Cutting right to the proverbial chase, many small businesses simply don’t realize how much they can save. Let us show you these simple tax deductions that can really save you money. However, just to backtrack a bit prior to outlining these deductions, simply realize that the more legitimate tax deductions your business can take, the lower your taxable profit will be, consequently putting additional money into your pocket by year’s end. It is also nice to know that the tax code provisions that oversee and regulate your deductions can also personally benefit you as well. Nonetheless, in the end, you must abide by and pay particularly close attention to the rules that the IRS deems what is and is not deductible. Let’s get started!
If either your business were to own your car or you were to actually use your car for business, you can deduct some of the expenses you pay to keep it running. However, to clarify, there are two different procedures you can use to claim expenses; an actual expense method or a standard mileage rate method.
With the actual expense method, you simply keep track of your automobile’s actual business related expenses and deduct its amount of depreciation for each subsequent year. Yet, with the standard mileage rate method, for which you must initially check the IRS website to determine the current standard mileage rate, you can deduct the specified rate for each mile you have driven, in addition to all of your business related tolls and parking fees, if pertinent.
Please keep in mind that if your car were newer, and were to obviously have greater value, the actual expense method would better benefit you by providing a larger tax time deduction, for which you would also be able to deduct the vehicle’s depreciation.
But in order to meet the criteria for the standard mileage rate, you must use it in the very first year that you utilize your car for business. Additionally, you are unable to use the standard mileage rate if you have already claimed previous accelerated depreciation deductions in earlier years or were to have already taken bonus depreciation or a Section 179 deduction for your car, which we will further explain later on.
As you might already assume, if you were to use your car for both business and pleasure purposes, you can only deduct the business portion of your car’s use, which dictates that you must keep track of your car’s actual business use, which you will tally at the end of the year.
The Cost of Starting a Business
If you were to already have a business that you are currently running, you would be able to deduct those expenses that correlate with your actual day to day costs, such as utility, office supplies, advertising, etc. However, you cannot do so before you are actually in business. In this case, the costs that you incur to get your new business up and running are known as capital expenses, for which you may deduct up to $5,000 for the first year that you are in business, with the remainder to be deducted in equal portions over the following 15 years. But, there is an exception, in that, if you were to anticipate that your business were to make immediate profit, you may then be able to get around this guideline by either delaying paying some of your bills until after you are actually in business, or by just officially starting your business by doing a small portion of business. However, as is often the case with many new businesses, whereby you might experience losses during the first few years, it may better benefit you if you were to take the deduction over five years in order to generate some profits to offset.
Legal and Professional Fees and Books
Professional fees, such as those that you pay to lawyers, consultants or tax professionals can generally be deducted in the year that they were incurred. However, if the professional’s work were for upcoming years, those costs or fees paid must then be deducted over the timeframe in which you will receive service (and benefit) from the professional.
In regards to any business books you purchase that are relevant to your business, as well as those that aid you without the professional assistance you might have otherwise sought, they too are fully deductible as a viable cost of doing business.
Your business related insurance premiums that you pay can be deducted as a business operating expense, and include the following:
- Medical insurance (for your employees)
- Fire, theft and flood insurance (for your business property)
- Credit insurance (this covers losses from any business debt)
- Liability insurance
- Malpractice insurance (such as professional medical or legal malpractice insurance premiums)
- Worker’s compensation insurance (required by the state to be provided to your employees)
- Business interruption insurance
- Life insurance covering a company’s officers and directors (provided that they are not direct beneficiaries under the policy)
- Unemployment insurance contributions (comprising either insurance costs or business taxes, which ultimately depend on how they are defined by each state’s laws)
Many business travel expenses can be deducted, including plane fare, lodging, meals, taxis and limos, automobile operating costs, shipping costs for business related materials, dry cleaning and laundry costs, telephone calls and faxes (if applicable), and even tips.
Keep in mind that if your travel were to combine both business and pleasure, you can deduct your travel expenses only if business were the primary purpose of your trip. Furthermore, if your family were to travel along with you, you can only deduct your own expenses.
If you were to use credit to finance any business related purchases, your incurred interest and carrying charges are fully deductible, as is also the case if you were to take out a personal loan to be used for your business. However, if your business profit were more than $25 million dollars, you are then only able to deduct 30% of your interest expenses. As should be noted, be certain to keep good, accurate records clearly demonstrating specifically how the money was used for your business.
Equipment for Business
Most small businesses are now able to deduct 100% of the cost of their equipment in a single year due to the changes that were created by the Tax Cuts and Jobs Act (TCJA). This can be implemented by using 100% bonus depreciation (expanded Section 179 expensing) and the $2,500 de minimis deduction. Deductions of this nature may only be used for your tangible personal property and your computer software, as opposed to real property, which must be depreciated over the course of many years.
The amount for used or new business property that may be deducted in a single year depending on when it was placed in service, noting that in later years, your first year bonus depreciation deduction goes down accordingly based on when it was placed in service.
