Small Business Tax Deductions and How to Claim Them
One of the simplest ways to reduce your tax bill is to ensure you’re claiming all of the tax deductions available to your small business.
Below you’ll find a comprehensive list of tax deductions commonly available to sole proprietors, and businesses that are organized as partnerships or limited liability companies (LLCs).
Use the links to jump directly to each tax deduction to learn if it’s relevant to your business, and detailed instructions on how to claim it.
- Business Meals
- Business Insurance
- Business Interest and Bank Fees
- Business Use of Your Car
- Charitable Contributions
- Child and Dependent Care Expenses
- Energy Efficiency Property Expenses
- Foreign Earned Income and Taxes Paid
- Home Office
- Legal and Professional Fees
- Medical Care Expenses
- Mortgage Interest Paid
- Moving Expenses
- Real Estate Taxes
- Retirement Contributions
- Telephone and Internet Expenses
- Travel Expenses
And remember, some of the deductions in this list may not be available to your small business. Consult with your tax advisor or CPA before claiming a deduction on your tax return.
You can deduct 50% of qualifying food and beverage costs. To qualify for the deduction, a meal needs to be business related, and you need to keep the following records of the outing:
- The amount of each expense
- The date and place of the meal
- The business relationship of the person you dined with
One good way to do this is to record the purpose of the meal and what you discussed on the back of the receipt.
Use Form 1040, Schedule C to claim business meal expenses.
You can deduct the cost of business insurance on Schedule C. If you have a home office, you can deduct the cost of renter’s or homeowner’s insurance as a part of your home office deduction.
When you borrow money for business activities, you’re charged interest for the use of the money you borrowed. You can deduct the interest incurred on business loans and business credit cards. Additionally, you can deduct fees and bank charges for your business bank accounts.
Keep in mind that if a loan is part business and part personal, you need to divide the interest between the personal and business parts of the loan.
Use Schedule C to claim these expenses.
Do you use a vehicle for your business? If you use your vehicle solely for business purposes, then you can deduct its entire cost of operation. If you use it for both business and personal, you can only deduct the costs associated with business-related usage.
If you purchased a new vehicle during the tax year, you can also deduct this on your return. Are you planning to purchase a new vehicle? Passenger vehicles, trucks, and vans that are used more than 50% for business, have a total depreciation deduction of $11,060 for cars and $11,160 for trucks and vans. SUVs can be deducted up to $25,000.
Note that the maximum depreciation deduction may differ depending on when your vehicle was put into service. Check this IRS resource for up-to-date information on the depreciation deduction for cars.
When claiming mileage, you can take a standard mileage deduction or you can deduct the actual costs. You can legally deduct the standard mileage deduction, even if your actual costs for mileage are less than the current rate..
Note that standard mileage deductions change from one year to the next. The standard mileage deduction for the 2016 financial year is $0.54 per mile. For the 2017 financial year, it’s $0.535 per mile.
Remember that all mileage costs claimed have to be related to a business activity, and you must retain proper documentation of these costs for seven years from the year of filing.
Use Form 1040, Schedule C to deduct these costs.
You can deduct charitable contributions made to qualified organizations. Sole proprietorships, single member LLCs, partnerships, and S corporations all deduct these costs on their personal tax return, while corporations deduct them on their corporate tax return.
Use Schedule A (Form 1040) to claim charitable contributions.
The cost of care for a child or dependent person is deductible. Qualifying persons include your children (12 years old or younger), or a spouse and certain other people who are physically or mentally incapable of self-care. Additionally, for care expenses to qualify, you need to either be working or looking for work while the care is taking place. For example, the cost of placing your children in daycare so that you can run your business is fully tax deductible.
Educational costs are fully deductible when they add value to your business and increase your expertise. In order to decide if your class or workshop qualifies, the IRS will look at whether the expense maintains or improves skills that are required in your current business.
The following list contains examples of expenses that can be incurred in the name of growing your business:
- Classes to improve skills in your field
- Seminars and webinars
- Subscriptions to trade or professional publications
- Books tailored to your industry
- Workshops to increase your expertise and skills
- Transportation expenses to and from classes
Keep in mind that any education costs that would qualify you for a new career, or costs related to education outside the realm of your business, don’t qualify as business tax deductions.
When reporting the costs of classes and workshops, you’ll record them as professional development against self employment income on Form 1040, Schedule C.
If you made energy efficient improvements to your home last year, you may qualify for tax credits. The Residential Energy Efficient Property Credit is 30 percent of the cost of alternative energy equipment installed on or in your home, such as solar hot water heaters, solar electric equipment, and wind turbines.
