Examples of Itemized Tax Deductions for Small Businesses

Tax Deduction Examples: Small Business Edition

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Filing business taxes may seem complicated, but knowing what exactly can be deducted can help make the process easier. Claiming deductions for business expenses requires staying organized with receipts, logs, and other important documents, but it’s worth the time because this can help reduce the amount of taxes you owe.

Key Takeaways

  • A deduction on a tax return is an expense made within that tax year that can be claimed to reduce the amount of taxes owed.
  • Itemized deductions for businesses are the expenses incurred for the purpose of conducting business that you can claim; it ultimately reduces the amount of taxes the business owes.
  • Some examples of business expenses that can be claimed as deductions include office supplies, professional services, employee salaries, and car usage.

What Are Itemized Deductions?

A deduction, in general, is an expense that can be claimed on a tax return so the amount of income taxed is lowered, reducing the amount of tax owed. An itemized deduction is a particular expense (for example, real estate or property tax) that can be claimed as an expense for that specific tax year.

When you file your individual taxes using Form 1040, you have the option to claim either itemized deductions or the standard deduction, but you can’t claim both. The standard deduction starts at $12,400 for single taxpayers younger than 65 and increases depending on filing status and other factors. You can opt for itemized deductions if your expenses are more than your standard deduction amount.

For businesses, you can claim work-related expenses as itemized deductions, regardless of your individual filing status, and you can still claim the standard deduction.

Whether you’re a freelancer filing as a sole proprietor or a single-member limited liability company (LLC), you’ll need to file a separate form called a Schedule C to claim these deductions when you file your 1040.

Common Examples of Itemized Deductions

There are many different types of business expenses that can count as itemized deductions on your taxes. While this is not a comprehensive list, as there are many other expenses that may be deductible for your specific line of business, this list includes the most common deductions.

When claiming any deductions, you’ll need to have proof of the cost of these expenses, such as a receipt, invoice, bank statement, or a log. You should also document dates, times, destinations, and purpose for the expenses, as well as provide proof as to how the expenses apply to your business.

Audits can occur by random selection or can be triggered because of an issue. To be prepared in case of an audit, keep records of all expenses that could be requested. This includes receipts, statements, and logs, as well as employment documents, bills, legal documents, and other agreements.

Advertising and Marketing Fees

One common and often necessary expense a business might take on to grow is advertising. Advertising fees and marketing fees can quickly add up, but they can also be deducted when you file your taxes. Costs for advertising-related expenses such as social media ads or print ads can be deducted if these costs are directly related to the business and aim to help the business grow.

Business Insurance

Depending on your industry, you may have insurance expenses that can be deducted when taxes come around. Different industries might require different types of insurance, but generally, the cost of the premium paid for by the business can be deducted. Some examples of insurance premiums that may be deducted include liability insurance, credit insurance, vehicle insurance, medical insurance for employees, and insurance covering natural disasters.

Business Meals

Some business meals may be deducted if they were provided when conducting a business meeting. For example, if a sales consultant were to meet with a client, or a potential client, and provide a meal while presenting a business matter, this could count as a deduction.

Meals provided to workers in general may range from 50% to 100% deductions, depending on whether the owner was present and whether meals were reimbursed. Again, it’s important to keep receipts of the charges for the meal.

Car Usage

Using a vehicle for work-related tasks also can be included in your tax deductions. Car usage typically includes miles driven for work purposes. For the year 2021, the IRS set the rate for deductible costs for business purposes at 56 cents per mile. This is the amount that may be deducted for each mile driven. Drivers must accurately calculate and document the miles driven to and from their destinations that are work-related.

Businesses may also opt to deduct the actual car expenses rather than the standard mileage deduction. This includes overall costs of the car, such as maintenance fees, gas, insurance, repairs, and depreciation.

Depreciation

Depreciation occurs when an item gradually loses value due to use over time. For example, a computer that can continue to be used for work for more than a year can be claimed because it depreciates in value. Claiming a depreciation deduction means you won’t deduct the entire amount within that tax year, but you can deduct that amount in other tax years as you continue to use the item. These items can include vehicles, computers, office furniture, and equipment.

Home Office and Supplies

General office supplies used strictly for work purposes can also be deducted, whether you work at an office or at home. Examples include laptops, paper, books, and printers. Those who have set up a home office can also deduct a portion of the rent or mortgage used for the office. By calculating the square footage of the office space, a portion of the rent, utilities, insurance, or mortgage can be deducted.

Taxpayers can opt for the actual expenses of the portion used for business or can use the method that uses an estimate of $5 per square foot. The IRS requires the use of the home office to be exclusively for business purposes.

Internet and Phone Costs

Cellphone costs may be deducted for the portion used for business. If you are using your phone or internet for both personal and work use, make sure to deduct only the portion of the phone or internet used for work.

For example, if you use your phone for work only 50% of the time, you can deduct half of your phone-bill costs. A basic home phone or residential phone line cannot be deducted, but a second phone line at home used for business can be deducted.

Mortgage and Real Estate Taxes

Other taxes, such as mortgage and real estate taxes, may be deductible if the property is considered business property. The real estate taxes that are deductible are local, state, or foreign taxes imposed on real estate owned by the business. Mortgage interest also can be deducted, as previously mentioned, if business is conducted from home.

Professional Services

Costs for hiring professionals to assist with your business may also be deducted. This includes but is not limited to legal, bookkeeping, and tax preparation services. For example, if you hire a tax preparer to file your taxes, these fees may be deducted.

Salaries, Benefits, and Education

The salary paid to employees can be deducted as long as it is reasonable and paid for the work performed. Salary even includes sick and vacation pay for employees, but the business owner’s salary cannot be deducted. Work benefits are included, such as health insurance, company discounts, and education fees and reimbursements, as long as the education is relevant to your industry.

Education expenses can be deducted, even by the owner, if the coursework or degree is relevant to their field of work. Items that can be deducted include books, tuition, and travel costs.

Startup Expenses

Some expenses incurred when starting a business may be deductible, depending on whether your business gets off the ground. Capital expenses, which are considered assets of the business, are usually not deductible, although some may be depreciated. But if the business is not successful, the capital losses from the expenses paid in an effort to start the business may be deducted.

The Bottom Line

There are many ways to decrease the amount of tax your business owes. Staying organized and keeping track of your business expenses will make it easier when claiming deductions. Keep in mind that what’s listed here does not include all the deductions you can claim, as many businesses may have additional industry-specific expenses that can be deducted.

If you have concerns or questions regarding which costs are deductible, contact a tax professional for advice or assistance when filing your taxes.

Frequently Asked Questions (FAQs)

What can small businesses write off on taxes?

Small businesses can deduct any expenses directly related to their businesses. This can include basic costs such as office supplies, advertising costs, and insurance, as well as costs such as car usage and professional services related to a specific industry.

Can I write off my LLC as a tax deduction?

When forming an LLC, the startup expenses incurred are usually not deductible as they are considered capital expenses, which are then included as the assets of a business.

How much of your cellphone bill can you deduct?

You can deduct the portion of your cellphone bill that is used for business. For example, if your cellphone bill is $75 and you use your phone for business about 30% of the time, you can deduct $22.50.