There are several steps involved in launching a business, and most of them are expensive. Since startup expenditures are frequently high, it can be some time before you start to see any returns. As a new small business owner, you’re probably searching for ways to optimize and cut expenses as early as now, but did you know that a lot of your startup expenditures can be written off?
Yes, you have read it just right! As a matter of fact, you can use a large portion of your initial investment as tax leverage to reduce your tax liability. The money you put toward starting your firm is known as startup costs. Fortunately, the majority of them can be written off if they meet the IRS’s requirements for allowable expenses.
The IRS permits you to deduct $5,000 in organizational startup expenditures as well as $5,000 in qualifying startup costs. If your startup expenses are more than these caps, you can gradually write them off over the following 15 years by amortizing the costs. Moreover, it’s crucial for business owners to know how to spot tax deductions that apply to their line of work. For small businesses, more tax deductions also translate into a faster tax filing process.
Given that increased income tax obligations result in smaller capital gains, this information is essential for small business owners working in a volatile market. There are also ways to avoid capital gains tax on cryptocurrency. As such, let’s list some of the most significant tax deductions and examine how business owners might reduce their income taxes by making use of these deductions. (P.S. – we also have a great article on personal tax saving strategies to legally reduce your taxes).
1. Home Office Expenses
If you run your startup business at home, you may qualify for a home office expenses deduction. The amount of this deduction will be based on how much of your home is occupied solely for business purposes.
Furthermore, to be entitled to this deduction, the following requirements must be met:
- Only work-related activities are conducted in your workspace. (Your kitchen does not count as a home office if you periodically do paperwork at the kitchen table.)
- Most of the time you spend in your homework area must be for business purposes.
- Your workspace must serve as the main place of operation for your e-commerce business. You ought to be able to demonstrate this with a regular, written schedule.
- Also, you shouldn’t have a different workplace. That implies that you cannot do business from an outside office or coworking space.
Moreover, there are two ways to figure out the home office deduction: the simplified method and the regular method. In the simplified method, house-based small enterprises and freelancers can deduct five dollars per square foot of your home that is utilized for commercial purposes, up to a limit of 300 square feet. To use the simplified method, fill out the appropriate worksheet on Schedule C of Form 1040.
Meanwhile, in the regular method, your home expenses—rent or mortgage interest, property taxes, electricity, heat, water, and anything else that makes it possible to occupy your home—are calculated as a percentage of the square footage of your home that you use for business. For instance, you can write off 10% of your mortgage interest on your tax return if you use 10% of the square footage of your property for commercial purposes. To use the regular method, report expenses on Form 8829.
On top of that, The IRS is known for closely examining home office expenses. Make sure you have the data you require to support your assertion. Take images of your workspace and keep a record of your daily agenda for it. Keep them organized with your tax documents and receipts for each fiscal year.
Heat, water, and electricity are examples of household expenses that can be written off on your tax return if your residence qualifies as a business workplace. This figure is obtained using the regular method for calculating home office expenses. Therefore, you can deduct 10% of your heat, water, and electricity costs if 10% of the square footage of your home is used for commercial purposes.
3. Repairs and Improvements
You can list the cost of an essential home office repair, such as replacing a broken window, as an item on your tax return. An upgrade or repair to your home office can also be declared, but, it must be depreciated over a maximum of 27.5 years.
Work done on your home office is classified as an improvement if it involves adaptation, betterment, or restoration—for example, installing a larger window. However, you must speak with your CPA to ensure you are classifying the upgrade or repair properly before paying for it.
4. Business Meals
You can write off 50% of eligible food and drink expenses as a small business. The meal must be connected to your business in order to qualify, and you must maintain the following records regarding the meal:
- The date of the meal and the location where you dine;
- The business relationship between you and the person or people you dined with; and
- The total cost of the meal
As such, the easiest way to keep track of business meal expenses is to keep the receipt and take down important details about the meal.
5. Work-Related Travel and Vehicle Expenses
All travel-related costs, including flights, lodging, rental car fees, tips, dry cleaning, meals, and more, can be written off from taxes. For a comprehensive list of allowable business travel expenses, you may refer to the IRS website. On top of that, the following requirements must be met for your trip to count as work-related travel:
- Your travel must be essential to your business.
- You must travel outside of your tax home, be it in the city or area where your company conducts its business.
- It must take longer than a typical workday for you to travel away from your tax residence, and you must stop to sleep or relax along the journey.
Moreover, you can also choose from a variety of business expenses if you use your vehicle to transfer items (to the post office, for example), meet with clients, or conduct any other business operations. You may write off the full cost of operating your vehicle if it is used just for business.
