6 Top Tax Write-Offs for Small Business Owners

February 3, 2015 / Reading: 6 minutes

Tax season is here. And while some Americans can get creative with their deductions, many small business owners overpay their taxes every year simply because they aren’t aware of the deductions available to them.

Claiming deductions can potentially save you a significant amount of money by reducing your taxable income so you pay less of your hard earned money to the government. But in order for an expense to be deductible, the IRS requires it to be:

  1. Ordinary: an expense that is common in your profession / industry.
  2. Necessary: an expense that is appropriate or helpful in developing or maintaining your business.

Chances are, most if not all of your business expenses fit the requirements above. So to help you reduce your tax burden, team Fundivo has compiled a list of deductions you won’t want to miss:

1. Business use of automobile

Being a small business owner, you probably find yourself having to use your car to visit clients or business partners, travel to meetings and attend tradeshows. In that case, you are able to deduct automobile expenses that are related to business activities.

There are two ways that you can use this deduction:

  1. Use your actual expenses: Deduct the business expenses related to your vehicle (e.g. Gas, Cas washes, Oil and tire changes).
  2. Use the standard mileage rate: Let’s say you had to use your car for 2,000 miles for business-related activities, then you need to multiply that by the IRS standard mileage rate (which for 2014 was 56 cents). Which equals a total deduction of $1,120.

2. Home office

If you are one of the many small business owners that run their business from home, you can take advantage of the Home Office deduction and deduct expenses for the business use of your home, whether you rent it or own it. Keep in mind however, that in order to be eligible for this deduction, the portion of your home that you use as your home office needs to be used regularly and exclusively for your business.

There are 2 methods to use when calculating your home office deduction amount, you may want to compare both versions to see which one gives you the most savings:

  1. Simplified method: Since 2013, the IRS allows for home office deduction of $5 per square foot, up to a maximum of 300 square feet ($1,500).
  2. Traditional method: This method requires figuring out the percentage of your home used for business. For example, if you house is 1500 square feet and your home office takes up 150 square feet of space, then your percentage is 10%. Once you figure out the percentage, you can then apply it to home-related expenses (e.g. Mortgage, Utility Bills, etc)

3. Insurance

Certain insurance premiums for small business are tax-deductible as long as they’re ordinary and necessary; which basically lets businesses write off part or the entire amount of insurance premiums.

Examples of what is deductible:

  • Coverage for losses resulting from unpaid debts.
  • Casualty and theft insurance.
  • Group hospitalization and medical insurance for employees, including long-term care insurance.
  • Professional liability or malpractice insurance.
  • Overhead insurance that covers long periods of disability caused by injury or sickness.

Examples of what is not deductible:

  • Life insurance where you are directly or indirectly the beneficiary.
  • Premiums paid on insurance to secure a loan for your business.
  • Business interruption insurance, which replaces business income lost as a result of an event that interrupts your business’ operations.

4. Interest

If you take out a loan to buy inventory or new equipment for your small business, you can deduct the interest that you paid on that loan during the year. In fact, most business-related interest payments can be deducted, whether it is for credit cards, line of credit, car loans or even a personal loan. The most important requirement is that it the money borrowed be strictly for business, in which case the interest would be considered a business expense.

Examples of what is deductible:

  • Loan for vehicle you use for your business.
  • For a working capital loan.
  • Loan to expand your business.
  • Money borrowed to buy inventory.
  • Credit card used for business purchases.

Let’s say for example that in 2014, you borrowed $150,000 to renovate your restaurant. You would be able to write off the interest amount that you paid in 2014 since the loan is for business purposes.

On the other hand however, if you take out a loan to buy a car that is used both for business and personal reasons, you will not be able to deduct part of the interest payments on that loan.

Examples of what is not deductible:

  • Loans used for personal purposes (e.g. wedding or a vacation).
  • Debts your business doesn’t owe.
  • Interest on overdue taxes.
  • Loans used to pay taxes.
  • Money borrowed to fund retirement plans.

5. Professional services

Fees for professional services like accountants or attorney are deductible, as long as they are directly related to your business. For example, if you contracted a licensed professional to complete your business’ formation documents; the fee you paid can be tax deductible. Which is why you should always ask for an itemized bill showing the cost for the professional services rendered.

Examples of what is deductible:

  • Tax preparation
  • Legal services
  • Bookkeeping and Accountant fee
  • Professional consultants’ fees

However, If you buy another business, the fees paid for professional services may not be deducted. Instead, they are added to the tax basis (or cost) of your business.

6. Employee compensation

If you have employees, you probably know that you can claim a business expense deduction for the wages and salaries that you pay them. But what you may not be aware of is that businesses can deduct other employee-related expenses like paid holidays and sick leave. In addition, if you reimburse your employees for work-related expenses such as business use of a personal vehicle or travel, you can receive tax deductions on that well, helping you reduce your tax bill.

Examples of what is deductible:

  • Employee salaries, awards and bonuses
  • Sales commissions
  • Sick leave and vacation pay
  • Health insurance
  • Tuition reimbursement
  • Group-term life insurance (up to $50,000)
  • Travel, meals and lodging
  • Discounts on goods or services

You should note that compensation paid to business owners may be come under scrutiny by the IRS. As such, if you are an Owner-employee, the compensation paid to you should not be unreasonably high.

DISCLAIMER : While the information in this article is derived from sources believed to be accurate, it is not intended as tax or legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. It is always best to check with the IRS and see what their current rules and options are.