There are some lesser-known expenses you can deduct to minimize your tax burden or receive a larger refund check.
Maximizing business deductions at tax time can mean the difference between a sweet refund check and a fat bill. The chance to get your taxes done right, on time, and with the optimal amount of qualified business expenses is a narrow window.
For most small and medium-sized businesses, standard deductions like rent and supplies are top of mind. But there are some lesser-known expenses you can leverage to reduce your tax burden or increase the chance of a nice refund check.
For all business owners, maximizing the deductions you take on your tax return — whether you file as a sole-proprietor, pass-through entity, or a large corporation — is a must.
Qualified business expenses
The Internal Revenue Service sets the rules of what is a “qualified business expense” when it comes to taxes. These are items usually and customarily found in your industry.
A pastry chef needs flour; a tooling company needs metal. In addition to supplies, routine expenses — like rent, phone bills, internet access, and all turnkey costs — qualify.
Whether you run your business out of a home office or a large factory, most items that help keep the wheels moving can count as qualified business expenses.
The United States government wants to encourage new businesses, so they offer a $5,000 write-off for start-up expenses. These include the costs involved in creating the business, and even investigating its creation.
The expenses cover advertising, travel costs to find suppliers, distributors, and customers. You can deduct up to the $5,000 write-off or even more if you provide detailed itemization. There’s a full list of what deductions are available to new startups on the IRS website.
The first 20%
Under the Tax Cuts and Jobs Act, small business owners may deduct the first 20% of profits as a “Qualified Business Income” deduction. For 2020 taxes, a single filer’s income threshold can be up to $160,700 in annual revenue, or $321,400 for joint filers.
If you are less than these thresholds, knock 20% off your income before you calculate your taxes due. If you’re over these limits, there are calculators that may help you get some of the QBI credit.
Tools of the trade
When you buy new tools and equipment, the cost is fully deductible. That includes everything from vehicles to high-tech computers to spatulas and pastry bags. In the past, only new equipment qualified, but now used property is also deductible.
First-year bonus depreciation allows a 100% write off for qualified purchases. For businesses that don’t take the first-year bonus, the IRS has a schedule of depreciation that can result in deductions.
Driving to and from work doesn’t qualify as a business expense, but driving — whether it’s your own vehicle or a company car — to deal with business is. Deliveries, picking up supplies, going to conferences all qualify. You can take mileage deductions, loan payments, parking fees, and even property taxes if you rent space for your fleet.
Cab rides and rideshare expenses are also deductible if they’re taken for business reasons. Make sure to keep your receipts, noting the reason for the trip as well as who you met, if anyone.
Airline tickets for business use are also a deduction, but make sure they’re legitimate. Your pastry exploration on the Amalfi Coast may sound great on paper, but unless you’re a professional baker attending a conference on crafting the perfect sfogliatelle, the IRS may balk.
Accommodations are also deductible, including hotel costs and some tips.
Meals and entertainment
The TCJA essentially eliminated the deduction for entertainment, but some meals are still deductible under the Act. You may deduct half the cost of business meals, including food and beverages, providing they aren’t excessive. These can include wining and dining a potential or current customer or other business contact.
Qualified deductions also include the costs of maintaining licenses, credentials, and trade association fees. If you go to workshops, seminars, professional development classes, or even take a course to improve your spreadsheet savvy, these costs are deductible. Even relevant magazine subscriptions and database costs qualify.
Fees you pay to keep your business running are also considered legitimate. Legal costs, accounting fees, tool and equipment rentals — even uniforms and cleaning costs count. If it’s necessary and customary to run your business, it’s a deduction. Business (not personal) credit card costs and interest are deductible, as is interest on any business loan.
Sole proprietorships can deduct the entire cost of their health insurance premiums. This includes the cost for spouses, dependents, and children under the age of 27 at the end of the year. The deduction is an adjustment to your income, so you can claim it even if you don’t itemize.
While out-of-pocket medical costs are not deductible as a business expense, large medical costs are deductible if your expenses are greater than 7.5% of your adjusted gross income for the tax year.
Many sole proprietors work from home. They may have a separate space for their toils or just get the job done wherever, but all have a right to deduct at least some of the cost of a home office. As a sole proprietor, there are complex calculators to determine how much you dedicate your home to work and how much you can deduct.
There’s also a simplified deduction that allows you to take the deduction without doing too much math. For a home office 300 square feet or less (about the size of a desk and a few file cabinets), the IRS offers a deduction of $5 per square foot to a maximum of $1,500.
For sole proprietors, a Federal Insurance Contributions Act tax deduction is available. Since you, the employer, pay half of the FICA contributions, that amount qualifies as a business deduction. There are some minimums and maximums involved.
Funding for your future
Thinking about tomorrow? You can deduct half the first $1,000 you spend to start a 401(k) or other qualified retirement plan for yourself. In addition to the deduction for starting the fund, sole proprietors have until April 15 to put money into their personal retirement accounts and defer some income as a business expense. There are limits to the amount you can fund, but the deduction for starting the plan and the expense for contributing to it add up to less taxes today and retirement savings for tomorrow.
For all business owners, maximizing the deductions you take on your tax return — whether you file as a sole-proprietor, pass-through entity, or a large corporation — is a must. The IRS has many publications that detail what deductions are available, what limits they may have, and how to maximize your savings for the year.