Tax time is just around the corner, so you should pay special attention to how to maximize all the deductions you can for your small business. You should think about tax time year-round, though, because you should always keep detailed records of business expenses. Not only will this help you stay accurate with the Internal Revenue Service, but it will also give you a better handle on your business expenses for your financial planning.
1. Keep Your Records
Before you start thinking about how to maximize your business tax deduction, you first need to organize your documents and record every expense related to your business. The IRS wants detailed records to support every deduction you take. While it might not seem so serious when you are filing, these records will become critical if you are ever audited.
2. Business Mileage
Keeping track of your business mileage is one of the most beneficial ways to maximize your deductions come tax time. You can either deduct your annual fuel and car maintenance costs or take the standard mileage deduction offered by the IRS. For the 2019 tax year, the IRS set the standard mileage rate at 58 cents per mile driven for business use. The latter is probably the better option, especially if you use your vehicle often for work. You can also deduct expenses like tolls or parking fees.
Keep records of your mileage throughout the year, noting the mileage of each trip as well as the business purpose of the trip. Importantly, you can’t deduct mileage for personal use of your car, including commuting to and from a workplace.
3. Employee Salaries and Wages
The IRS allows businesses to deduct payments to employees, which includes salaries, wages, bonuses, commissions, and some fringe benefits. Employee benefit programs, like dependent care assistance, can be deducted, as well as contributions to qualifying employee retirement plan accounts.
Depending on how your business is structured with the IRS, you might be able to deduct your salary. However, if you are a sole proprietor, you cannot deduct your income. Check with your accountant about how you should go about this.
This deduction does not include payments to other corporations, freelancers, or contractors, which can be deducted but under a different category.
4. Contract Labor
If you have any 1099 laborers, you cannot deduct these payments as wages because the IRS does not consider them your salaried employees. If you pay any independent contractor more than $600 in one year, make sure to issue them a 1099-MISC so that the IRS has a record for the sake of both of your taxes.
Since employee salaries and payment to freelancers can add up to a huge portion of your business’s yearly cash outflows, you want to make sure this is all categorized correctly so that you can maximize your business tax deductions.
5. Business Equipment and Supplies
You can deduct the cost of all your business equipment and supplies bought during the year, including vehicles. Keep receipts of everything you bought for your business, including cleaning supplies. You can also deduct depreciation costs for lots of business equipment, including computers, machinery, and even office furniture or livestock. Consult with a tax professional or tax software program to calculate equipment depreciation costs over the years.
6. Rent on Business Property
Rent for business property is fully deductible—including rent for an office, co-working space, storefront, boutique, factory, or any other business facility. Your utilities are also deductible, including electricity, water, and telephone costs.
7. Home Office
The business property rental deduction even applies to your home office, but extra rules are in place because you can’t just deduct your apartment rent or home mortgage payments as a business expense. If you have a home office or other area of your home used regularly and exclusively as a business area—such as a room where you meet clients—calculate what percentage this area takes up of your home. This percentage of your rent or mortgage is deductible as a business expense.
Note that the IRS requires you to use a home office for business only, not for personal use…ever. Even if you are deducting the corner of your dining room table as a home office, you have to be able to show you use this corner only for business.
With the exception of health insurance, almost all forms of business insurance costs are fully deductible, including flood insurance, business continuation insurance, and malpractice coverage.
You can deduct health coverage, but there are more regulations at play. Small businesses can actually receive a tax credit, which is better than a deduction, for up to half of the health insurance premiums paid for employees. If you are self-employed, your health insurance premiums are not business deductions. Instead, you have to take them as deductions on your personal taxes.