29 Tax Deductions for Businesses (the most common)
“There is nothing sinister in arranging one’s affairs as to keep taxes as low as possible . . . for nobody owes any public duty to pay more than the law demands.” – Judge Learned Hand.
The tax deductions that come with owning a business are one of the biggest motivations for owning a business. Taxes are calculated based on the business’ income after expenses (recall the income statement). It’s also a progressive tax, meaning the more you make, the more you pay. So, anything that can be listed as a business expense reduces the net profits and in turn reduces taxes. To qualify as deductible, a business expense must be:
- Ordinary and necessary for the business
- Not extravagant
- Primarily for the business (not personal)
The tax code can be vague on what these terms actually mean, so many of the rules come from court decisions and the judge’s dictation in those court cases. As mentioned in a previous post, researching these cases is a the major operation of W. Murray Bradford (Bradford Tax Institute). You’d think that driving to work would be an ordinary and necessary business expense since you can’t work unless you get to work, but this trip is not tax deductible (unless you have a home office). Knowing what is and isn’t tax-deductible and what rules to follow should be a major point of criteria for which accountant you will hire, and a good reason for firing an accountant if they miss something that costs you more in taxes.
The following is a list of the most common tax deductions for businesses. Many of them have their own rules on how they can actually be deducted. Only some of them can be deducted 100%. Consult with your accountant and educate yourself with the sources below to make sure you’re doing all you can for your own business.
- Vehicles (there will be a separate post on vehicle expenses)
- Equipment and Furniture
- Home Office
- Retirement Account Deposits
- Expenses for employees and independent contractors
- Costs of Going into Business
- Accounting, Legal and Other Professional Fees
- Office Supplies
- Entertainment and Meals (follows certain rules, 50% rule and others)
- Gifts to Clients and Customers (up to $25, also has certain rules)
- Travel (follows certain rules)
- Moving Expenses
- Health Insurance
- Disability and Sick Pay for employees
- Education Expenses
- Interest paid for loans or credit
- Bad Debts
- Charitable Contributions (for C Corps, other business owners can claim on individual tax returns)
- Many Taxes (not income taxes, but can include self-employment tax, real estate taxes, sales taxes)
- Advertising and Promotions
- Business Licenses and Permits
- Repairs and Improvements
- Casualty Losses (sounds dark doesn’t it? No one has to die. It includes damage, destruction, loss of business property from natural disasters)
- Business Insurance
- Research and Development Credits (credits are better than deductions, its a dollar for dollar reduction on your tax bill)
- Domestic Production (for manufacturers who produce products in the US)
- The General Business Credit
The main source for this article (listed below) has a table for activities that count towards the General Business Credit (and it lists which IRS forms to use). Here are a few examples:
- Child care facility credit
- Low-income housing credit
- Alcohol Fuels Credit (for using alternative fuel vehicles)
- There are 9 total in the table on page 31 of the book
The book also lists the following as commonly overlooked business expenses:
- Sample giveaways and promotions
- CDs and DVDs related to business
- Bank service charges on business accounts
- Business association dues
- Business gifts to employees and customers under $25
- Business publications and books (that means any time a book is cited on this blog, you could buy it and deduct it!)
- Casual labor, independent contractors
- Casualty and theft losses
- Coffee and beverage service
- Consultant fees
- Credit bureau fees
- Environmental clean-up costs
- Magazines for your waiting room
- Internet service for your waiting room
- Website development and maintenance
- Parking and meters
- Petty cash funds used for minor items
- Postage and shipping
- Tips and gratuities
- Outplacement service fees
- Taxi and bus fare
- Telephone calls away from the business (not sure what this one means)
This article is just an introduction to tax savings. Once you start a business, it should be one of your top priorities to become an expert on tax deductions (over a period of time) in order to maximize your tax savings. All of these deductions are available only to business owners and not to employees. That’s one of the reasons why it’s better to own a business than not to own one.
Major source for this article: Tax Savvy for Small Businesses by Tax Attorney Frederick W. Daily and Jeffery A. Quinn, CPA. Buy this book to get the specific rules that must be followed in order to take advantage of the tax deductions listed above. All of the information above is a very brief summary of just one chapter of the book, which is over 340 pages of tax-savings gold!
For more tax deduction education, I’d also recommend the Bradford Tax Institute and Tax-Free Wealth by Tom Wheelwright. I was going to include separate blog posts which summarized Tax-Free Wealth as part of Accounting Month, but I don’t think it’s going to arrive in the mail in time for me to get the information listed. So it will be included later on this blog.
Although this information comes directly from a reliable source, there could be mistakes and you should consult an accountant/tax adviser before performing accounting for your business.
If you have any questions (or answers to questions), leave a comment below.
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