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To reduce the tax burden, consider these top 25 tax deductions for small businesses. Some of the common deductions are wages, travelling expenses, interest, promotion expenses. Check out the whole list now to save your business cash.
Below are Tax deductions for small businesses as per US tax Law:
Cost of goods sold:
As a reseller/manufacturer, you can save your taxes by claiming the cost of goods sold. The deduction is not for the service providers. However, if you are charging for material supplies in your business (In addition to the service fee), you can claim this deduction.
Travelling expense:
Travel expense is deductible when you are travelling away from tax home for business purposes or business assignment. You can deduct transportation expenses, car expenses, telephone, tips paid, meal expenses, incidental expenses. Please note that you cannot claim travel expenses that are for personal purposes. There are different rules for travel in the US and outside the US.
Advertising:
Advertising expenses you have incurred during the year can be deductable. Advertise includes all the costs you have done to market your business.
Bad debt:
When some customers become bad and it is not possible to recover the money, you can write that amount as bad debt. The bad debt amount can be claimed as a write-off. The condition to write off bad debt is that you use the accrual accounting method (You Record income when it dues and not when cash is received by the customer). When you follow cash basis accounting, you cannot write bad debt.
Rent:
When you have rented any property and used for business purpose, rent paid for the period used in the tax year is deductible. If you are working from home using part of the home for business purposes, you can still claim the rent paid for the home as per guidelines of Business use of the home.
Employee salary/pay:
Employee pay is deductible in schedule C. Please note that payment must be reasonable and for services provided by the employee. When you have a sole proprietary firm, you cannot deduct your own salary as employee pay. The pay may in the form of cash, service or property.
The following can be considered as employee pay:
You can claim depreciation as an expense when you acquire the property and are using for business purpose. Following conditions should be satisfied to claim depreciation:
Insurance:
Following insurance premiums are deductible from gross income for business tax purposes.
You can write off expenses related to operating and maintaining the car. The car should be used for business purposes. You can claim car expenses reimbursed by you to your employees.
Local transport Expense:
You can claim local transport expenses incurred for business meetings away from your regular workplace, visiting clients or getting to a temporary workplace.
Repair and Maintenance:
You can deduct repair and maintenance expenses incurred for tangible assets- building, machinery, equipment. Please note that repair and maintenance which is required to be capitalized should not be claimed as a deduction in the tax return.
Legal and professional fees:
Legal and professional fees paid necessary to operating your business is eligible to write off. However, legal fees paid to acquire an asset is of a capital nature. It should be added to the asset value.
Tax preparation fees:
You can deduct tax preparation fees related to the preparation of business schedules.
Accounting Fees:
Account maintenance fees can reduce your tax burden. Accounting includes bookkeeping services.
Pension plans:
You can contribute to pension plan SEP, SIMPLE, Qualified pension and save taxes. Contribution to a pension plan for employees and you are eligible for deduction.
Interest expense:
Interest accrued or paid by you for the tax year can be claimed as a tax deduction for small businesses. The debt should be related to business purposes. You cannot claim interest paid on personal loans. If the loan is partially for personal use and partially for business use, you can divide the loan interest between personal and business and claim interest for business purposes.
Taxes:
Do not forget to claim the following taxes while filling schedule C/ C-EZ:
Do not mix this with your personal entertainment expense such as visiting parks or watching movies. As per US tax law, Entertainment expense is the expense you incurred for the entertainment of clients/customers. It includes amusement expenses, meals provided, and recreation activities.
Other expenses you can deduct from Gross income:
Please note that this is not tax advice. Contact your accountant before making any tax decisions.
Below are Tax deductions for small businesses as per US tax Law:
Cost of goods sold:
As a reseller/manufacturer, you can save your taxes by claiming the cost of goods sold. The deduction is not for the service providers. However, if you are charging for material supplies in your business (In addition to the service fee), you can claim this deduction.
Travelling expense:
Travel expense is deductible when you are travelling away from tax home for business purposes or business assignment. You can deduct transportation expenses, car expenses, telephone, tips paid, meal expenses, incidental expenses. Please note that you cannot claim travel expenses that are for personal purposes. There are different rules for travel in the US and outside the US.
