Small Business Tax Deductions to Know About

Small business owners are excited to kick-start their businesses and start generating revenue, but often miss opportunities to document and claim ordinary and necessary business expenses as tax deductions.  Below are some of the most common expenses that small business owners won’t want to miss when it comes time to filing their tax returns.  

• • Advertising
  • Car and truck expenses – If you use your car only for business purposes, you may deduct its entire cost of ownership and operation (subject to limitations). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.

You can generally figure the amount of your deductible car expense by using one of two methods: 

Standard mileage rate: Multiply the business miles driven by the current standard  mileage rate ($0.585 for 1/1/2022 – 6/30/22, and $0.625 for 7/1/22 – 12/31/22);

Actual Expenses: To use the actual expense method, you must determine what it actually costs to operate the car for the portion of the overall use of the car that’s business use. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.

For both methods, you will be required to keep track of the personal/commuting, and business miles.

• • Parking fees and tolls
  • Commissions and fess
  • Contract labor: Note that 1099s may be required to be issued if amounts paid to a vendor exceed a specified amount, which is generally $600.
  • Employee benefit programs and health insurance: Note that for health insurance to be deductible for an S-Corporation, generally the policy must be issued and paid through the S-Corporation.  The amount paid for a greater than 2% shareholder would then be reported on their W-2. 
  • Home office: This generally requires regular and exclusive use of an area to qualify.  In general, Corporations should have an accountable plan (see below) in place while Schedule C filers can claim these expenses on Form 8829. See our blog here for more information on the home office deduction.
  • Insurance (other than health)
  • Interest
  • Legal and professional fees
  • Office expenses
  • Rent or lease – vehicles, machinery, and equipment
  • Rent or lease – other business property
  • Repairs and maintenance
  • Supplies
  • Taxes and licenses
  • Travel – To reimburse employees for business travel expenses, please see accountable plan and per diem information below.
  • Meals – Business meals and beverages provided by a restaurant are 100% deductible in 2021 and 2022.  The deduction for business meals and beverages not provided by a restaurant remains at 50%.  All business meals and beverages will revert to 50% deductible for 2023.  Keep in mind that these are the IRS rules, and state treatment of these expenses may be different.
  • Entertainment (deductible on some state returns)
  • Utilities
  • Wages
  • Pension and Retirement Plans – A great way to provide tax-deferred benefits for your employees and receive a company deduction is by setting up and contributing to a retirement plan. 
  • Business Gifts – If you give business gifts in the course of your trade or business, you can deduct all or part of the costs subject to the following limitations:
    • • You deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during your tax year.
        • • If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer.
          • Incidental costs such as engraving, packing or shipping aren’t included in the $25 limit if they don’t add substantial value to the gift.
          • For purposes of the $25 per person limit, don’t consider gifts costing $4.00 or less that have your business name permanently engraved on the item and which you distribute on a regular basis.
      • Any item that could be considered either a gift or as entertainment is generally considered entertainment and cannot be deducted for federal purposes.
      • You need to have records that prove the business purpose of the gift as well as the details of the amount spent.

Company Expenses Paid by an Employee

To qualify as an expense to the employer and not considered income to an employee, these expenses must be reimbursed under an accountable plan.  Reimbursement is not reported on any tax reporting forms issued to the employee.  Please contact us for a sample accountable plan and to discuss the related rules.

Any business expense reimbursement paid by an employer to an employee that does not meet the accountable plan requirements is deemed paid under a nonaccountable plan.  Amounts reimbursed to an employee under a nonaccountable plan, are treated as taxable compensation reported on the employee’s W-2 and are deductible as wages by the employer.  Two of the most common types of nonaccountable plans are auto and cellphone allowances.

Per Diem Reimbursements

Instead of reimbursing actual travel expenses, employers can rely upon federal per diem tables and mileage allowances as part of their accountable plan.  It does not matter if the amount paid to the employee is more or less than the actual expenses. Like other accountable plan reimbursements, amounts received by the employee are not taxable.  The federal per diem rates are set by the U.S. General Services Administration (GSA) and differ based on the location of travel.

Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with affluent individuals and start-up/emerging growth companies. Building connections beyond the code.