Tax

Small Business Expenses: A Guide to Tax Deductions and Saving Money

By Finaloop Team
January 23, 2020

It's not easy to run a business, especially if it's a new business. Cash flow is tight, expenses are high, and it usually takes some time until your new business picks up. The last thing you want to do after all your hard work is to start dealing with paying taxes. You need to gather all your information, make sure all the numbers add up, and get it all to your accountants and hope they can make sense of it all during their busy tax season.

But even more than that, let's admit it - we all just don't like actually paying taxes, because no one wants to give their hard earned money to the tax man. That makes it incredibly important to know where all of your deductions are, saving you the most money.

Most retail and eCommerce businesses we speak with don't even know that they are able to deduct many of their everyday expenses. Tracking and properly labeling expenses can save a company thousands of dollars in tax breaks.

Your accountants might not have the time and resources to make an in depth analysis of your deductions during busy season giving some of your money away to the IRS. In fact, most of our customers say that Finaloop saved them a lot of money with the additional deductions and opportunities that our tax experts and our specially designed algorithms were able to find them.

What is a tax deduction

A tax deduction, also called a tax write-off, is an expense which can be deducted from your taxable income for tax purposes. You take the amount of the expense (or a part of it as approved by the IRS when the entire amount is not permitted) and you subtract the approved amount from your taxable income.

Claiming tax deductions lowers your taxable income, allowing you to pay a smaller tax bill. Not all deductions will apply to everyone, and it is advisable to speak with a tax consultant or CPA to be sure that a specific deduction applies to you. It is always important to ensure that you maximize your deductions, making sure you leave no penny on the table.

Aside from just ensuring that you claim all of your available deductions, it is equally important to ensure that you do not claim any disallowed, or prohibited deductions, such as personal or other non-business deductions. Claiming prohibited deductions can lead to an audit and the IRS can impose heavy fines and penalties.

To ensure that you are only claiming permitted deductions, and that you don't miss anything, it is equally important to be sure you have a good accounting and tax prep system. You can always go with a do-it-yourself program such as Quickbooks or Xero and then pay an accountant to file and prepare your taxes, or you can have Finaloop do it all for you in one simple and easy to use software platform which uses our specially designed software, created and managed by tax experts.

Expenses You can Deduct

According to IRS, deductible business expenses must be "both ordinary and necessary". Items purchased must be standard for the line of work, and not personal expenses. For example, an eCommerce business selling beauty and health care products can't claim a deduction for purchasing children's toys. This will likely trigger an IRS audit.

Start Up Costs

Most companies need to shell out a lot of money up front in start-up costs to get the company off the ground, long before you've even begun to operate, let alone turn a profit. However, these start-up costs can usually be deducted from your taxes.

Did you travel to meet with vendors, suppliers and partners? Did you conduct market research, purchase your web domain, begin advertising your future company or hire and consult with attorneys and accountants?

You can deduct up to $5,000 of these expenses in the first year of your business while spreading the remaining amounts over the course of several years. The spread out deductions over time will provide you with a gradual tax benefit from these expenses.

Advertising and Promotions

Both before and during the operation of your business, you constantly need to advertise and bring customers to your store or website. Some of the biggest expenses any retail or eCommerce store will have includes hiring people to build your company logo, build a website or landing page, design the interior of your store, conduct Google Adwords, Youtube, Instagram and Facebook ads campaigns and payment to marketing or PR agencies. These expenses can all be deducted.

However, be advised, while the government appreciates you engaging in your civic duty, political ads and lobbying efforts are not deductible.

Home Office

Do you have a businesswhich you manage and operate from the comfort of your own home? This is seen often in a services-based or eCommerce type business which do not require more formal offices and working spaces.

If you work from home, you can deduct a portion of your housing expenses. It is important to note that the work space must be a separate designated space. It does not need to be its own private room, but it must be in a designated space in the house, such as a corner of your living room.

The IRS allows for 2 methods of claiming the home office deduction, the Simple Method and the Standard Method.

In the Simple Method, the IRS allows you to claim a deduction of $5 per square foot for a max of 300 square feet. Your home office deduction cannot exceed $1,500 per year.

Using the Standard Method, you are required to track all expenses related to your home, including, but not limited to, mortgage interest payments, rent, utilities, real estate taxes, housekeep, landscaping, homeowners association fees and repairs. Then multiply the amount of your expenses by the percentage of the home which is devoted to business use.

