Top 5 Deductions for Small Business

Small businesses should not ignore relevant tax deductions.  Tax deductions help businesses lower their taxable income.

However, tax deductions differ according to how a business is structured. A sole proprietorship will have different tax deductions than an S corporation or a partnership, even if the differences are marginal.

According to the IRS website, tax deductions are subtracted from the income before calculating the taxes owed.

Following are the top five deductions that are applicable to a small business.

1. Start Up Expenses

This deduction accounts for the expenses associated with starting a business, including office space, supplies, tools and equipment. These costs may be categorized as organizational costs and are applicable for up to a year after the business launches.

2. Travel Costs

Travel costs are tax-deductible if a vehicle has been utilized for business transportation purposes. The deduction applies to fuel and vehicle maintenance. To apply this deduction, maintenance and repair receipts, proof of fuel purchases, etc. are required. The deduction may be calculated a few different ways:

Actual expenses: Costs are calculated based on the actual expenses made on fuel and repair and maintenance work. This is also applicable to the depreciation expenses on the vehicle.

Standard mileage rate: Costs are calculated as a fixed or standard amount for each mile that the vehicle has driven. Parking fees can also be included in this method.

In the case of business-related travel including hotel stay and airfare, deductions claimed need to be substantiated, including information about when and where the expenses were incurred. Hotel stays and airfare are 100% deductible while meal costs are 50% deductible.

3. Home Office Deductions

Home office deductions are available when an area within the home is used exclusively for the purpose of carrying out business. Here are some details:

• Deduction can be claimed on an area of up to 300 square feet
• A standard deduction per square foot is applicable
• In the time-period of availing of this deduction, home deduction depreciation will not be valid

4. Wages and Employee Pay

For small businesses, deductions are also granted for the wages paid to employees. Furthermore, a start-up may hire contract employees. The cost of contract manpower is a deductible expense for a business. If you are deducting the cost of contract manpower, make sure you are issuing the Form 1099-MISC.

5. Health Insurance Premiums

Sometimes, businesses can be penalized for not providing employees with health insurance.  Fortunately, premiums paid on health insurance are deductible. This deduction is valid whether the policy is in the name of the business or the business owner. In order to claim this deduction, the business needs to pay the premium for the employee and their dependents.

Maximize Your Deductions

While the deductions listed above are illustrative of those applicable to a business, in order to optimize available deductions, it is best for a business to talk to a professional who understands tax laws well enough to advise the business best.

Furthermore, remember, timing is everything when it comes to tax filings. The earlier a business takes stock of tax liabilities and deductions, the easier it is to benefit from them.

Analytix Solutions offers customized solutions for companies ranging from accounting and bookkeeping to more complex requirements. For more information on how we can assist your business, call us at 781-503-9004 or email us at sales@analytix.com.

Written by

Analytix Editorial Team