The financial aspect of starting a small business can be challenging. Being able to expense purchases for a deductible on your taxes can go a long way. To learn the top deductible expenses for small businesses, continue reading.
Discovering new small business expenses that you can deduct on your tax forms represents a solid win for you and your company. In this post, we’ve explained everything you need to know about saving up on your taxes. We’ve also compiled a list of deductible business expenses to help you reduce the taxes you will owe next year. Take a look below and hopefully you’ll find new ways to save money on taxes.
1. Office Space
Because of COVID-19, most employers and their employees work at least part-time at home. If you’re one such employer, you can claim tax deductions for using part of your home for business. There are two main conditions for this:
- You should have a dedicated area for regular and exclusive use for business activities. This could be a home office or something similar.
- You must demonstrate that you, in fact, use the home as a principal place of business. In other words, even if you have a business office somewhere else but still maintain a home office, you may qualify for a home office deduction if that’s where you spend the majority of your work time. A good example is if you frequently take business meetings from home – something which has become more or less a routine due to COVID-19.
The IRS grants a deduction of up to $5 per square foot of your home provided that the home office is no more than 300 square feet. The maximum amount deductible is $1,500.
2. Online Apps and Software
You’re allowed to deduct the cost of purchasing a software or app that your business uses to operate. The same goes for monthly subscriptions to essential apps and software.
If your business relies on accounting software like QuickBooks and Xero, then you can claim deductibles. The same goes for:
- Marketing tools like Constant Contact, Unbounce, WAYB, Yelp and SEMRush
- Sales software like Drip POS and Square. You also get tax breaks on processing fees
- HR apps like Buddy Punch, Gusto, Indeed and Zenefits
- Document management tools like PandaDoc and SignEasy
- Web hosting services
- Email service providers
To enjoy tax deductions on software, you must itemize your deductions. Additionally, the grand sum of all deductions must total to more than 2% of your AGI (adjusted gross income). In other words, you stand to gain more by using as many software as you need (to increase the gross value of deductibles).
3. Employee Salaries and Benefits
Small business owners can deduct their employees’ salaries and benefits when filling out their tax forms. However, they must meet certain criteria to make the deduction. Some of the elements include:
- The employee must not have a financial interest in your company
- You do not unreasonably overpay the employee
- Your business needs the services of the employee
- The employee provided the services
4. FFCRA Deduction
The Families First Coronavirus Response Act (FFCRA) makes you eligible for deductions every time your employee takes a paid sick leave that’s related to COVID-19. You’re entitled to deductions, not just on the amount you’ll spend on paid leave, but also the additional costs that come with the employee’s absence.
While not mandatory, the FFCRA allows employers to grant their employees paid sick leave whenever they or their dependents are sick from COVID-19. Dependents are defined under “qualified family leave wages” and include:
- The employee’s immediate family member
- A person who resides in the employee’s home
- Someone with whom the employee has a personal relationship and would be obliged to care for (like parent or estranged spouse).
Note that FFCRA deductions are valid through September 30, 2021.
5. Educational assistance plan
Does your business have a Section 127 plan for its employees? If yes, then the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows you to pay for your employees’ educational expenses with zero tax obligation. Although this tax relief was introduced to shield employers from COVID-19, it has now been extended through 2025.
6. Interest Expense
You may deduct interest on any loans taken out for the purpose of sustaining your business. This is important now more than ever seeing as many small businesses were pushed into debt due to COVID-19. Thus, interest paid on lines of credit, term loans, mortgages as well as refinanced loans (and mortgages) are all deductible. Two main conditions hold:
- The business must be legally liable for the loan.
- The lender requires that you repay the loan. That is to say, grants and other sources of businesses finances that don’t require repayment are not deductible.
7. Childcare and Dependent Care
Childcare represents a deductible small business expense. If your children have not reached the age of 13, you can deduct their childcare costs. You can also write off expenses related to the care of your spouse or other adult dependents.
Meals might represent the most popular form of small business expense deduction. In general, you can deduct half of all qualifying food and beverage items. The meal must reasonably relate to business, and you must document the event. Make sure you keep a record regarding the date, location, and total cost of the meal, as well as some proof of a business relationship with your dining partner.
9. Travel Expenses
Another popular entry on our list of deductible business expenses, travel costs, can qualify for a tax deduction if they relate to work. The elements that the IRS uses to determine whether travel expenses remain work-related include whether:
- The travel proves necessary
- The filer left the area of the principal place of business
- The trip lasted longer than a workday
- The filer slept or rested during travel
Deductible travel expenses include airfare, hotels, taxis, rental cars, and more.
Businesses that take any form of business insurance can have the cost of their insurance deducted from taxes. Some types of insurance that are 100% deductible from small business expenses include a business owner’s health insurance and policy and a business continuation insurance. Property insurance, malpractice insurance and liability coverage are other types of insurance which can be deducted when it’s tax time.
11. Auto Expenses
All auto expenses are tax deductible as far as you use the car for business purposes. Nevertheless, to claim your tax deductions you need records that prove your car was used for business purposes. You will also need to keep track of your miles if you intend to claim your tax deductions for business trips. For business owners who use their car for both personal and business use, expenses will have to be divided based on the actual mileage to know what amount is tax deductible. As of January 2022, the standard IRS mileage rate is 58.5 cents per mile for business use.
12. Advertising and Marketing
Small business expenses spent on advertising and marketing are tax deductible. These include everything from business cards to Yellow Pages ads. A business logo, “thank you” cards to clients and billboard ads are also inclusive in this type of deductible tax.
13. Phone and Internet Expenses
All phone and internet expenses are tax deductible as far as they are being used to run your business. In situations where you use the phone and internet for both business and personal usage, you can only deduct the exact percentage of your small business expenses that goes into the phone and internet cost for business use.
For businesses that need to ship goods to customers, shipping costs like postage, delivery charges, and shipping meter subscriptions are all tax deductible. The IRS considers the small business expenses geared towards shipping as “ordinary and necessary.” Everything it costs for packaging your goods and having it delivered as quickly as possible are tax deductible.