Did you know that farmers can add breeding cows as a depreciating expense on their business taxes? An ostrich farmer once successfully claimed his ostrich as a depreciating expense! If you are a business owner, you likely already know about business deductions and how they benefit you. However, there are many overlooked deductions that you may be missing out on. Ensuring all deductions are taken advantage of helps business owners maximize their tax savings.
Ordinary and Necessary
The IRS has rules that determine whether business deductions are eligible. Taxpayers should ensure that all their deductions are “ordinary and necessary” for the type of company they are operating. This means that all expenses must be relative to the business and are incurred to facilitate positive outcomes or growth. Remember that without these expenses your business either would not be running today or would not be successful, so keep that in mind when you are considering the application of certain expenses as business deductions. Here are examples of typical business deductions.
Startup expenses
The foundation of your business often requires a big personal investment. Startup costs are not technically a tax deduction, but they are considered a capital expense. These expenses occur on the take-off stage of your business.
Legal and Professional fees
Did you know that professional help acquired externally of your business can be deducted? While starting a new business, you seek legal or financial advice. This can be written off as a deduction. This includes accounting! For this reason, you should not skip out on hiring a professional accountant to ensure the accuracy of your financial records and tax filings.
Advertising
Marketing is an essential aspect to many businesses. Without proper platforms, the business will see little traffic and it will be difficult to expand the business. All the expenses you spend on acquiring advertising and promotional services related to your business count as a deduction for your business taxes.
Educational Expenses
Often, while you are learning to start a business, there will be education available to you so that you can further your knowledge within the subject of your work. Webinars and education are included in your taxes as a business deduction and can be very helpful to utilize for the business owner! Some businesses even have the option to provide external training for their staff in subjects related to the business. The expenses acquired for your staff members education, in relation to the business, can also be deducted.
Equipment
What machinery and software are needed for your business? Computers, printers, and even sewing machines can be written off on your business taxes. This, of course still means that the expense must be in direct relation to the operation of your business. Any equipment that is
purchased for use in your business is an applicable deduction.
Office Supplies
Office supplies like pens, papers, ink, and staplers are another form of ordinary business deduction.
Depreciation
All the equipment you buy are assets to the business. New equipment costing under 2,500 dollars can be fully expensed in the year it was purchased. New equipment that costs over 2,500 dollars should be depreciated over a 5–7 year life span. Current tax law allows 100% depreciation for any assets with a life span of 20 years or less.
Insurance
There are a few types of insurance that may be needed for your business. These can be deducted on your business taxes. Health insurance, business insurance, workers compensation costs, life insurance and rental property insurance are some examples that qualify.
Interest credit
If you pay credit card or loan interest due to the purchase of business equipment and other business-related expenses, those can be written off on your business taxes. These purchases must follow the ordinary and necessary rule, but generally, all that interest can be deducted.
Other deductions
There are many other qualified deductions that business owners are unaware of or usually lean away from adding to their business taxes. This can be for several reasons, but the main one usually being their lack of knowledge on the subject. As a quick reminder however, being frugal with your write offs is important. Once again, these expenses must contribute to the business directly.
Home office
The cost of space used for your business that you regularly use can be written off. This includes an office that you use within your home that you own or rent.
Office furniture
Whether you are buying a desk for your home office or your office in a rented space, you may add this into your business tax deductions. Anything that you purchase for the interior of your workspace counts as furniture excluding the equipment and software.
Internet and phone
Your business will most likely require you to use internet service, have a business phone line, and use your personal cell phone. These expenses qualify towards your business deductions. If you use your personal cellphone and internet for business purposes, the percent of business use qualifies as an applicable tax deduction.
Utilities
If you rent a building, not only is the rent deductible, but also the cost of utilities. This would be easy to understand, but what about when you are working from home? In this case, an allocable percentage of utility cost can be deducted as a business expense.
Travel
Some businesses have direct travel expenses that qualify as business tax deductions. When traveling outside of your normal working locality for business purposes, expenses incurred on these trips are deductible. Expenses such as lodging, meals, air fare and taxis or ride shares can be written off.
Meals and entertainment
Costs incurred for business related food and beverage purchases from restaurants are tax deductible. Normally businesses can receive a deduction in the amount of 50% of their cost of meals. Due to the Covid-19 pandemic and its negative effect on restaurant businesses, for tax years 2021 and 2022, businesses are allowed to deduct 100% of their meal cost.
Energy efficiency
Currently, businesses that use qualified energy efficient equipment, can receive tax deductions and credits for the cost of the equipment and installation. These generally cost money to keep maintained as well, so that’s an additional deduction that should be considered. Going green can be the basis of some business success and it’s comforting to know that this that there are tax benefits too.
How do I qualify a business expense?
The IRS says, “an ordinary expense is one that is common and accepted in your industry, a necessary expense is one that is helpful and appropriate for your trade or business.” Costs of goods sold, operating expenses, overhead expenses, and capital expenditures make up the entirety of your business deductions. To make sure that you are correctly accounting for all your business deductions, speak with an accountant. They will be able to provide you with clarity about your business financial situation.
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