However, if you utilize it for both personal and business uses, you must figure out what portion of the expense of operating is related to your business. You have two options for deducting the miles you drive for work: either you take the standard mileage deduction of $0.56 per mile driven, or you deduct the actual miles you drive for work. Check out our popular guide on Vehicle Write Off for Business.
6. Business Insurance
On your tax return, you can write off the cost of your company insurance. Renter’s insurance charges are deductible as part of home office write-offs if you have a home office or use a section of your house to conduct your business.
You can receive a tax break on some types of business insurance, including:
- Commercial property insurance
- Data breach insurance
- General liability insurance
- Workers’ compensation insurance
- Professional liability insurance
You might be able to deduct the business insurance premiums for any insurance policies you maintain to safeguard your company. If the insurance policies are standard and required, the entire cost may be written off.
7. Office Supplies
If you use office supplies, such as printers, paper, pens, computers, and work-related software, for business purposes during the tax year in which they were purchased, you may deduct the cost of those items. Expenses for postage and shipping related to your job are also deductible. For documentation purposes, make sure to keep any office supplies purchase receipts.
Depreciation is the process of writing off the cost of an expensive item, such as a car or piece of machinery, over the course of its useful life rather than doing it all at once for a single tax year. For longer-term, more expensive expenditures, businesses typically deduct depreciation so they can be compensated for the cost over the course of the asset’s useful lifetime. To calculate depreciation, here’s what you need to do:
Depreciation = Total cost of the asset / Useful lifetime of the asset
9. Employees’ Salaries and Benefits
If you own a small business and have employees, you can deduct their wages from your taxes, as well as their perks and vacation money. As a matter of fact, your company may benefit from a tax break on offering some staff benefits, compensation, and perks if they are deemed “fair” and “essential,” such as:
- Employee pay
- HSA employer contributions
- Vacation pay and sick time
- Life insurance coverages
- Meals and lodging
- Employee assistance programs
The following conditions must be met in order to deduct salary and benefit costs:
- The employee is not a partner, sole proprietor, or member of an LLC in the company.
- The services delegated to the employee were provided
- The pay is adequate and required.
On top of that, Your business structure will determine how you can write off these costs.
- Schedule C’s Expenses section is used by single-member LLCs and sole proprietorships.
- Companies fill out Form 1120 or Form 1120S’ Deductions section (for S corporations).
- Partnerships and multi-member LLCs use the“Deductions section of Form 1065.
Your educational costs are entirely deductible for tax purposes if you use them to advance your career. The course or workshop must enhance your abilities or support the maintenance of your professional competence in order to qualify as education-related expenses. Additionally, the cost of transportation to any classes that are related to business is considered a travel expense.
The following expenses for education are eligible for deductions:
- Webinars and Seminars
- Courses and classes related to your field of work
- Books related to your industry
- Trade publication subscriptions
11. Internet and Mobile Expenses
You can write off these costs if using the phone and the internet is essential to operate your firm. However, you can only deduct the portion of your phone and internet expenses that are related to your company use if you use them for both business and personal purposes. You can deduct 50% of your internet expenses for the year, for instance, if nearly half of your online usage is for business purposes.
12. Business Interest and Bank Fees
The bank will charge you interest if you take out a business loan to finance your business activities. When tax season rolls around, you are able to write off the interest paid on both business loans and company credit cards. Additionally, you can deduct any fees and extra costs associated with your business’s bank account and credit card, including monthly service charges and annual credit card fees.
13. Charitable Contributions
Donations you make to eligible organizations can be written off as charitable contributions. If your company is organized as a sole proprietorship, LLC, or partnership, you can deduct these costs from your taxable income. You can deduct charitable contributions on your corporate tax return if your business is a corporation.
14. Health insurance
You can be qualified for a health insurance premium deduction if you are self-employed. The Small Business Jobs Act introduced a new deduction in 2010. This pertains to the health insurance premiums paid by independent contractors. If you’re self-employed, you can adjust your taxable income by deducting all of your medical insurance costs for these people:
- Your spouse
- Your children below 27 years old at the end of the tax year
- Your dependents
Furthermore, on Line 29 of Form 1040, you can claim the health insurance deduction as an above-the-line deduction. Find out more by speaking to a tax expert. Also, you should remember that you cannot claim a tax credit for any month in which you received health insurance through your work or that of your spouse.
15. Professional Service Fees
For tax-filing purposes, you may deduct any professional service payments that are required for the operation of your business, such as those for legal, accounting, and bookkeeping services. As such, You could deduct the cost of any accounting or bookkeeping software you use for your company.
