Taxes are a fact of life for all businesses, but some small business owners are better off than others. If you know what to look for when preparing your taxes, you may reduce your tax bill by taking advantage of certain deductions. Still, trying to figure out where to start? Here are four common types of small business tax deductions that could help ease the burden of filing taxes as an independent contractor or self-employed person:
If you use a portion of your home exclusively for business, you can deduct the expenses related to that space. This includes the cost of decorating or remodeling to make your work area easier and more efficient. You can also claim depreciation on equipment used for business purposes in your home office; however, intangible assets like licenses and patents do not qualify for a deduction.
The IRS has specific rules about how much square footage must be used as a home office before deductions are allowed:
- The primary purpose of the room(s) must be to conduct business activities
- The space must be used exclusively (or at least regularly) when conducting these activities
You can deduct the cost of business use of your car, van, pickup truck or SUV. If you lease a vehicle from someone other than an employer, you generally must capitalize the lease payments and depreciate them. However, those payments are deductible as a current expense if you own the vehicle and finance it.
Vehicle use includes parking fees and tolls (but not bridge tolls). You also may claim depreciation costs for your vehicle if it’s used for business purposes for more than 50% of its total annual mileage.
Advertising and promotion costs are another business tax deduction that you can claim based on the nature of your business. These expenses may be deductible if you advertise or promote your brand, product or service. However, certain restrictions are in place to ensure that personal image promotions aren’t eligible for tax deductions.
What exactly is an allowable advertising and promotion expense? An advertisement doesn’t have to be sophisticated or expensive to qualify as a deduction—it just needs to:
- promote your goods and services;
- be directed towards potential customers; and
- lead directly to sales revenue.
Travel expenses are a deduction if you have to travel more than 50 miles from your home. You can deduct the cost of travel and lodging, as well as some meal costs. You can also include car expenses such as mileage and parking fees.
Travel Expenses are allowed if:
- You had to use your car for work-related activities, or
- The trip was overnight (with no sleep time at home), or
- You were away from home on an overnight trip that included business meals or entertainment
Lanter by SoFi advisors have to say, “Many types of qualified business expenses are specifically addressed on the tax return.”
Hopefully, this post has given you a better understanding of the different types of tax deductions available to small businesses. As discussed in the article, there are many ways for entrepreneurs to save money on their taxes and lower their tax bills. So it’s important to know what these items are because you need to take advantage of them now to claim them again in the future!