There are 2 requirements to qualify for the deduction:

  1. Regular and exclusive use: You must regularly use your home office exclusively for conducting business. The home office must have have identifiable boundaries such as a separate room, or a separate, designated and easily identifiable corner or section of another room in the house. (one example of this is to place a desk and chair and specifically designate the area exclusively for work purposes.)
  2. Principal place of business: The majority of the business work must be conducted from the home office. If you have a storefront or a seperate office where most of your work is done during the day, and you simply do some additional work late at night from home, it is unlikely that you will be able to claim the home office deduction.

Business Insurance

Every company needs insurance to protect itself from unforeseen circumstances. Some business insurance policies are optional, such as general liability insurance, and some are required by law, such as workers compensation insurance for your employees. You can deduct the premium payments for insurance policies such as:

  • Liability coverage
  • Property coverage for furniture, equipment and buildings
  • Theft insurance
  • Flood insurance
  • Malpractice or professional liability insurance
  • Group health, dental and vision
  • Workers compensation
  • Motor vehicle insurance for business vehicles
  • Business interruption insurance
  • Life insurance for employees (the employer cannot be beneficiary)

Business Meals and Entertainment

The Tax Cuts and Jobs Act of 2017 made drastic changes to the rules regarding deductions for business meals and entertainment. The IRS has been closely monitoring the deductions companies claim for meals and entertainment and has been auditing many companies for failure to comply with the new rules.

Some meals and events are 100% deductible, some are only 50% deductible and some are not deductible at all.

0% Deductible

It is a common practice for businesses to splurge a bit on their more important customers as a means of keeping their business. However, entertaining customers is no longer deductible at all. Those concert or broadway show tickets, or tickets to the company box seats at sporting events, and other gifts or outings with clients which were once deductible can no longer be deducted as a business expense.

50% Deductible

The following meal expenses are 50% deductible:

  • A meal with a client where work or business is discussed. The meal cannot be lavish under the circumstances
  • Employee meals at a conference or seminar where the food is not included in the price of the conference ticket
  • Employee meals while travelling (See how the IRS defines "travel")
  • Office snacks
  • Treating a few employees to a meal. (Note: if you are treating half or more of all employees it is 100% deductible)
  • Food for a board of directors meeting
  • Dinner provided to employees at the office when they are working late

100% Deductible

The following meal expenses are 100% deductible:

  • A company wide holiday party
  • Food and drinks provided free of charge to the public
  • Food included as taxable compensation to employees and included on the employees W-2
  • Meals provided to employees at office outings and official office recreational events (Note: the cost of the event or outing is also 100% deductible)
  • Food provided to employees in a company cafeteria or if you go out for a team dinner

It is important to document all of your meals, including where the event took place, who was there and what was the purpose of the meal and business relationship with each person who dined with you. These records will be necessary in case of an audit so you can prove to the IRS that the meal is in fact eligible for the deduction.

Business Travel

Does your business require you or your employees to travel sometimes? Do you attend trade shows, seminars and other professional events outside your city? Perhaps you and your team need to go meet with vendors, clients, consultants or contractors? If you are travelling for business purposes, you can deduct your expenses, such as airfare, hotels, meals, automobile expenses, taxi fares, and more.

There are also some business related expenses some people don't think about, such as fees to use the wifi, tolls and parking, printing costs of documents, fees for use of a hotel business lounge, additional airline fees for baggage, and shipping items to and from your conference or trade show.

To be eligible, the travel expense must meet 2 criteria:

  1. The trip must take you away from your regular place of business for longer than 1 day of work (trips inside your own city or area will not suffice)
  2. You need to sleep or rest while away to meet the demands of the trip.

These days, most of your expenses will be tracked and recorded for you on your credit card or bank statement. It is advisable to get a company credit card or use the company bank debit card for your expenses. However, if you have your employees charge expenses to their own credit cards and you will reimburse them, or you and your employees make certain payments in cash, it is important to track your expenses and keep the receipts in case of an audit. You can use an expenses tracking software such as Expensify to help you with keeping track of your expenses.

Business Interest and Bank Fees

All of your banking and loan fees are deductible. If you incur overdraft fees, ATM fees, and monthly account charges, all of these can be deducted on your tax return.

