costs, luggage fees
- Utilities
- Vehicle Expenses
- You need to keep track of your miles no matter if you’re going to track your individual expenses like gas and maintenance or if you’re going to use the IRS’ standard mileage deduction.
- Don’t forget: tolls, parking fees
- Wages (not your own)
How to Calculate Tricky Deductions
There are several other tax deductions that are commonly used by business owners and also commonly cause confusion. Here’s the lowdown on how you can successfully use these deductions to your advantage:
Cell Phone Expenses
Most small business owners have one cell phone they use for business and personal purposes. The cost of the phone and the monthly charges can be split based on an estimate of how much you use the phone for business purposes and how much it’s used for personal purposes.
One way to estimate the business usage is to go through a couple months of statements and add up what minutes were personal and what minutes were for business calls. If you divide the business minutes by the total overall minutes used for the month, you will get the business percentage.
Tracking what data is used for business purposes versus personal purposes gets a little trickier. One way of doing this would be to view your data usage, and if your phone has the feature, see how much data your business apps are using compared to your overall data usage. If you can’t get a monthly report of this, use the screenshot feature on your phone to capture and save the information.
Business Meals
Within reason, any food or drink expense incurred while having a business meeting is a deductible business expense. You will record the expenses at their full cost in your bookkeeping. On your tax return, they will be reported at 50% of the total cost.
If you host a conference or workshop where food is provided to attendees, those costs are deducted at 100%.
If you’re calculating business meals during travel and don’t want to keep track of all the receipts, you also have the option of using the per diem rate for the state where you conducted your business trip. If you really want to maximize your expenses, you can figure out how much you actually spent and then figure out what the per diem rate is in the place you traveled, and use the higher number.
If you’re just going to a coffee shop to get out of the house and get work done, those expenses aren’t deductible. I wish!
Clothing
A common question I hear is whether or not clothing and shoes purchased specifically for work can be deducted as a business expense. It seems logical that you should be able to deduct an outfit you only wear for shooting weddings or speaking at events, but unfortunately that won’t be good enough for the IRS when it comes to deducting the expense.
If your clothing purchase satisfies these requirements (also found in IRS Publication 17), then they can be deducted as a business expense:
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- Clothing must be specifically required by your employer.
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- It is not enough that you do not wear your clothes away from work.
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- The clothing must not be suitable for taking the place of your regular clothing.
Some common jobs that would have clothing that satisfies these requirements include delivery workers, firefighters, and health care workers.
Digital Downloads
If you purchase fonts, stock photos, and other digital images for business use, you can lump these together and call the expenses “Digital Downloads.”
Software Subscriptions
This category can include any software you pay a monthly or annual fee to use. Some examples include your cloud accounting program, Google Apps for business, and Adobe Creative Suite.
Home Office Deduction
Use [this worksheet] if you work from home in a space dedicated only to your business (the kitchen table doesn’t count!). Complete both methods the first time you are taking the deduction to see which one is higher. Use that method for your tax return.
Business Auto Expense Deduction
Use [this worksheet] if you’ve driven your car for business purposes. Complete both methods the first time you are taking the deduction to see which one is higher. Use that method for your tax return.
