What Are the Common Tax Deductions for Small Businesses?

What Are the Common Tax Deductions for Small Businesses?

For many people, it feels like 2021 only arrived last week! The year has flown by, and before long, we’ll arrive at tax season. In the coming months, people will start to focus more on saving on taxes. 

The same holds for businesses. If you run a small business, you’ll soon need to examine your records to determine how much you’ll owe in taxes. For many companies, this is a stressful season.

Fortunately, we have a way to make this time less strenuous. How, you ask? 

It’s simple. In this guide, we’ll break down the possible tax deductions for small businesses.

With these potential deductions, you can make filing taxes much more affordable. So, without further ado, let’s get started!

Inventory-Based Tax Deductions for Small Businesses

Some businesses run on an inventory model, meaning that they manufacture their products or purchase them for resale. This is a business model that most stores follow, ranging from retailers to antique shops. 

If you follow this business model, you can deduct your inventory price and the cost of your sold products. In general, you must value your inventory at the start and end of the tax year to determine the cost of your goods sold. 

So, what types of expenses go into determining the cost of your sold goods? Some of the following factors affect this:

  • The cost of products/raw materials
  • Storage
  • Factory overhead costs

However, not all businesses run on inventory models. In the sections below, we’ll examine broader categories of tax deductions.

Tax Tips for Businesses: Deducting Utilities

Did you know that you can deduct your business utilities from your taxes? Expenses such as your water, electricity, and telephone bills can all come off of your taxes. However, there are a few caveats. 

For example, if you run a business from your home, you may use a landline for work. Your initial landline does not qualify as a deductible fee. However, if you use any additional landlines, you can deduct these. 

Insurance and Paying Taxes

Most businesses take out some type of insurance, whether it be general, worker’s compensation, or liability policy. As it turns out, certain types of insurance policies are 100% tax-deductible. Some of these include:

  • Health insurance
  • Business continuation insurance
  • Business owner’s policy. 

While other policies may not be 100% deductible, you can deduct portions of their cost. Some examples of these include liability and worker’s compensation

If you run a small business, there’s another way that health insurance can help you. This type of insurance policy could qualify you for up to a 50% tax credit! To learn more, look into QSEHRA and its qualifications. 

Auto Expenses and Taxes

If you own a car for business reasons, you can typically deduct all associated costs from your taxes. However, you have to prove that the car serves a business function; you can’t try to pass your personal car off as a business expense. 

How do you prove that you use the car for business? There are a few things to do. 

First, you must have records that demonstrate your vehicle serves a work function. Additionally, you must keep track of your miles. 

If you use your car for both business and personal purposes, there is a way to use it as a deductible. To do so, you must divide your expenses based on your mileage.

How much of your driving is for business? When you find that figure, you can deduct the total amount of your business driving expenses.

Advertising and Marketing Expenses

If you can prove that the expenses come from your business, you can reclaim money spent on advertising and marketing purchases. These expenses could include money you spent on billboards, business cards, or other ads. 

You can also count your digital marketing and advertising expenses as tax-deductible. If you’re unsure how to do so, you can use tax preparation outsourcing to compile the information.

Business Entertainment

Do you ever have business meetings over a meal or an event? Maybe you’ve spent some time wining and dining clients or hosting an employee outing.

Activities like these can qualify for tax deductibles. However, not all of these expenses are deductible. You can only deduct meal costs for up to 50%. 

However, other types of meals could qualify as 100% deductible. An example of this would be a meal provided for an in-office party.

Travel Expenses

Do you have a job where you travel frequently? Maybe you have conferences across the country or meetings with investors. Whatever the case, travel expenses qualify as tax-deductible. 

Some of the travel expenses include airfare, tolls, lodging, or taxis. 

However, travel costs must meet some qualifications. The primary need is that your travel must be out of the city. To qualify for travel, you must also stay away from the city for longer than a standard workday. 

Contracted Workers

Increasingly, many businesses use contracted or freelancers to perform their work alongside employees. Contractors provide several advantages to a company, such as not paying them a full-time salary or benefits.  

Another benefit they offer you is that you can count their expenses as tax-deductible. In fact, the expenses you incur hiring these workers are 100% deductible. 

Remember, though, that you have a few obligations for this. First, you must issue a MISC-1099 form to any contract worker who made more than $600 in a given tax year. If you pay your contractor through a credit card or PayPal, the processor must issue the 1099-K form to workers. 

Start Saving on Taxes 

Tax deductions for small businesses come in several forms, including those listed in this article. By following these tax tips for businesses, you can save on taxes tremendously. So, don’t hesitate; start saving on taxes today!

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