12 Essential Tax Write-Offs for Small Businesses

Imagine this: you're at the end of the fiscal year, analysing your small business finances, and wondering how you could save money on taxes.

Tax write-offs are an essential part of a strategic approach to reduce taxable income. 

Many business expenses—from advertising to utilities—can qualify as tax-deductible, which eventually lowers your overall tax liability.

Every dollar saved through deductions can be reinvested into your business, contributing to its growth and sustainability.

With continuous changes in tax laws, staying informed can be challenging but rewarding. This article will help you understand how to navigate tax write-offs properly.

Let's get to it!

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What Is a Tax Deduction?

Think of a tax deduction as any legitimate expense that significantly contributes to the operation of your business. During tax calculations, these can be subtracted from your income to arrive at a lower taxable income. There is quite a broad range of deductions, so everything from office rent to employee health insurance premiums can be deducted.

The Internal Revenue Service (IRS) stipulates specific rules and regulations governing tax deductions for small businesses.

Each deductible comes with its own set of criteria, and not all expenses will qualify. Proper documentation and accurate record-keeping are imperative to validate the expenses should the IRS request evidence. 

Also read: Start filing form 1120

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12 Small Business Tax Deductions

Here is an extensive list of common deductions that you should consider when preparing your tax filings.

Advertising and Promotion

Advertising and promotional expenses, including designing a logo, printing business cards, buying ad space, mailing cards, creating a website, or sponsoring events, are fully tax-deductible.

However, costs associated with lobbying or supporting political campaigns or events are not deductible.

Also, ensure that the expenses are directly related to the business and aimed at drawing revenue or promoting your brand.

Bank Fees

Bank fees you incur from your business bank accounts are deductible. This includes maintenance fees, overdraft charges, and transaction fees. Keep in mind that penalties or fines for late payments are not deductible. 

To properly claim this deduction, ensure that you keep a separate business bank account to track and justify the charges as legitimate business expenses easily. 

For credit card transactions, the fees charged by the credit card company are also deductible.

Business Meals

Meals with clients, associates, or employees can qualify for deductions as long as they are directly associated with the business and you're present. 

You can generally deduct 50% of the meal expense, but exceptions exist, like office parties, which may be fully deductible. 

Keep your receipt and a note of the business purpose for each meal to ensure you have the necessary proof for such deductions during tax time.

Business Insurance

Business insurance premiums are often overlooked, yet they are essential and tax-deductible. 

This includes coverage for property, liability, and even employees' health care. To qualify, the insurance must be deemed ordinary and necessary for your type of business. 

Keep thorough records and receipts to substantiate these expenses, as proper documentation is critical. 

The types of insurance that are deducted must be clearly for business purposes, not personal insurance plans or policies.

Business Use of Your Car

When you use your personal vehicle for business-related activities, you're entitled to claim deductions for that usage. This can include trips to meet with clients, purchase supplies, or attend business meetings. 

There are two methods to calculate this deduction: the standard mileage rate, which is the simplest, and the actual expense method, which requires detailed records of all car-related expenses. 

It's important to track the business's use diligently for accurate reporting. 

Always remember the distinction between personal and business use.

Contract Labour

Many small businesses use freelancers or independent contractors to handle specific tasks or projects. The money paid to these individuals is a deductible business expense. Ensure you issue Form 1099-NEC to anyone you pay $600 or more during the tax year. Maintaining records of payments and contracts is vital. However, be cautious to correctly classify workers to avoid misclassification issues, which can lead to penalties. Only the amounts paid for directly work-related tasks are eligible for deduction.

Depreciation

When you buy business assets like furniture or equipment, you don't have to absorb the cost all at once.

Instead, tax regulations allow you to spread the expense over the asset's useful life. 

However, claiming the entire cost immediately can be more appealing due to the immediate tax relief it offers.

The IRS provides several options for deducting the total cost in the year of purchase:

• De minimis safe harbor election
• Section 179 deduction
• Bonus depreciation

Education

Education expenses that enhance your business and expertise are tax-deductible. To qualify for a deduction, the IRS considers if the expenditure maintains or enhances skills needed in your current business.

Valid business education deductions include:

• Skill enhancement courses in your field
• Industry seminars and webinars
• Trade or professional publication subscriptions
• Specialized industry books
• Workshops to boost your expertise and skills
• Travel costs to educational events

However, education expenses that prepare you for a new career or are unrelated to your business are not deductible.

Home Office Expenses

To take advantage of the home office deduction, a specific area of your home must be designated exclusively for business use. 

You can calculate this deduction using two methods: 

• The simplified option, which is a standard deduction based on the square footage of the space, 
• Or you can use the regular method, where you itemise direct and indirect expenses related to the home office, such as rent, utilities, and insurance. Only expenses directly tied to the business area are deductible.

Interest

Interest accrued on business loans or credit lines can be deducted from your taxes, provided the loan funds are used for business purposes. 

To properly claim this deduction, keep all related loan documentation and ensure that the loan is truly for the business's purpose and not for personal use. 

This enables a clear differentiation of business versus personal interest, which is essential when claiming this type of deduction. Accurate record-keeping is crucial for substantiating these expenses.

Legal and Professional Fees

Legal and professional services incurred for your business are tax-deductible. These services include consultations with lawyers, accountants, and other professionals if the fees are paid for advice or services related to your business operations. 

Collect and organise your invoices, receipts, and any written agreements to document these expenses. 

Similarly, tax preparation fees for your business taxes are also deductible. 

It is essential to demonstrate that these costs were incurred exclusively for business purposes and not for any personal legal matters.

Moving expenses

Moving expenses for relocating a business to a new location are tax-deductible. 

To qualify, the new workplace must be a certain distance from your old location, and the move must be closely related to the start, continuation, or completion of work. 

Maintain all records of moving expenses, including equipment transportation, travel costs to the new place of business, and temporary living accommodations if necessary. 

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Conclusion

Taking advantage of tax deductions can significantly benefit your business by lowering your taxable income and saving you money. 

For venture founders seeking scalability and efficiency, automated accounting tools like Inkle Books can streamline this process. This simplifies cash flow management and helps identify expenditures that could be reduced. 

With Inkle, you can focus on your business's growth while ensuring your tax documentation is in order, maximising potential deductions with ease.

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