Top Tax Deductions for Your Small Business
Using these tax deductions for your small business can save you money.
It's simple: The more tax deductions your business can legitimately take, the lower its taxable profit will be. Also, in addition to putting more money into your pocket at the end of the year, the tax code provisions that govern deductions can also yield a personal benefit: a nice car to drive at a small cost, or a combination business trip and vacation. It all depends on paying careful attention to IRS rules on just what is -- and isn't -- deductible.
When you're totaling up your business's expenses at the end of the year, don't overlook these important business tax deductions.
1. Auto Expenses
If you use your car for business, or your business owns its own vehicle, you can deduct some of the costs of keeping it on the road. Mastering the rules of car expense deductions can be tricky, but well worth your while.
There are two methods of claiming expenses:
- Actual expense method. You keep track of and deduct all of your actual business-related expenses.
- Standard mileage rate method. You deduct a certain amount (the standard mileage rate) for each mile driven, plus all business-related tolls and parking fees. Check the IRS website for the current standard mileage rate.
As a rule, if you use a newer car primarily for business, the actual expense method provides a larger deduction at tax time. If you use the actual expense method, you can also deduct depreciation on the vehicle. To qualify for the standard mileage rate, you must use it the first year you use a car for your business activity. Moreover, you can't use the standard mileage rate if you have claimed accelerated depreciation deductions in prior years, or have taken a Section 179 deduction for the vehicle. (For more on Section 179, see "New Equipment," below.)
If your auto is used for both business and pleasure, only the business portion produces a tax deduction. That means you must keep track of how often you use the vehicle for business and add it all up at the end of the year. Certainly, if you own just one car or truck, no IRS auditor will let you get away with claiming that 100% of its use is related to your business.
To learn more about deducting driving expenses, see Nolo's article How to Deduct Your Local Business Driving Expenses.
2. Expenses of Going Into Business
Once you're running a business, expenses such as advertising, utilities, office supplies, and repairs can be deducted as current business expenses -- but not before you open your doors for business. The costs of getting a business started are capital expenses, and you may deduct $5,000 the first year you're in business; any remainder must be deducted in equal amounts over the next 15 years.
If you expect your business to make a profit immediately, you may be able to work around this rule by delaying paying some bills until after you're in business, or by doing a small amount of business just to officially start. However, if, like many businesses, you will suffer losses during the first few years of operation, you might be better off taking the deduction over five years, so you'll have some profits to offset.
3. Books and Legal and Professional Fees
Business books, including those that help you do without legal and tax professionals, are fully deductible as a cost of doing business.
Fees that you pay to lawyers, tax professionals, or consultants generally can be deducted in the year incurred. However, if the work clearly relates to future years, they must be deducted over the life of the benefit you get from the lawyer or other professional.
4. Bad Debts
If someone stiffs your business, the bad debt may or may not be deductible -- it depends on the kind of product your business sells.
- Goods. If your business sells goods, you can deduct the cost of goods that you sell but aren't paid for.
- Services. If, however, your business provides services, no deduction is allowed for time you devoted to a client or customer who doesn't pay.
5. Business Entertaining
If you pick up the tab for entertaining present or prospective customers, you may deduct 50% of the cost if it is either:
- directly related to the business and business is discussed at the event -- for example, a catered meeting at your office; or
- associated with the business, and the entertainment takes place immediately before or after a business discussion.
Make notes. On the receipt or bill, always make a note of the specific business purpose -- for example, "Lunch with Joyce Slater of Ace Manufacturing Co. to discuss widget contract."
When you travel for business, you can deduct many expenses, including the cost of plane fare, costs of operating your car, taxis, lodging, meals, shipping business materials, cleaning clothes, telephone calls, faxes, and tips.
What about combining business and pleasure? It's okay, as long as business is the primary purpose of the trip. However, if you take your family along, you can deduct only your own expenses.
To learn more about deducting travel expenses, see Nolo's article Operating Expense: Deducting Travel Costs.
If you use credit to finance business purchases, the interest and carrying charges are fully tax-deductible. The same is true if you take out a personal loan and use the proceeds for your business. Be sure to keep good records demonstrating that the money was used for your business.
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