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Posted by Pat Raskob

Deductions That Small Business Owners Hardly Take Advantage Of

Deductions That Small Business Owners Hardly Take Advantage Of

For a small business owner, tax season can be stressful, and the prospect of paying a large sum of money to the government is not really a pleasant one. That's why small business owners are always on the lookout for tax deductions. Here are five tax benefits often overlooked by small business owners that can help save good money for your business.

The IRS defines deductible expenses as "ordinary and necessary" costs to the business. Of course, the agency backs up that vague phrase with a mountain of deductible expense rules.

The five below require you to keep an eye on your taxes throughout the year. Keeping accurate records of your daily expenses can mean big tax savings.

Tax deductions: an overview

Tax deductions are expenses you can deduct from your taxable income to reduce the tax you owe.

Many of the common tax deductions available to individuals have been removed or limited with the passage of the Tax Cuts and Jobs Act (TCJA 2017). Most employees now benefit from the standard deduction, which has doubled with the tax act.

The same is not true for small business owners, whose taxable income can only be determined by subtracting operating costs from their gross income. Whether you're a small business owner, self-employed, or earning income from a limited liability company (LLC), tracking business expenses to deduct them from income remains critical to your success.

Some of these costs are obvious: office rent, business equipment, employee salaries, and business insurance are all tax deductible.

Others may not be so obvious. Some require meticulous record keeping and receipts, but the effort can be worth it come tax time.

How Tax Reform Changed Small Business Taxes

The Tax Reform Act of 2017 brought about a very significant change in the way small businesses pay their taxes. It allows eligible small businesses to claim a deduction of 20% of their maximum income. In other words, taxes will be levied on the taxpayer's business income of less than 20%.

The 199A deduction can be taken irrespective of whether the business income is earned by self-employment, sole proprietorship, LLC, S corporation, or partnership.

It can be used by eligible taxpayers, whether they benefit from the standard or itemized deductions.

Who Is Eligible?

There are income phase-outs for this deduction. The full deduction for the 2022 tax year is available for taxpayers with taxable income less than $170,050 for individual filers or $340,100 for joint filers. Consult a tax professional to get a detailed side-by-side comparison that the IRS provided.

1) Write off Lunch Meetings

If you usually eat lunch at work (at noon or on the way out), you can deduct 50% of your meal expenses.

If you are meeting with partners, employees, or business contacts, consider meeting for lunch. As long as meal expenses are reasonable, you can deduct 50% of meal expenses when dining with business associates and employees.

So if you buy lunch daily and spend about $10, you can deduct $5. If you do the math, that's over $1,000 yearly in taxable deductions.

2) Use your cell phone and internet for work

Let's say you spend about 30,000 minutes per year on the phone for personal and professional reasons. Spend about 60 minutes daily on business calls during an average work week. This represents approximately 15,600 minutes devoted to business calls (60 minutes per day x 5 days x 52 weeks), or more than 50% of the total annual telephone minutes.

Based on the numbers in this scenario, you can deduct more than 50% of your annual personal cell phone costs as business expenses.

The same goes for your Internet account. You can deduct the cost from the percentage of use that falls to the company.

Of course, this is difficult to document.

It would be a good idea to get a separate business phone number routed to the phone, making it easier to separate and document calls. Assuming a $100 monthly phone bill and a 50% deductible, you can save an additional $600 in deductible.

3) Deduct your healthcare premiums

Suppose you have an individual health insurance plan (not a group one) and pay your health insurance premiums out of pocket, with no tax breaks or subsidies. In that case, you can probably claim those premiums as a tax deduction income tax.

To be eligible to claim this deduction, you must be a sole proprietor, a partner in a partnership or LLC, or an S corporation shareholder who owns more than 2% of the corporation's shares.

Let's say you are a sole proprietorship, and your business and personal income totals $60,000 per year. State and federal income tax is approximately 30%. You can deduct that cost if you spend $10,000 a year on health insurance premiums for you and your family.


Variations on this deduction

As a business owner who meets the above criteria, you can claim an income tax credit of $10,000 but not a self-employment tax credit, which would remain at $60,000 in income taxable. (Small businesses pay both.) 