Even though the Section 179 (of the Internal Revenue Code) annual limit has been permanently set at $1 million dollars (effective as of January 2018), you are currently able to deduct up to an annual established threshold amount of the cost of the equipment and certain business assets that you purchased, placed in service that year, and most importantly, use over 50% of the time for your business (not for your personal use).
Under Section 179, there is also a phase out (in addition to the annual limit) on how much property can be deducted, starting when a business purchases more than $2.5 million dollars in business property in a single year. Once the annual investment limit has been reached for the year, the amount which you may then deduct is reduced accordingly by the amount your purchase has exceeded the $2.5 million dollar limit.
Lastly, using the de minimis safe harbor tax law provision, a business may then deduct in a single year any personal property costing $2,500 or less, for which you will then have to file an election with your tax return in order to use this deduction.
If your business is a partnership, an LLC or an S corp, then your business is able to make a charitable contribution, for which the deduction can then be passed through to you to be claimed on your individual tax return. However, if your business were a regular C corp, then the corporation can then deduct the charitable contribution.
In regards to old office equipment or furniture that you may consider donating, although you might potentially receive a tax benefit, if the equipment were to have been fully depreciated, you are then unable to claim a deduction.
Although taxes that are incurred in operating your business are usually deductible, how, if and when they are to be deducted depends on the type of tax it is. Here is the breakdown:
- Sales tax paid on items you buy and use for your business’ operations is deductible as part of the cost of the items and is not deducted separately, unless it were a tax on a large business asset, like a car, which must then be added to the car’s cost basis.
- Excise taxes and fuel taxes are both separately deductible items.
- If your business were to pay employment taxes, the employer’s share is then deductible as a business expense, as opposed to self employment taxes, which, because they are paid by individuals and not their businesses, is not considered to be a business expense.
- Federal income taxes paid on business income are not deductible. However, state income tax can be deducted can (only) be deducted on your federal return as an itemized deduction, as it is not a business expense. It should be noted that the annual personal itemized deduction is limited to $10,000 for state and local taxes.
- Real estate property taxes are deductible on property that is used for business, in conjunction with special local assessments for maintenance or repairs, which may or may not be immediately deductible.
Your education expenses can be deducted only if they are specifically related to your current business, trade or occupation, and were incurred to either maintain or improve your required skills for your present business. Education costs incurred for education for a new business or trade is not deductible.
Advertising and Promotion Expenses
The advertising costs of your goods and services, which comprises your website, business cards, phone book and related advertising and promotional media is deductible as a current expense. Promotional costs that create or are perceived to create business goodwill, such as sponsoring little league teams or donations are another type of deductible expense, provided that there is a distinct connection between your business and your intended sponsorship or donation. Consequently, naming the local junior soccer team after your company or listing your company in the high school orchestra’s program guide is sufficient proof of your promotion or business goodwill.
Pass-Through Tax Deduction
The aforementioned Tax Cuts and Jobs Act (TCJA) has created a tax deduction for those who earn their income through pass-through business (a sole proprietorship, partnership, S corporation, LLC or LLP that is not subject to the corporate income tax, but rather, reports its income utilizing the individual tax returns of the business owner’s personal income, and, subsequently, is taxed at individual income tax rates in lieu of business income tax rates), potentially enabling business owners to deduct up to 20% of their net income from each of the pass-through businesses that they own in addition to their other business deductions. The added benefit is that the pass-through deduction is a personal deduction that pass-through business owners can take on their returns in any case, even if they were or were not to itemize.
However, the pass-through deduction is restricted to those whose businesses provide personal services, such as health, law, accounting, or any business in which the principal service is the skill or reputation of one or more of the business owners (with an exception for engineers and architects), thus allowing the business owner to a 20% pass-through deduction on the premise that his or her total taxable income from all sources after deductions is less than $315,000 (if married and filing jointly) or $157,500 (if single). There are other stipulations of applicability for the deduction if income were to exceed the limits.
Even if your business were not to provide personal services, you can still potentially qualify for a pass-through deduction if your business income were to exceed $415,000 (if married and filing jointly) or $207,500 (if single) with certain limitations.
Additional Business Expenses
There are a host of other everyday expenses that business owners often miss, which include:
- Service charges, such as those from banks
- Business related gifts
- Business related association dues
- Business related magazines and trade publication subscriptions, journals and books
- Business related labor expenses and tips
- Coffee service, stocked beverages and snacks
- Losses: casualty and theft
- Office supplies
- Seminars, trade shows and related expenses
- Travel: limousines, taxis, Uber, Lyft, etc.
- Fees paid to consultants
- Parking: garages, lots and parking meters
- Fees paid to credit bureaus
- Petty cash expenses
Even though it is always a good idea to try to get and retain a receipt for your business-related expenses, if a receipt were not available or possibly overlooked, you can still possibly deduct those expenses by keeping track of them.
Still have questions about tax deductions for your business? Tsamutalis & Company LLC will work with you throughout the year to ensure compliance with tax laws and regulations while also maximizing your profits. Contact us to learn more about what it’s like to work with our team for your New Jersey small business accounting and tax needs.