There is no shortage of tax tips for small business owners, but some of the best deductions are easy to overlook, and it's not always easy to know which ones will save you cash when it's time to file a tax return. On this page, we'll provide you with some talking points to help you get the most out of a discussion with your tax professional and a list of the top ten small business tax deductions to keep in mind if you're handling your own taxes.
Money-Saving Tax Tip #1: Discuss These Points with Your Tax Professional
Does your business qualify for different tax treatments?
Most companies are considered "pass-through" or "flow-through" entities. Unlike C- corporations, which pay entity-level tax or corporate income tax, pass-through companies' owners pay taxes on business income themselves. In these cases, 20 percent of qualified business income can usually be deducted, but the amount may vary based on industry and income. If your business fits certain criteria, it may be better to change your status to a C corporation to reduce tax liabilities.
Are there creative ways to pay taxes you can try?
If you wait until April to pay, you may wind up carrying a burden by having a large sum to pay or have interest and penalties to pay on top of your tax liabilities. That's not only expensive but can strangle your business cash flow too. There may be benefits to making more frequent payments or even using a line of credit to pay your taxes. However, it's wholly situation-specific, so it's a good idea to get a professional's advice on this one.
Should you have a retirement savings plan?
Employer-sponsored retirement plans are often tax-deductible, and sometimes tax credits are given to help make setting them up more affordable. Plus, you can often contribute to them up until the tax deadline in April and have the amount qualify toward the prior tax year. However, the rules regarding this are complex, which is why it's helpful to discuss this with a tax professional. These are examples of plans that typically qualify:
- SIMPLE IRA
- SEP IRA
- Profit-sharing plans
Can you take advantage of larger deductions for equipment?
Businesses have historically been forced to spread the depreciation of business assets like equipment over a period of years. Newer tax laws designed to help small-business owners now allow you more opportunity to deduct the full amount the year the equipment starts being used. It's not always a straightforward decision whether to deduct the full amount on year-one or spread it out, so talking to a tax professional about this is helpful. Additional details on how the depreciation deductions work are also provided in item four on the list of small business tax deductions below.
Should you defer expenses and accelerate income—or vice versa?
Suppose your business is experiencing a year with low profits and anticipates a year with much higher profits ahead. In that case, it can be advantageous to accelerate your income in the slow year and deduct additional expenses the following year when they stand to provide greater benefit. This was arguably the case for most businesses impacted by COVID-19 in 2020, as sluggish sales due to the pandemic reduced annual revenue.
When should you pay back payroll taxes?
Businesses were allowed to defer paying their share of Social Security taxes incurred from March 27, 2020, through the end of the year under the Cares Act. If your business took advantage of this, you'd be responsible for repaying half the balance by the end of 2021 and any remaining balance by the end of 2022. Check with your advisor on the best way to pay this balance off, so you can avoid any potential penalties while maximizing the cash kept on hand.
What expenses can you write off for a small business?
The IRS allows you to write off almost any small business expense that's "ordinary and necessary." A breakdown of some of the most popular tax deductions, including often-overlooked examples, is provided below.
Money-Saving Tax Tip #2: Take Advantage of These Top 10 Small Business Tax Deductions
Tax deductions are expenses you can write off, so they don't count toward your taxable income. When your taxable income is lower, you pay less in taxes, so it's worthwhile to maximize your deductions. The deductions outlined below are commonly leveraged by sole proprietors, limited liability companies (LLCs), and businesses organized as partnerships. It's a good starting point, but it's always wise to connect with a tax professional who can provide you with information specific to your small business if you have questions.
1. Advertising and promotion
Most people think of traditional forms of advertising, such as radio or print ads, when looking at their tax deduction options. However, it's so much broader than that, and you may be engaging in "advertising" without realizing that's what you're doing. A few examples:
- Building a website
- Advertising online
- Running social media campaigns
- Having a logo designed
- Printing business cards
- Sending cards to your customers
- Sponsoring a non-political event
2. Business insurance
Whether your insurance is mandated by law or it's something you picked up out of an abundance of caution, it can often be deducted. Consider deducting:
- General liability insurance
- Professional liability/ malpractice insurance
- Property insurance (office/ structure, equipment)
- Auto insurance for company vehicles
- Business interruption insurance
- Workers comp insurance
- Employee health, dental, and vision coverage
- Employee life insurance (as long as you're not the beneficiary)
3. Bank fees
The term "bank fees" is a bit of a misnomer, as fees from just about any type of financial institution can be deducted from your small business taxes. That includes banks, credit unions, third-party payment processors, such as PayPal, Square, or Stripe, and factoring companies like Viva.
