As a small business owner, you might wonder what expenses are deductible for tax purposes. One of the many advantages of having up-to-date and accurate bookkeeping records, is that your tax professional will be able to determine what is deductible, by looking through your accounting software.
So, which expenses are deductible? As a general rule, it is only deductible if it is ordinary, necessary and reasonable. As the IRS states in Publication 535, “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
What would be some specific examples? As in all cases, you should consult your tax professional for specific tax advice. However, here are five common tax deductions that small businesses owners incur.
Five Common Tax Deductions for Small Business Owners
1. Advertising:
Most business owners have to spend at least some money on advertising regularly. Of course, the best advertising is word of mouth, but what about the advertising that you have to spend money on? Per IRS Publication 535:
“You can generally deduct reasonable advertising expenses that are directly related to your business activities. Generally, you can’t deduct amounts paid to influence legislation (for example, lobbying).”
2. Legal and Professional Services:
Do you pay an attorney to help you with business structure, or ensuring you are compliant? Does a CPA file your taxes for you? These expenses may be deductible per IRS Publication 535:
“Fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses. However, legal fees you pay to acquire business assets usually aren’t deductible.”
3. Office Expenses:
Some examples here could include paper, ink cartridges, pens, and postage. Do you pay for these types of items in your business?
4. Rent:
If you rent office space for your business, it may be deductible, per IRS Publication 535:
“Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business.”
Or, do you work from home? Per the same publication, a portion of your rent may be deductible:
“If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. You must meet the requirements for business use of your home.”
5. Wages:
In order to deduct employees’ wages, as with other business expenses, it must be an ordinary and necessary business expense. There are also a couple of other requirements per the IRS:
“To be deductible, your employees’ pay must be an ordinary and necessary business expense and you must pay or incur it. These and other requirements that apply to all business expenses are explained in chapter 1. In addition, the pay must meet both of the following tests. • Test 1. It must be reasonable. • Test 2. It must be for services performed.”
Summary
What are your thoughts on the above? Do you have any of the above expenses in your business? Do you have a good bookkeeping system set up to properly track all of your expenses? If you ever need help or would like some advice, feel free to reach out to me at ian@lucrativebookkeeping.com.
Do you have any questions, comments or feedback? Email us at contact@lucrativebookkeeping.com.
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