Simplifying Small Business Tax Deductions

Running a business costs money, but did you know that many of your business expenses can help reduce your taxes? Expenses like office rent, salaries, and even water bills can be deducted from your gross income, saving you money.

The Hartford has created a straightforward guide to some common business deductions that can help lower your tax bill.

Business Expense Categories

To qualify for a deduction, the IRS says an expense must be ordinary, necessary, and directly related to running your business. Most small business expenses fall into specific categories. The IRS’s Schedule C form lists 20 broad categories, including:

• Advertising

• Car and truck expenses

• Commissions and fees, contract labor

• Depletion

• Depreciation and section 179 expense deduction

• Employee benefit programs

• Insurance, interest

• Legal and professional services

• Office expense

• Pension and profit-sharing plans

• Rent or lease

• Repairs and maintenance

• Supplies

• Taxes and licenses

• Travel and meals

• Utilities

• Wages

Properly categorizing expenses helps the IRS determine if your deductions are legitimate and can also save you money on accounting fees.

Common Business Expenses

Here are some common deductible expenses for small businesses:

Utility Expenses

If your business owns its premises, you can deduct expenses like electricity, gas, water, and trash collection. Renters can also deduct these expenses unless covered by the landlord.

Rent or Mortgage Payments

Renters can deduct monthly payments to the landlord. Owners can deduct mortgage interest, but not the principal.

Home Office Costs

If you run a business from home, you might be able to deduct some household expenses. The space must be used exclusively for business, and your home must be the principal place of business. IRS Publication 587 explains these requirements in detail.

Website and Software Expenses

Expenses like accounting software subscriptions, website domain name registration, and hosting fees are deductible.

Business Licenses and Permits

Costs for obtaining and renewing business licenses and permits can be deductible as long as they don't exceed your annual profit.

Bank Fees and Interest Payments

You can deduct bank fees, credit card interest, financing costs, and depreciation as long as they don't exceed your annual profit. Note that the 2017 Tax Cuts and Jobs Act (TCJA) limits the amount of interest you can deduct, but small businesses with average revenues up to $25 million over three years may still deduct all their interest.

Professional Fees and Business Services

Fees paid to lawyers, accountants, and consultants for business-related advice and services can be deducted. However, payments for ordinary business services, like cleaning, are not deductible.

Business Meals and Travel Expenses

You can deduct 50% of business meal costs, whether dining locally or while traveling. The same 50% limit applies to transportation expenses. Refer to IRS Publication 463 for more details.

Equipment and Supplies

Furniture, Equipment, and Machinery

Decide whether to deduct the full cost in the first year (using Section 179) or over time as depreciation. The maximum Section 179 deduction for 2024 is $1,220,000. Check the IRS website for more details.

Office Supplies

Items like paper clips, pens, cleaning products, and break room supplies are deductible if you keep receipts.

Marketing and Advertising

Advertising and Marketing Deductions

Expenses for business cards, websites, commercials, and creating marketing materials are deductible. These expenses must be ordinary and necessary.

Membership Fees

Membership fees for trade groups and professional associations can be deducted if the organization has a business purpose. Social organization and country club dues are generally not deductible.

Auto and Vehicle Expenses

Vehicle Expenses

Deduct a portion of expenses for leasing, insurance, repairs, fuel, and garage rent if you use your personal vehicle for business. The IRS provides a standard mileage rate or you can calculate the business-use percentage.

Insurance Premiums

Business Insurance

Premiums for property, casualty, workers compensation, disability, health, liability, and industry-specific insurance may be deductible.

Health Insurance

Self-employed business owners can deduct their own health insurance premiums, with limits adjusted annually.

Payroll and Employee Benefits

Payroll

Wages, salaries, bonuses, and commissions are all deductible.

Taxes

Local property taxes and payroll taxes (including Social Security and Medicare) are deductible.

Employee Benefits

Health or life insurance, retirement contributions, adoption assistance, and dependent care benefits may be deductible.

Training and Education

Education or training costs can be deducted if they improve job skills and the employee is working in the field of study. Ensure you have an employee education plan in place.

Non-Deductible Expenses

The IRS has many exceptions and prohibitions on deductions, and these can change with new tax laws. Always check the IRS website and consult a tax professional before taking deductions.

Remember, make business decisions based on what makes sense for your business, not just for tax deductions.

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