- Monthly service charges
- Transfer fees
- Overdraft charges
- Merchant/purchase fees
- Factoring fees
Traditional Depreciation: While the ability to write off depreciation is nothing new, how it works has changed over the years. It used to be that you could only write off the depreciation of business assets over a period of years. For example, the depreciation value of things like tractors and manufacturing tools is written off over a three-year period. Depreciation of office equipment, computers, cars, and light trucks is written off over five years. With that in mind, if your business purchased office equipment for $100,000, you could write off only $20,000 the year it was purchased, and the same deduction would apply for the next four years.
De Minimis Safe Harbor Election: However, it's inefficient to break down depreciation costs for assets of little value over a period of many years, so the IRS created the de minimis safe harbor election. This allows businesses to deduct items less than $2,500 the year they go into service. The amount increases to $5,000 if an invoice substantiates the item.
Section 179: Then, IRS Section 179 built upon this. In many cases, small-business owners can now deduct the full amount the first year, up to one million dollars, provided the expense doesn't result in a net operating loss for the business that year. However, any remaining depreciation expenses can be deducted the following year in these situations.
Bonus Depreciation: Often used in conjunction with 179, bonus depreciation allows businesses to deduct depreciation even if it results in a net operating loss for the year. Before the Tax Cuts and Jobs Act of 2017, up to 50 percent of the item's value could be deducted. Now, 100 percent of the expense can be deducted. However, the amount will begin to reduce by 20 percent annually starting in 2023.
Interest related to business loans, lines of credit, and credit cards can be deducted. The only real caveat here is that you must have a formal relationship with your lender. In other words, you can't write off interest from money being gifted to you, nor can you write off interest if the loan is in another party's name or interest from informal loans, such as those provided by family and friends.
6. Legal and professional fees
If you work with any professional service providers for business purposes, chances are those expenses can be deducted too. However, it's important to note that if you work with the same provider for both personal and business reasons, only the business expenses can be deducted. For example, if you hire a bookkeeper to get your business finances in order, but you also have your bookkeeper pay your personal expenses too, you can only deduct the fees related to their work with your business. Common examples of professional service providers include:
- Tax specialists/ preparers
- Bookkeepers/ bookkeeping services
7. Salaries and benefits
All sorts of employee-related expenses can be deducted, provided the person on the receiving end is not the sole proprietor, partner, or LLC member. The IRS will also consider whether the services were actually provided and any expenses are "ordinary and necessary."
- Disability benefits
- Vacation time
- HSA contributions
- Cafeteria plans (IRS Section 125)
- Employee Assistance Programs
- Insurance (see item #2 on this list)
- Fringe benefits (items typically under $25)
- Bonuses and awards
8. Telephone and internet expenses
As long as your phone and internet expenses are used exclusively for business, it is considered a home office deduction, allowing you to deduct 100 percent of the cost from your business taxes, even if those lines are installed in your home. However, if you're using the services for personal and business reasons, you can only deduct the bill's portion that applies to your company.
9. Travel expenses
For travel expenses to qualify for deductions, you must be leaving your city or geographic region—far enough away that you'll need to sleep or rest while you're gone. If you're traveling close to home, you can still deduct for business travel use of your car using the standard mileage rate or actual expense method, but you won't qualify for other traditional travel expenses. Some examples of these include:
- Hard travel costs (car, bus, plane, or train expenses)
- Baggage fees and shipping of business-related materials to your destination
- Parking and toll fees
- Taxis, ride-sharing, and other on-location transportation costs
- Dry cleaning during the trip
- Business calls
- Other similar "ordinary and necessary" expenses
Provided your educational expenses increase your expertise and add value to your current business, you can deduct these expenses too. Examples of educational expenses that can be deducted include:
- Subscription to professional or trade publications
- Industry-specific books
- Travel expenses related to your education
Money-Saving Tax Tip #3: Get Started on Next Year's Tax Planning
Once the year ends, there's often very little you can do to reduce your tax liabilities. Moreover, changes to tax laws, how pass-through companies are handled, and new liabilities stemming from deferred payroll taxes are sure to present both new challenges and opportunities going forward. With this in mind, it's a good idea to take stock of the latest updates and identify which, if any, changes your business needs to make to minimize tax liabilities for the upcoming year.
Money-Saving Tax Tip #4: Accelerate Your Business Cash Flow with Viva
Accelerating cash flow when revenue is down and saving deductions for the upcoming year can help your business thrive at tax time. As a leading invoice factoring company, Viva helps small businesses do just this every day. Because factoring fees can be deducted from your taxes too, it's also a cost-effective way to boost cash flow. Click here to learn more about how factoring works.