As a small business owner, there are a variety of expenses you can use as tax deductions. Take a look at these common small business tax deductions and see if you qualify.
1. Cost of goods sold
If you buy goods to sell, or if you make them yourself, you can deduct the cost of those goods that you sold. To determine how much you can deduct for the cost of goods sold, you must track beginning and ending inventory every year. You also must keep a record of your inventory purchases and manufacturing expenses.
If you use any inventory for personal use, you must reduce your cost of goods sold by that amount. You can’t take a deduction for inventory you use yourself.
Be sure to include all materials, supplies, labor, containers, packaging, and manufacturing overhead expenses that go into making your product as part of your cost of goods sold.
2. Bad debt
If someone owes you money related to your business, and you cannot collect on it, you may qualify for a deduction. Do not take a bad debt deduction for uncollectible accounts receivables unless you have already included the receipts in your total income.
3. Car and truck expenses
If you have a small business, you probably have vehicle expenses. You cannot deduct commuting expenses to your primary place of business. However, every time you drive to the office supply store or post office, or meet with a client, for example, you are running up deductible miles.
You can use the standard mileage rate to deduct vehicle expenses or your actual expenses. The Internal Revenue Service (IRS) allows a standard mileage rate of 53.5 cents per business mile driven in 2017. That rises to 54.5 cents per mile in 2018. You can also deduct parking fees and tolls in addition to the standard mileage rate.
If you’d rather track actual vehicle expenses, you can deduct expenses for gas, oil changes, repairs, and tires.
4. Depreciation
When you purchase equipment, buildings, or other assets that last longer than one year for your business, you generally don’t deduct all of the costs in the year you purchased them. Instead, you should spread out the deductions over the life of the assets.
For many assets other than real estate, you can choose to expense the asset in the year you start using it or use one of the IRS depreciation methods.
5. Employee pay
If you have employees, you know that payroll costs can account for a large portion of all your business expenses. The total amount you pay your employees for services performed for your business, whether you pay in cash, property, or services, is a small business tax deduction. Include sick pay, bonuses, and other forms of compensation in that group.
Do not include amounts you pay yourself if you are a sole proprietor.
6. Insurance
You can deduct all ordinary and necessary insurance related to your business, including fire, flood, storm, crop, theft, and liability. You can also deduct other insurance on business assets, workers’ compensation, business interruption, business vehicle, malpractice, and health insurance premiums for your employees.
7. Self-employed health insurance deduction
If you are self-employed and have a net profit for the year, you may qualify to deduct health insurance premiums for yourself, your spouse, and your dependents.
8. Interest expense as a small business tax deduction
If you have loans or credit cards for business purposes, the interest is deductible. If you have a loan that is part business and part personal, divide the interest between business and personal use.
9. Legal and professional fees
If you pay lawyers, tax professionals, or other legal and professional fees for your business, you can deduct them on your business return.
10. Pension plans
If you set up a small business retirement plan for you and your employees, you can deduct contributions you make for your employees as a business expense.
As a self-employed person, you can deduct contributions for yourself as an adjustment to income on Form 1040, instead of on Schedule C.
11. Rent
If you rent a storefront, warehouse, or other space for your business, you can deduct the rent cost. You can also deduct rent you pay for equipment or other assets used in your business.
12. Supplies
Don’t forget the supplies you buy to keep your business running. Be careful, however, to track supplies that become part of inventory separately from other supplies for running your business.
13. Taxes
Most taxes you pay in the course of business are considered small business tax deductions. That includes sales tax on business assets you purchase, excise tax, fuel taxes, personal property tax, vehicle tax, real estate tax, and state and local income tax attributable to your business.
If you qualify to deduct a tax, such as real estate tax, on Schedule A as an itemized deduction or as a business expense on Schedule C, it may also be advantageous to include the business portion on Schedule C.
You cannot deduct federal income tax.
14. Travel, meals, and entertainment
You can deduct business travel expenses, including airplane, bus, taxi, train, and other transportation costs. Baggage and shipping expenses are also deductible. These are deductible even if they are day trips.
If you travel away from your home long enough to need sleep or rest (generally overnight), you can deduct travel expenses, including 50% of the cost of your meals and lodging.
15. Business use of a home
Using a room of your home as your office can be a small business tax deduction. You must, however, use that part of your home exclusively and regularly for your business.
You don’t need to meet the exclusive use test when you use part of your home for inventory or sample storage or as a daycare facility.
You can track your direct and indirect expenses for your home office, or you can use the Simplified Method. Under this method, you deduct a flat $5 per square foot used for your business, up to 300 square feet.
16. Contract labor
If you pay someone as an independent contractor, whether you pay with cash, check, or property, be sure to take your deduction.