Advertising:
Advertising expenses you have incurred during the year can be deductable. Advertise includes all the costs you have done to market your business.
Bad debt:
When some customers become bad and it is not possible to recover the money, you can write that amount as bad debt. The bad debt amount can be claimed as a write-off. The condition to write off bad debt is that you use the accrual accounting method (You Record income when it dues and not when cash is received by the customer). When you follow cash basis accounting, you cannot write bad debt.
Rent:
When you have rented any property and used for business purpose, rent paid for the period used in the tax year is deductible. If you are working from home using part of the home for business purposes, you can still claim the rent paid for the home as per guidelines of Business use of the home.
Employee salary/pay:
Employee pay is deductible in schedule C. Please note that payment must be reasonable and for services provided by the employee. When you have a sole proprietary firm, you cannot deduct your own salary as employee pay. The pay may in the form of cash, service or property.
The following can be considered as employee pay:
- Monthly salary
- Bonus
- Sick pay
- vacation pay
- Fringe benefits
- Employee benefits programme
- Education expense
- Reimbursement
- Bonus
- Other as per tax law
You can claim depreciation as an expense when you acquire the property and are using for business purpose. Following conditions should be satisfied to claim depreciation:
- Property should be owned by you.
- It should be used for business.
- It must have a useful life of more than 1 year.
- You can claim depreciation on computers, machinery, car, truck, office furniture, building etc.
Insurance:
Following insurance premiums are deductible from gross income for business tax purposes.
- Insurance to cover bad debt
- Insurance premium to cover fire, theft, flood etc.
- Car or vehicle insurance
- Business interruption insurance
- Malpractice insurance
- Liability insurance
- Workers' compensation insurance
- Group insurance and medical insurance for Employees
- Self-employed health insurance for you and your family
You can write off expenses related to operating and maintaining the car. The car should be used for business purposes. You can claim car expenses reimbursed by you to your employees.
Local transport Expense:
You can claim local transport expenses incurred for business meetings away from your regular workplace, visiting clients or getting to a temporary workplace.
Repair and Maintenance:
You can deduct repair and maintenance expenses incurred for tangible assets- building, machinery, equipment. Please note that repair and maintenance which is required to be capitalized should not be claimed as a deduction in the tax return.
Legal and professional fees:
Legal and professional fees paid necessary to operating your business is eligible to write off. However, legal fees paid to acquire an asset is of a capital nature. It should be added to the asset value.
Tax preparation fees:
You can deduct tax preparation fees related to the preparation of business schedules.
Accounting Fees:
Account maintenance fees can reduce your tax burden. Accounting includes bookkeeping services.
Pension plans:
You can contribute to pension plan SEP, SIMPLE, Qualified pension and save taxes. Contribution to a pension plan for employees and you are eligible for deduction.
Interest expense:
Interest accrued or paid by you for the tax year can be claimed as a tax deduction for small businesses. The debt should be related to business purposes. You cannot claim interest paid on personal loans. If the loan is partially for personal use and partially for business use, you can divide the loan interest between personal and business and claim interest for business purposes.
Taxes:
Do not forget to claim the following taxes while filling schedule C/ C-EZ:
- Income taxes on business
- Employment taxes
- 50% of self-employment tax
- Personal property tax and Real estate tax (when the property is used in business.)
- Sales tax paid on service or goods purchased. You can treat the sales tax amount as the cost of goods or services.
- Excise taxes paid for carrying on your business.
- Fuel taxes should be considered as part of fuel expenses.
Do not mix this with your personal entertainment expense such as visiting parks or watching movies. As per US tax law, Entertainment expense is the expense you incurred for the entertainment of clients/customers. It includes amusement expenses, meals provided, and recreation activities.
Other expenses you can deduct from Gross income:
- Bank Fees:
- Donation:
- Education expense
- Subscription to professional publication
- Interview expense allowance
- License fees
- Penalties paid for non-performance of the contract
- Supplies and material
- Bribes
- Penalties paid to government agencies for non-fulfilment of the law
- Political contribution
- Charitable contribution
- Lobbying expense
- Family and personal expense
- Repairs that adds value to a property - Capital nature.
- Demolition losses
Please note that this is not tax advice. Contact your accountant before making any tax decisions.
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