The IRS standards for legal and professional fees will aid you in judging the nature of the expense if you are having problems deciding whether a certain professional service expense is for work or personal use.
16. Dependent and Child Care
Tax deductions are available for expenses related to caring for minors or dependent adults. You can deduct expenses related to your own children’s upkeep if they are under the age of twelve. Adult dependents who are unable to care for themselves due to a physical or mental disability, such as spouses and some other related individuals, are also eligible for these deductions.
17. Retirement Plans
If you work for yourself, you can alter your taxable income by deducting payments to your retirement plans. Plans comprise:
- Simplified Employee Pension (SEP) IRA. A retirement savings program created by businesses, including those who are self-employed, to offer retirement benefits.
- Savings Incentive Match Plan for Employees (SIMPLE.) is a strategy for small businesses with under 100 employees to save for retirement. The employee retirement plan contribution limitations for SIMPLE IRAs are lower than those for 401(k)s, but they operate similarly to traditional IRAs and are simpler to set up than a 401(k).
- Qualified Plan. A defined benefit plan, commonly referred to as a pension, is a retirement savings account in which your company makes all of the contributions and guarantees you a predetermined payout when you retire. Similar to a 401(k), a defined contribution plan necessitates that you contribute your own funds.
18. Bad Debts
Customers or clients will occasionally refuse to pay for the good or service you’ve already rendered. You might never receive the money, no matter how many statement reminders you send. They are referred to as bad debts or also known as uncollectible accounts.
Uncollectible accounts are sums of money owed to you by a client or customer that you are unable to recover. If it turns out that the debt cannot be collected, you can write it off at the end of the first year. Bad debts can include:
- Business loan guarantees
- Loans to suppliers and clients
- Credit sales to customers
19. Independent Contractors
The cost of their services is tax-deductible if you use independent contractors or freelancers for any business-related task, such as photographing things for your online store. Before an independent contractor begins working for you, always be sure to gather their 1099 forms and file them accurately (you must send one copy to the contractor and another to the IRS by the deadline).
Reduce your tax burden while supporting the expansion of your firm. The expense of advertising is deductible from your taxes, whether you promote your company on Instagram or in your neighborhood newspaper.
This includes the cost of running the advertisement as well as any costs associated with having it written and developed. If you employ a designer, copywriter, or other marketing experts to create advertisements for you, you should deduct their pay just like you would for any 1099 employee.
21. Domain and Web Hosting
Without an internet presence, you cannot operate a start-up business related to e-commerce. Hosting for domains and online stores is tax-deductible. You can subtract the price of any stock photos or web design templates you buy to utilize on your website.
22. Client and Employee Entertainment
If you take your clients out, you can write off the cost as long as you talk business during the gathering and the entertainment is held in a professional atmosphere. The price of these entertainment charges is 50% deductible. Additionally, you may write off up to 100% of the price of social activities you hold for your staff.
23. Real Estate Taxes and Mortgage Interest
You can write off state and local real estate taxes paid while filing your income taxes. These deductions include property taxes, which you can deduct up to a maximum of $10,000. Aside from that, you can also deduct interest payments made on mortgage loans used for acquisition, construction, or improvement of your home, if you use your house for work. Moreover, the interest on any loans you take out using the equity in your property is also deductible.
You can deduct the interest paid on loans if you borrow money to undertake investments. The interest is deductible up to the amount that equals your investment income.
25. Moving Expenses
You might be able to fully deduct your moving expenses if your move is primarily because of work-related reasons. Your move must pass the distance test in order to be eligible. That being said, your new job location must be at least 50 miles further away from your previous residence than your old job location in order for them to pass the distance test.
26. Foreign-earned Income Inclusion
Under some conditions, Americans who own businesses overseas may elect to exclude their foreign income from their tax returns. Your tax home must be located abroad in order to be eligible for the exclusion.
27. Legal Fees
You can deduct the cost of hiring an attorney if you need them to draft contracts, file trademarks, and copyright applications, negotiate leases, represent your company in court, or do any other legal work for your company.
28. Employees Gifts
You can deduct up to $25 per recipient each year for presents you provide to staff. You might exclude Christmas gift baskets or gift cards, for instance.
29. Startup Expenses
You are eligible to claim a deduction for up to $5,000 in starting costs if you started a new business venture in the most recent tax year. This can include expenses for marketing your new company, travel, and training.
30. Other Business Expenses
There can be additional expenses you can deduct from your taxes, depending on the nature of your business. As such, The Internal Revenue Service considers a business expense to be tax deductible if it is “ordinary and necessary,” which means that it is an expense you would typically incur in the course of conducting business and that is required for your business to run.