Own a small business? You may benefit from utilizing these 10 deductions to lower your taxable income. Key deductions include those for home office expenses, health insurance premiums, and startup costs.
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updated September 1, 2023 · 4min read
Legally lowering your taxable income isn't as thrilling as winning the lottery, but it runs a close second, and it's a lot more likely to happen. If you have a small business, you may benefit from utilizing these 10 deductions. Key deductions include those for home office expenses, health insurance premiums, and startup costs.
Home office expenses are one of the most common small business deductions. Because of its prevalence, the Internal Revenue Service (IRS) designed a simplified option in 2013 to calculate your home office expense deduction. You may now choose between the simplified and standard deduction calculations.
Startup and organizational costs for a small business can be deducted up to $5,000 each. The allowable startup deduction is reduced by the amount your total startup or organizational costs exceed $50,000; the remainder must be amortized. Startup costs refer to any amounts paid to investigate or create a business. Organizational costs include the expenses incurred to form a corporation, partnership, or limited liability company (LLC).
Certain insurance premiums are deductible for small businesses. Insurance premiums for fire, theft, or accident losses are deductible. Liability, malpractice, workers compensation, unemployment, business interruption, and car insurance are generally deductible, subject to certain criteria. Please note, car insurance is only deductible to the extent the car is used for business.
Health and long-term care (LTC) insurance paid by a partnership for its partners is generally deductible as a guaranteed payment to the partners. Health or LTC insurance paid for by an S corporation for shareholder-employees who hold a 2% or greater stake in the company is generally deductible as well. However, it must also be included in the shareholder's wages which are subject to federal income tax.
As in the previous section with car insurance, other car-related expenses are only deductible to the extent the car is used for business. Keep detailed records of your business travel to substantiate your deduction if your car is used for both business and pleasure.
To deduct mileage driven for work, you can either select the standard mileage rate or the actual expense method. The standard mileage rate, set annually, is simply multiplied by the business miles you drove. Alternatively, you could also keep records of all your car-related expenses, including depreciation, registration, car insurance, repairs, and gas. The percentage of business-use for your vehicle is applied to the actual expenses to arrive at your deduction. For example, if you had $2,000 in car-related expenses and drove your vehicle for business 50% of the time, your deduction is $1,000.
You can deduct phone and internet expenses, regardless of whether you claim the home office deduction, so long as the expenses are directly business-related. For example, you cannot deduct the first line of your home phone. However, if you have a second line devoted to business, you can deduct the additional cost related to your second line.
Reasonable costs incurred to advertise your business are tax-deductible. Lobbying expenses are not typically tax-deductible.
Travel expenses may be tax deductible if they are ordinary and necessary for your business. The travel must take you out of the area of your regular place of business, last for substantially longer than a typical workday, and you must need to sleep or rest to perform the demands of your work away from home. To substantiate your deduction, keep detailed records of your business-related travel expenses, including transportation, lodging, and non-entertainment related meals.
You can deduct education expenses that are required for maintaining or improving your skills related to your business. It must be related to your current line of work, rather than a new trade or business.
Contributions to SEP, SIMPLE, or qualified retirement plans may be tax deductible. You can deduct contributions made to the plan for your employees. If you are a sole proprietor, you can also deduct contributions made to the plan for yourself.
Self-employment taxes, which fund Social Security and Medicare, are paid by independent contractors and small business owners. The total self-employment tax rate is 15.3%. Because you are both the employer and the employee of the small business, 7.65% is essentially the employer share and 7.65% is the employee share. When filing your income taxes, you will be able to deduct the employer half of the self-employment tax as a business expense.
This is a broad overview of 10 common deductions for small businesses. There are many other small business deductions. The main takeaway is, no matter what business expense you're deducting, it must be reasonable and directly related to your business.
by Alicia Tuovila
Alicia Tuovila is an accounting and finance writer based in Tennessee. She holds an active Certified Public Accountan...
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