It’s hard work running an online business. Especially at first when you’re just trying to figure everything out (hello 18-hour workdays). But it gets even more difficult if you owe a huge bill at tax time. By taking advantage of these 20 small business tax deductions, you can lower your tax bill and make the money you earn go farther.
Which business expenses can I deduct?
The baseline for figuring out if a business expense is deductible is asking yourself if the expense is both ordinary and necessary. According to the IRS, ordinary means a “common” expense in your business, and necessary means an expense that is “helpful and appropriate” for your business. Necessary expenses do not have to be indispensable.
In this article we specifically go over deductions in these categories:
- Professional services
1. Home office
While the home office deduction is widely known, it also is one of the trickiest deductions. You have to meet some pretty strict requirements in order to qualify. To claim this deduction, your home office must meet the following qualifications:
- It’s a dedicated space used exclusively and regularly for business. (Your dining room table doesn’t count. ☹️)
- It’s the primary place you conduct your business. You don’t conduct substantial management or administrative activities at another location.
Activities that will not exclude you from claiming the home office deduction include:
- Having other staff members who conduct management or administrative activities at locations other than your home office.
- Conducting management and administrative activities in non-fixed locations such as cars or hotel rooms while traveling.
- Occasionally conducting management or administrative activities from another fixed location (such as doing a little bit of paperwork from a co-working space).
- Having a space to conduct management or administrative activities but using your home office instead.
- Conducting substantial non-management and non-administrative activities at another fixed location other than your home office (such as meeting with customers at a different location).
So, if you do meet the qualifications of the home office deduction, how much can you deduct?
There are two ways to calculate this deduction.
The simplest calculation is something called the safe harbor test. Under the safe harbor test, use this equation:
$5 x office square footage = deduction*
*(with a maximum of 300 square feet or $1,500 deduction)
The more complicated calculation is where you take the square footage of the office space and divide it by the total square footage of the house. You then take that percentage of your home expenses, such as mortgage interest or rent, property taxes, homeowner’s insurance, utilities, HOA dues, repairs to the home, etc., and deduct those.
Be sure to back up your claims with receipts and other documentation. Technically, you would also need to be able to pass an on-site exam if someone were to ask to see your office.
As mentioned with the home office deduction, if you work from a home office, you can deduct utilities such as your water, heat, and electricity. To get the amount you can deduct, take the square footage of your home office and divide it by the total square footage of the house. You then take that percentage and deduct that amount of your utility expenses. For example, if your home office takes up 5% of your home, you can deduct 5% of your utility costs.
3. Internet and phone bills
Whether or not you work from home or from an office space, you can deduct your internet and phone expenses. Deduct only the portion of your expenses directly related to your business. If you use your phone and internet for personal use, don’t count that toward the deductible amount.
If you rent a space for your business, you will most likely be able to deduct the rent as a business expense as long as it’s not considered “unreasonable rent.” The IRS generally considers rent unreasonable if you’re related to the landlord and you pay them a different amount than you would pay a stranger to rent the same space.
It’s also good to keep in mind that rent is deductible in the year it was paid. If you pay rent in advance, you can only deduct the amount that applies to that tax year.
5. Maintenance expenses
Maintenance expenses such as repairs, cleaning, etc. are deductible in the year you pay for them as long as they are part of the routine maintenance that keeps your property in normal, operating condition. If you make improvements that don’t fall under that category, the cost will likely have to be capitalized and depreciated rather than deducted.
The deductible cost of repairs and cleaning includes things like labor and supplies. If you do the work, your labor is not deductible. If you hire someone to do the work, their labor is deductible.
6. Salaries and wages
If your business is an LLC or sole proprietorship, you can deduct the salaries and wages you pay part-time and full-time employees if those salaries and wages meet the following criteria:
- ordinary and necessary
- reasonable in amount
- paid for services actually provided
- paid for in the current year.
7. Employee benefits
Typically, you can deduct what you spend on employee benefit programs, including:
- Accident and health plans
- Adoption assistance
- Cafeteria plans
- Dependent care assistance
- Education assistance
- Life insurance coverage
- Welfare benefit funds
- Sick pay
- Vacation pay
8. Independent contractors
If you hire independent contractors or freelancers to provide a service related to your business—for example, designing marketing materials or taking photos for your website—the cost of their services is tax deductible.
Chances are, advertising is one of the biggest expenses you have, so it’s great news that it’s tax deductible! Ask your accountant about writing off everything from billboards to Facebook ads. If you hire someone to produce ads for you, that’s also deductible (see independent contractors above).
10. Marketing tools
If you use tools or software to manage your marketing efforts and campaigns such as social media scheduling tools, email software, etc. be sure to deduct those expenses.
