Small-business deductions can lower your business's tax liability, which can ultimately mean you owe fewer taxes, but it's up to you (or the financial experts you rely on) to know which ones apply to your business in a given tax year.
Being aware of the various categories of deductions is a good start. As you start to assemble your documents this year, keep these major deduction categories in mind:
Brand-new businesses can reap deductions from many aspects of starting up. The IRS has a few rules for what types of start-up costs qualify: You must have incurred the expense before you opened your business, and it must be an expense that would have been eligible for a deduction had the business been up and running.
Note that buying certain types of business equipment is not deductible, so be careful to parse which purchases may or may not qualify.
SCORE, the nonprofit small business mentoring group, adds that you can also deduct expenses that are related to opening a business, such as wages you paid to train your staff prior to opening, or marketing and advertising efforts to promote your business before it officially launched.
Costs Related to Running Your Business
Some operating costs, like rent and utility payments for your business space, insurance premiums or even office supplies, may be deductible. Equipment you purchase to run your business, on the other hand (such as machinery to produce the goods or services you sell), can offer some tax advantages, but it may not technically be deductible.
The IRS requires some equipment expenses to be capitalized, which is a method of deducting certain capital costs over a fixed period of time, beginning when the item is placed in service. You can learn more about how to appropriately report these expenses on your tax return at the IRS website.
If your business vehicle needs repairs, for example, the IRS says those expenses are deductible. However, it's important to understand what does or doesn't qualify. The money you may pay to recondition and overhaul a business vehicle is considered a capital expense; it isn't deductible.
Business Use of Your Home
The IRS allows business owners who use part of their home "exclusively and regularly" to conduct business to deduct some expenses related to mortgage interest, insurance, utilities, repairs and depreciation.
To qualify for the deduction, the IRS requires that the business part of your home be either a principal place of business or a separate structure (not attached to the home) that's used in connection with the business. This may include a workshop or an unattached garage that you use as your business's warehouse. And, keep in mind that "exclusively" means the space can only be used for business — if your office doubles as a family area, for instance, you likely would not be able to consider it a home office for tax purposes.
Business Travel, Entertainment and Other Items
Transportation and lodging costs may be deductible if you travel for business, along with expenses for parking and tolls on a business trip. Treat clients to meals or business-related entertainment, and those expenses may qualify for a deduction, too. You may also deduct the fees you pay to credit bureaus, your bank, or consultants you hire, in addition to the fees you pay to belong to industry groups.
There are many opportunities to take small-business deductions. However, it's important to ensure that any expenses you claim are legitimate based on the accounting method your business uses, and supported by receipts and similar documentation.
To learn more about small-business deductions, consult Internal Revenue Service publications, connect with reputable small-business associations like the U.S. Small Business Administration or SCORE, or a financial professional who specializes in small-business accounting.