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Posted by Tiffany Gaskin

Tax Deductions Every Small Business Should Know

Tax Deductions Every Small Business Should Know

There are a series of deductions available for all qualified small business owners. It can go a long way to reduce their tax burden even though most businesses are not aware, let alone know, how to take advantage of these deductions. 

S corps, C corps, and sole proprietors can claim these tax deductions even though the rules differ for each. Here are some tax deductions every small business can take advantage of:


  1. Startup and Organization Costs

Startup costs for businesses are classified as a capital expense by Uncle Sam, so it is not a tax deduction. They are an investment into your business since the funds were converted into an asset without actually leaving. 

Typically, any deduction for capital expenses occurs over many years. It is called amortization which helps small businesses access profit through the years. 

  1. Inventory

Businesses focused on inventory will either produce goods or buy them and resell them. For companies operating in this model, it is possible to deduct inventory costs or the costs of goods sold. Generally, one needs to value inventory at the beginning and end of the tax year to access the costs of goods you sold. 

Here are expense types that help deduce the cost of goods sold:

  • Storage 

  • Costs of raw materials and products, with freight

  • Factory overhead

  • Costs for direct labor


  1. Utilities

You can completely deduct all utilities used for your business. Water, electricity, trash, telephone bills, etc., are examples. For people working from a home office with a landline, you cannot deduct the cost of the first landline; however, you can deduct subsequent ones.

 

  1. Business property Rent

It is possible to deduct lease or rental payment from your taxes provided you rent your business property. Also, it is possible for those running their business from home to have an eligibility test with Uncle Sam to see if they qualify for any deduction. 

Home business expenses that can be deducted are mortgage interest, utilities, depreciation, and repairs. IRS pub 587 has more information.


  1. Auto Expenses

If you use a car for your business, whatever expense you incur can be deducted. Although, you must have a record that proves that you used it for business and keep a tab on your miles. 

Alternatively, you can use the IRS standard mileage rate pegged at 0.58 cents per mile. People who use their vehicles for business and personal means have to divide the expense by the actual mileage.

 

  1. Travel Expenses

For people who frequently travel, deducting all expenses incurred on the trip is possible. However, such a trip needs to be out of the city or vicinity where your business is to qualify as a business expense. 

Also, one needs to be away from the tax home for more than a complete workday. Sample travel expenses you can deduct are airfare, taxis, lodging, etc.

 

  1. Interest

For people with a small business loan, there will be interest payment on the amount borrowed. You can completely deduct such interest payment provided the loan majorly took care of business expenses. 

There must be a debtor-creditor relationship between the business owner and the lender to qualify and claim this deduction. The business owner needs to be legally liable for the debt. Such a loan cannot come from a friend or family member but a traditional lender.

 

  1. Bad Debt

All funds you lent to a vendor or an employer you never got back can be claimed as a bad debt. However, one needs to prove that such was a business debt and not a personal debt. 

Uncle Sam defined a bad debt as any loss that comes from the worthlessness of debt you create or got in a business or trade that became totally or partially worthless. 


Sample bad debts are:

  • Loans to suppliers, distributors, clients, and workers

  • Business loan guarantees

  • Sales to customers on credit. 


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Tiffany Gaskin
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