Starting a business may cost a pretty penny, and it doesn’t help that you need to pay business taxes to stay compliant. But what most new entrepreneurs don’t know is that there’s a way to play your taxes in your favor. By paying attention to your expenses, you can lower your tax bill through business deductions.
If you want to know what tax deductions your business can qualify for, below are a few important business deductions that every entrepreneur should keep track of.
What is a business tax deduction?
A business tax deduction is a type of business expense that can help decrease your tax bill. The amount is deducted from your revenue to arrive at your company’s taxable net income.
Note that the expense should be ordinary and necessary for your business’s operations. Ordinary includes common expenses that business owners in your industry often incur, while necessary comprises expenses that your business may be unable to manage without.
Personal expenses are not tax-deductible, but if you’re using an item or utility as part business and part personal use, you can claim it as a business component if you can justify using it primarily for business purposes. Not all expenses are tax-deductible, and a few examples include demolition expenses, lobbying expenses, political contributions, and illegal activities.
Key Tax Deductions for Your Business
Now that you know that keeping track of your expenses is valuable for your taxes, here are a few fully deductible business expenses that every new entrepreneur should keep an eye on:
1. Advertising and promotion
Advertising and promoting are essential for a new business since they help get your name, products, or services out to attract new customers. So if you’re hesitant about spending a certain amount of your budget for marketing, the good news is it’s tax deductible.
Advertising expenses that qualify as tax deductions include:
- Business cards
- Billboards
- Flyers
- Running television and radio ads
In this modern era, digital advertising is also accepted as tax deductible. So you can also consider acquiring a website, running social media ads, hiring a social media manager, and working with an SEO expert to help expand your business.
2. Business Insurance
Having business insurance helps protect your company from unexpected lawsuits, accidents, emergencies, or natural disasters. So if you can, it’s always a good idea to get a premium one as soon as possible to help you cover potential losses in the future.
But if you‘re worried about the cost, business insurance is fully deductible from your tax bill, and policies that qualify include:
- Commercial liability insurance
- General liability insurance
- Business interruption insurance
- Health and life insurance
- Unemployment insurance
3. Salaries and Benefits
If your business has employees, you can deduct their salaries, wages, bonuses, and commissions from your tax return as business expenses. But it only applies if your business employs someone other than yourself and isn’t a member of your sole proprietorship, partnership, or limited liability corporation (LLC).
In addition to employee salaries, you can also claim deductions from employee’s vacation pay or their additional education for maintaining or improving skills required for your business.
4. Business Vehicle Expenses
It can be difficult to operate your business if you don’t have a designated vehicle, especially if you often need to travel from one location to another. Considering purchasing and maintaining a vehicle can get expensive, you can claim its expenses as a business write-off.
These expenses include
- Gas
- Repairs
- Car insurance
- Registration fees
- Lease payments
But if you’re using your vehicle for business and personal use, keeping track of its expenses can be challenging since you can’t deduct personal expenses. One trick to stay organized is to save every receipt so you can keep track of actual expenses and list down standard mileage rates for when it’s used for business purposes.
5. Travel expense
When you have a business, it can be necessary to travel for work-related purposes to close deals with clients, source raw materials, or explore your market. Although it’s for the expansion of your company, the expenses can add up if you have to travel often.
Good thing, you can deduct the expenses of your plane tickets, meals, car rental expenses, hotel rooms, and more on your business tax return. But it should only be under the condition that the trip is necessary for your business, takes you to a different city or area code from your business address, and lasts longer than a normal work day.
6. Bank interest fees
It costs money to build a business, and there’s no shame if you take a bank loan to fund your operations. Since you’ll be charged monthly interest on your loan, you can deduct its expenses from your business taxes. The same way goes for credit cards, transfer fees, service charges, and overdraft fees.
So make sure your business has a separate account from your personal one since you can’t deduct your personal expenses. Plus, it also makes it easier to track your company’s expenses during tax season.
7. Startup expenses
If you plan to run a startup, you can deduct up to $5,000 of the expenses in the first year to create it. Note that this only applies if your costs are equal to or less than $50,000, but once it exceeds $55,000, you won’t be able to claim the deduction.
Startup expenses that you can claim for deduction include:
- Attending training events
- Building a website
- Hiring a business consultant
- Business research expenses
- Licensing and permit fees
- Hiring and training employees
- Advertising and professional fees
Need help with your business taxes?
If you need help with your business tax deductions, let Lear & Pannepacker assist you. They have a team of licensed accountants and CPAs experienced in various industries that you can trust to manage your business taxes. They also offer bookkeeping, budgeting, tax planning, auditing, and business advisory services to help your company grow. For questions and inquiries, feel free to contact their team now.