But, if your spouse is an employee of your company, you can get both. You can purchase a plan in the name of your spouse (not your company) that covers you and your dependents. Since this person is an employee and your spouse, they can deduct $10,000 of their income tax and self-employment tax payments, assuming you file a joint tax return.

In this instance, you could save $3,000 in income taxes and an additional $1,530 in self-employment taxes, for a total savings of $4,530.

Some meals are 50% deductible, while others are 100% deductible. Food served at an office party is 100% deductible!


4) Plan your big expenses

Depending on your taxable income, your tax bracket can differ significantly, up to 10% for individuals. The tax rate is currently 21% at the federal level. 

Let's say your business is a limited liability company (LLC). This means that you pay taxes on the share earned. A few weeks after the end of the business year, you check your taxable income and find approximately $90,000.

You have to buy new equipment, which will cost you $15,000. If you make these purchases, you reduce your taxable income to about $72,000. The higher number puts you in the 24% tax bracket for 2022. The lower number is in the 22% tax bracket.

If you schedule your high-end purchases wisely, you can maximize your deductions and save money each year.

5) Deduct Travel Expenses

Many business owners accumulate points on their travel mileage cards to save money later by using the miles for vacation flights. It is a mistake. Business travel expenses are fully deductible as business expenses. Personal travel expenses are not. 

It makes sense to save the frequent flier points for vacation travel and deduct the full cost of business travel. 

What can you deduct from your taxes with an LLC?

If you earn income from an LLC, you have the right to deduct your expenses like any business.

A Limited Liability Company (LLC) can transfer all its profits to its partners so that the partners, not the LLC, owe all taxes. They don't have to be set up that way, but most are to avoid the dreaded "double taxation" of the company and its partners.

Depending on how the LLC is structured when created, the IRS will treat the income as income from a corporation, partnership, or sole proprietorship.

What can you deduct as a business expense in 2022?

The IRS defines deductible business expenses as the "ordinary and necessary" costs of doing business.

It breaks them down into two broad categories, the cost of goods sold (raw materials, transportation, storage, labor, and factory overhead) and capital expenditures, including start-up costs, resources, business, and upgrades.

Then, some deductible expenses include your business rent, salaries, travel expenses, telephone and internet expenses, legal fees, advertising and marketing expenses, interest, and borrowing costs.

Don't forget the big change for the 2018 tax year, the 20% business income deduction for qualifying businesses.

How much can a small business earn before paying tax?

You owe no tax on income less than $400 per year. Whether you're selling your old stuff or running a big business, this is true. 

Can I deduct my car as a business expense?

Yes. All operating costs are tax deductible if you use a vehicle for business purposes only.

Only the expenses incurred during the activity are deductible if you use the vehicle for personal and business purposes.

This requires serious record-keeping. There are two ways to calculate expenses; one is cheaper than the other: 

  • You can take advantage of the standard deduction of 62.5 cents per mile for the last six months of the 2022 tax year. You must track your mileage when using your vehicle for business purposes. Multiply the standard deduction by the percentage of total business mileage spent during the year.

  • You can use the actual expense method, which requires you to track all business car costs, including rent, gas, oil, repairs, insurance, and taxes registration. Add up the costs and multiply the total by the percentage of mileage in the year you invested in the business.

The bottom line

The tax reform measure that eliminated many deductions for individuals did not change the fact that business owners must deduct expenses from profits to calculate taxable income.

"Ordinary and necessary" costs of doing business are tax deductible.

It requires meticulous record keeping to calculate costs and demonstrate accuracy if an audit requires it. You can also plan major business expenses to get the best tax benefit.


  • If you organize lunch meetings, you can deduct the cost of the meals.

  • If you pay for health insurance, you can deduct the cost from your premiums.

  • You can deduct business usage costs if you use your phone or the Internet for work.

  • You can deduct your travel expenses and save the bonus miles for a vacation.

  • You can schedule your large business expenses to maximize your tax-free expenses.



Pat Raskob
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