Self-employed individuals could claim deductions for items like pens, staplers and paper as expenses for running their businesses – as well as software costs associated with managing those businesses as well as professional membership dues.
No matter the expense, keeping receipts, invoices, bank and credit card statements and mileage logs to prove each claim at tax time can significantly lower taxable income. Deductible expenses reduce this tax bill.
Home Office Deductions
Home office deductions are among the most frequently claimed tax breaks for small businesses, though you must adhere to specific IRS guidelines in order to claim them. Your workspace must be exclusively used for business and regularly used. Furthermore, expenses must be documented.
Choose either the simplified method or regular method when it comes to deducting home office expenses, depending on how you calculate them. Either way, direct and indirect expenses that benefit your entire house such as mortgage/rent payments, utilities bills, repairs/maintenance bills, insurance premiums and depreciation can all be deducted; any unused deduction can also be carried forward to next year’s return.
Business Equipment Depreciation
Equipment depreciation allows you to write off the costs associated with business assets, thus lowering your tax liabilities. Understanding its depreciation rate allows for timely repairs or replacement decisions and can save money over time.
Use either the straight-line or accelerated method to calculate how much of a deduction you can claim each year. With the latter approach, larger deductions are taken early on while also helping the IRS provide percentage tables so you know how much is available to claim.
Depreciation may not be cash expenses, but it still has a direct effect on cash flow as any money used to acquire assets is no longer recoverable and reduces their value on your balance sheet.
Business Travel Deductions
When traveling for business purposes, the IRS allows certain expenses to be deducted as tax expenses. This includes transportation (plane, train or bus tickets), lodging and meals incurred while away from your tax home for at least eight hours each day and overnight accommodations required to qualify as deductions.
Meal and entertainment expenses are also tax deductible; however, the IRS restricts them to 50% of meals that facilitate business. So if you close a deal over alligator nuggets in Durham that’s probably OK whereas dining at Cosmopolitan won’t qualify. Furthermore, AirBnb may be cheaper but cannot replace hotels in terms of accommodation needs.
Business Phone Deductions
Smartphones have become an integral component of modern businesses, used for communication with clients and meetings arrangements as well as taking pictures for reference purposes. But are small business owners eligible to claim them as tax deductions?
Entrepreneurs who use mobile phones solely for professional purposes can claim 100% of their expenses as tax deductions, provided they keep detailed records and itemize bills to track how much of their usage can be classified as being business related.
Business Supplies Deductions
Business expenses such as paper, pens, desk calendars and tape are entirely deductible. Office furniture purchases; monthly telecommunication fees at commercial space locations and utilities for home office users such as electricity, water and sewage bills; as well as food and beverages purchased for clients, employees or business events is also partially deductible.
Keep in mind that you can only claim items that you intend to use within one year as expenses, like Henry’s guitars, sheet music and speakers – these would all qualify. Other expenses such as subscriptions to Nation’s Restaurant News or Nathan Myhrvold’s Modernist Cuisine boxed set might not. Consult your tax professional for further advice.
Business Interest Deductions
Interest expenses can add up quickly for businesses with large capital-intensive requirements that borrow to purchase equipment, expand into new locations or launch marketing initiatives. Prior to 2022, this expense was fully tax-deductible but is now limited by law.
Effective 2018, the limitation is 30% of an entity’s adjusted taxable income (ATI), including depreciation, amortization and depletion costs which have been added back in to compute it. Any interest expenses disallowed under this limit are carried forward for future tax years indefinitely.
There are ways to mitigate the effect of the business interest deduction limit. Speak to a tax adviser to identify what strategies would work best for your business.