You have to have a website to run an ecommerce business. Paying for your domain is tax deductible, as is the cost for stock images, design templates, etc.
If you’re a business that ships its own goods, the costs associated with postage, shipping, and delivery are all deductible.
Packaging costs fall under deductible shipping costs. This includes envelopes, packing material, labels, tape, markers, printer ink, boxes, and anything else you use to package your goods.
13. Bookkeeping and accounting fees
You can deduct the fees you pay for professional financial services such as bookkeeping and accounting that relate to your business. This includes your tax preparation costs if an accountant prepares your business tax return or, if you do business as a sole proprietor, your personal tax return.
14. Legal fees
Legal fees are another tricky area for tax deductions. Some legal fees are deductible and some are not.
Legal fees are not deductible when they are paid to defend charges that arise from participating in a political campaign; when related to producing or collecting taxable income; or when paid to acquire business assets. They are also not deductible if they were paid for personal reasons and not business reasons.
So when are legal fees deductible?
In order to be deductible, generally legal fees have to be related to doing or keeping your job. For example, if you paid legal fees to defend yourself against charges arising from your business, they may be deductible. The legal fees associated with preparing a partnership agreement may also be deductible.
Be sure to contact your accountant to learn more about which legal fees are deductible.
15. Business insurance
There are several types of insurance you may purchase to protect your business including fire insurance, professional liability insurance, general liability insurance, credit insurance, data breach insurance, commercial property insurance, and workers’ compensation insurance. If you pay the premiums for these types of insurance, you can deduct those premiums.
16. Health insurance
You may be able deduct health insurance premiums for yourself, your spouse, and your dependents if you are not insured under your spouse’s employer’s insurance.
17. Long-term care insurance
Long-term care insurance premiums are also deductible. For each person covered, you should deduct the smaller of these two amounts:
- The amount paid for that person
- The amount based on the person’s age at the end of the tax year
- Age 40 and younger: $420
- Age 41-50: $790
- Age 51-60: $1,580
- Age 61-70: $4,220
- Age 71 and older: $5,270
When you use your car for business, your related expenses are deductible. If you use your car exclusively for business, every expense is deductible. If you use your car for personal use and your business, you can only deduct the portion of your expenses that are associated with the business.
There are two ways you can calculate this deduction:
The first way is the easier option. All you need to do is keep records of the dates and miles you travel for business. Then multiply your total annual business miles by the standard mileage rate, which is 58 cents per mile for 2019. There are a variety of apps that you can use to track your mileage.
The second way is to keep track of all of your car operating expenses for the year—such as gas, oil changes, registration fees, car insurance, etc.—and deduct the portion that was used for business. For example, if you spent $2,000 on your car in a year and used that car for business 15% of the time, your deduction would be $300.
Car expenses aren’t the only travel expenses you can deduct at tax time. If you take a business trip, you can deduct the expenses from the trip including hotels, meals, and airfare. For a business trip to qualify for this deduction, your trip must be longer than one day’s work and you must need to rest in order to meet the demands of your work.
If you plan on claiming travel deductions, be sure to keep very detailed, thorough records.
19. Startup costs
If you’re just getting started with your business, the IRS allows you to deduct up to $5,000 in startup costs. These costs include travel, advertising, accountant fees, market research, setting up a corporation or LLC, and more.
Buying equipment doesn’t fall under startup costs, but many equipment costs can be depreciated.
20. Qualified business income (QBI)
The QBI deduction allows you to deduct up to 20% of your qualified business income if you meet these eligibility requirements:
- You have a pass-through business
- You have qualified business income
- You meet certain income levels
A pass-through business is a business where income is reported on the owner’s personal tax return. This includes sole proprietorships, partnerships, S corporations, and limited liability companies.
Qualified business income is the “net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.”
In order to qualify for the full QBI deduction, your taxable income should be at or below $160,700 for single filers and $321,400 for joint filers. If your income is above those levels, you may still qualify for a partial deduction, but you should talk with an accountant because there are quite a few caveats.
The bottom line
There are a lot of small business deductions you can potentially claim on your tax return. While this list is a good place to start, it’s not exhaustive. The best practice for making sure you’re claiming all the business deductions available to you is working with an accountant (and remember, that’s tax deductible as a professional service 😃).
With tax season being extended due to the COVID-19 outbreak, the deadline for filing your taxes this year is July 15. If you need to extend past that date, you can use Form 7004.
Canopy provides cloud-based, practice management software for accounting firms. With Canopy, accountants can keep their firm organized and running smoothly, as well as create a more connected experience for their clients.