Whether you’re a long-time small business owner, or one who’s filing as self-employed for the first time, now’s a great time to review the tax deductions you could qualify for when you file your returns. Tax laws change from year to year, and changes within your company over the past year could change your eligibility for given deductions.
Check the following suggestions and run them by your accountant, as the penalties for incorrectly claiming a deduction – unintentionally or otherwise – can be severe. In 2014, the IRS assessed “$2.1 billion in civil penalties against business income tax filers.” Protect yourself, but don’t leave money on the table either.
Here are ten small business deductions that go beyond the obvious examples, such as office supplies or advertising expenses.
1. Startup Costs
Did you know you might be able to deduct costs incurred for launching a new business before you actually formed it? According to SCORE:
“Along with travel costs and consultant fees, other examples include: expert fees such as a CPA or attorney, meals and entertainment for meetings, mileage expenses and vehicle tolls. State fees for establishing the business entity and franchise fees should also be considered.”
This is just one of the many reasons proactive business accounting and expense reporting are critical for new entrepreneurs. Get in the habit of proper financial management by tracking any investments you make in researching your future business.
2. Business Mileage
If you operate a business vehicle – for example, as part of a construction or landscaping fleet – you can generally deduct the full expenses associated with purchasing, running and maintaining it.
However, even if you use your personal vehicle for business purposes, you may be able to deduct mileage for any work-specific trips. The IRS’s Publication 463 has the full details, while another document gives the Standard Mileage Rates to use in calculating your deductions.
As a note, you typically can’t use this deduction to expense trips to and from your office. However, if you’re traveling to a specific destination (say, a client’s office) exclusively for business purposes, you should qualify. Keep your mileage records up-to-date throughout the year to make life easier.
3. Magazine Subscriptions
Whether you read them or plan to use them as waiting room or lounge materials, magazine subscriptions can often be deducted as a business expense. The only requirement is that they be used for your business – People magazines delivered to your home that you occasionally remember to bring into the office don’t count.
4. Clients Who Don’t Pay
If you have clients who aren’t able to pay, their losses may be deductible as bad debts. Megan Sullivan, writing for Quickbooks, offers three examples of expensable bad debts, including “loans to clients and suppliers, credit sales to customers, and business loan guarantees.”
Writing off a loss as a tax deduction isn’t the same as receiving full payment, but it certainly takes some of the sting out of the situation. Your accountant can help you determine whether or not your clients’ bad debts can be deducted, or you can find more information in the IRS Tax Topic 453 document.
5. Interest on Business Debt
If you get a business loan or credit card, or if you use a personal loan or credit card to finance business purchases, you may be able to deduct any interest the financier charges you. If your financier doesn’t issue an annual statement detailing interest charges, you can typically find the amount billed on your monthly or quarterly statements.
A word of caution, though. If you’re using personal financing for business purchases, keep impeccable records of how the funds were spent if you plan to deduct the interest on them. The last thing your small business needs is a penalty due to improper deductions.
6. Coworking Space Fees
If you rent an office, you can deduct most of the expenses associated with running it. If you use a home office, that space is deductible as well, including a proportionate percentage of your real estate taxes, utilities and other home maintenance expenses.
But if you use a coworking space as a place of business – essentially, a happy medium between the two examples above – your usage fees may be tax-deductible as well. Make sure to get a purchase receipt stating where the expenses originated; your accountant can make the determination from there.
7. Payment Processing Fees
If your business accepts money using services like Paypal or Stripe, you know how frustrating it can be to see a chunk taken out when you’re paid for goods or services. Well, good news – these fees themselves may be deducted as a business service expense.
8. Utilities and Cell Service
If you claim a home office deduction, you’ll calculate the square footage of your business space relative to the size of your house. Once this percent usage is determined, you may be able to apply it to your utility bills, real estate taxes, repair/maintenance costs and more (after all, a portion of these bills went to keeping your business space operational).
In a similar way, using your personal cell phone for business calls may entitle you to claim a portion of these expenses as a deduction. Be aware, however, that in all of these cases, you’ll want to keep meticulous records, should you be audited. Robert Wood, writing for Forbes, gives the following caution:
“If you don’t have a solid home office claim with good records, don’t claim it. If your money-losing sole proprietorship is really just a hobby, treat it as such.”
9. Retirement Contributions
Going self-employed doesn’t have to mean giving up the benefit of tax-free retirement savings that you enjoyed with a former employer’s 401(k) or 403(b) account. You can still take advantage of them – and, in fact, you may have even more tax-saving opportunities as a solo worker or business owner.
Forbes contributor Kerry Hannon summarizes the three main options as follows:
- SEP-IRA, into which you can contribute up to 25% of your net self-employment income, up to a maximum of $53,000 for the 2016 tax year.
- Solo 401(k), where you can stash up to $18,000, as well as 25% of your income up to a limit of $53,000 ($59,000 if you’re over age 50).
- SIMPLE IRA, where you can contribute up to $12,500 pre-tax ($15,500 if you’re over age 50).
Don’t choose your retirement plan based on these numbers alone. There are a number of other considerations to take into account, including the way each plan handles employee eligibility and contributions. Do, however, put something in place. The tax savings can be substantial.
10. Hiring a Veteran
Technically, this is a credit, not a deduction, but if your business hired a veteran this year, the Work Opportunity Tax Credit may grant you incentives of up to $5,600 for hiring unemployed veterans and up to $9,600 for hiring unemployed vets with service-related disabilities. More details on claiming this credit can be found here.
The bottom line? Keep great records and work with a qualified accountant to file your taxes. This list is just the start. You won’t know what deductions you’re missing until you talk to a professional.
This article was written by Sujan Patel from Forbes and was legally licensed through the NewsCred publisher network.