Use Form 5695 to claim energy efficiency improvements.
Qualifying American citizens and resident aliens who live and work abroad may be able to exclude all or part of their foreign earned income from their personal tax return. The exclusion can be a great benefit to those working and living abroad, but it can be tough to qualify. In order to qualify, your tax home needs to be abroad. Learn more about the foreign earned income exclusion.
To claim the foreign earned income exclusion, use Form 2555.
The IRS has introduced a simplified method for calculating home office expenses. You’re able to deduct a standardized $5 per square foot of your home that is used for business, up to a maximum of 300 square feet.
In order to qualify for the home office deduction, you need to measure up in three areas: exclusivity, regularity, and precedence.
To pass the “exclusive” requirement, your working area needs to be used exclusively for your business activities (a desk that doubles as the kitchen table won’t work), so make sure that your work area has clearly identifiable boundaries. You can include photos of your home office work space in your tax return as evidence. In order to qualify as the principal place of business (precedence), you need to be spending the most time and conducting the most important business activities out of your home office. You also need to use your home office regularly and as the principal place of business (regularity).
You can deduct home office expenses on Schedule C (Form 1040). If you calculate your deduction using the standard method, then you’ll also need to fill out Form 8829. Learn more about the home office deduction.
If you borrow money to invest, you can deduct interest paid (however, there are restrictions). Within a year, you can deduct investment interest up to the amount that you earned in investment income. If you have more interest than income from the investment, you can carry forward the additional interest to the next year.
To claim the cost, itemize your deductions and include it on Schedule A, under “Interest You Paid.”
Legal and professional fees that are necessary and directly related to running your business are deductible on Schedule C or C-EZ. These include fees charged by accountants, bookkeepers, and online bookkeeping services such as Bench.
If the fees include payments for work of a personal nature (for example, making a will), you’re allowed to make a business deduction for the part of the fee that’s related to your business. If you’re unsure whether a legal and/or professional expense is a business deduction, here’s the IRS’ official rundown on deducting legal and professional fees
In addition to insurance premiums, you can also deduct medical costs such as doctor’s fees, the cost of prescription drugs, and inpatient or home care.
As a self-employed individual, if you pay for your own health insurance you can deduct all of your health, dental, and long-term care insurance premiums. You can also deduct the cost of premiums that you pay for your spouse or dependents. However, if you are eligible to participate in a plan through your spouse’s employer, then you can’t deduct a plan that you opt to pay for.
Use Schedule A (Form 1040) to claim medical care costs.
You can deduct the interest paid on mortgage loans to buy, build, or improve your home. You can also deduct interest on loans that were taken out against your home’s equity.
Moving expenses are fully deductible if the main reason for the move is work. You also need to meet the distance test and the time test.
To pass the distance test, your new main job location needs to be at least 50 miles farther from your former home than your old main job location was from your former home.
To pass the time test, you need to work full-time for at least 39 weeks (about 10 months) during the first 12 months, and for at least 78 weeks (about 18 months) during the first 24 months that you live in your new job location area.
State, local, and foreign real estate taxes are all deductible as non-business expenses. You can claim these as itemized deductions on Form 1040, Schedule A.
Contributing to an IRA can reduce your taxable income for the year. Your total contributions for the year can’t exceed your total earned income for the year or the annual maximum amount (whichever is less). These contributions can be claimed on Form 1040.
If these tools are integral to your business, they’re deductible business expenses. However, if you use your phone and internet connection for personal and business reasons, you can only deduct the percentage of the cost of these expenses that was generated from business-related use. Keeping detailed records to prove the amount of business use will help justify these expenses in the event of an audit.
You can claim telephone and internet costs as utility expenses on Schedule C (Form 1040).
In order for a trip to qualify as business travel it has to be ordinary, necessary, and away from your tax home. Your tax home is the entire city or area in which you conduct business, regardless of where your main residence is. You also need to be traveling away from your tax home for longer than a normal day’s work, requiring you to sleep or rest en route.
Deductible, IRS approved business travel expenses include:
- Travel to and from your destination by plane, train, bus, or car
- Using your car while at a business location
- Parking and toll fees
- The cost of taxis and other methods of transportation used on a business trip
- Meals and lodging
- Dry cleaning
- Business calls
- Shipping of baggage and sample or display materials to your destination
- Other similar ordinary and necessary expenses related to your business travel
The IRS also approved special per diem rates for business travel for the 2015-16 tax year.
Remember to keep records that include the amount of each expense, as well as dates of return/departure, details of the trip (whom you met with), a mileage log if you drove your own vehicle, and the business reason for the trip.
Use Form 1040, Schedule C to claim business travel expenses.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.