Further, if you take out any business loans or lines of credit, the interest you pay on the loan is entirely tax deductible. However, if you take out a personal loan and transfer some of the funds to your business, the tax consequences will be somewhat more complicated.

Business Use of Your Car

Do you need to drive to meet your inventory supplier, or to meet with your company lawyer to draft a business contract? You can deduct a part of the expenses related to your personal vehicle when it is used for business purposes. If the car is exclusively used for business purposes, the entire cost of vehicle can be deducted.

There are 2 methods for calculating the deduction:

  1. Standard Mileage Rate: Multiply the number of miles driven by $0.58 per mile (as per 2019)
  2. Actual Expense Method - Track all costs of the vehicle, including gas, repairs, insurance, registration, lease payments, etc, and multiply by the percentage of miles driven for business purposes.

It is advisable to keep a log and record all of your business trips, including how many miles you drove per trip and how many miles per year overall. Keep a record of the date, time, and the location you drove to and the purpose of the trip, such as to meet with your vendor, business partner, or company attorney or accountant.

You cannot deduct the miles driven commuting to your regular place of work, that is you cannot deduct driving form your home to your office or other regular place of business and back. Only trips to places other than where your work normally takes place can be deducted.

Legal and Professional Fees

Any legal or professional fees which are necessary to run your business are deductible, such as fees paid to lawyers, accountants, bookkeepers, and tax preparers.

Monthly fees paid for use of things such as an online accounting software like Quickbooks, or the monthly fee to use a cutting edge bookkeeping and tax preparation service like Finaloop, can also be deducted.

Continuing and Further Education in Your Field

If you need to take classes or attend seminars as a requirement to maintain your professional license, or if you simply want to stay abreast of changes in your industry and field, fees paid to take lessons and attend courses or seminars are deductible.

Depreciation

Did you buy a new couch, some desks or a new computer for the office? Company equipment and furniture can be depreciated over time to lower your tax bill.

However, if your equipment costs less than $2,500, the De Minimis Safe Harbor rule allows you to deduct the entire cost of the equipment or furniture in the year it was purchased.

Moving Expenses

If your company grows, you hire more people and you need a bigger office space than you currently have, or if your eCommerce company grows to be too big for that small corner in your living room, you can deduct the costs of moving your office supplies and equipment to your new office.

Salaries and Benefits

Employee salaries are tax deductible. They must be reasonable and ordinary, and the employees must provide services which are necessary to the company. You can have your employee take care of certain business errands for his usual monthly salary, but you can't pay your friend $10,000 to to pick up your inventory across town and mark it off as an expense.

As a sole proprietor, a partnership or a pass-through entity for tax purposes such as a pass-through LLC or an S Corporation, you cannot deduct salaries you pay yourself or your business partners. However, if you are taxed as a C Corporation, the corporation would be able to deduct employee salaries from the corporate profits.

Learn more about the differences between LLCs and Corporations.

Taxes

Payments made for state and local income taxes are deductible on your federal income tax return.

Telephone, Internet and Utilities Expenses

Every business can deduct expenses for its utility bills, such as office phones, internet, electricity, gas, and water.

If you have a second cell phone you exclusively use for business purposes that would be 100% deductible as well. However, if you only have 1 cell phone, you can deduct the percentage of time you use your cell phone for business purposes. So if you use your phone 50% of the time for business purposes, you can deduct 50% of your cell phone bill.

However, the rule for your employees cell phones are different. If you provide your employees with a cell phone and a phone plan and require your employees to use a cell phone for work, the employees entire cell phone bill is deductible. The IRS views the employees personal use of the cell phone as a de minimis fringe benefit and allows you to deduct the entire amount of the employees phone bill.

Make Sure to Get All of Your Deductions

Your business deductions can really add up, and its important not to miss anything. Missing a big deduction can cost you thousands of dollars. While most accountants and bookkeepers tend to miss things here and there, Finaloops unique logic and algorithms can help make sure you claim all your deductions and save you the most money.

Finaloop centralizes all of your financial information by connecting your bank accounts, credit card accounts, bill processing software such as Bill.com, employee expense software such as Expensify and payroll providers such as Gusto or Justworks, as well as other third party applications to gather and cross-reference all of your information, letting you know precisely what you can deduct and how much you can save each year.

Finaloop can also prepare, review and file your quarterly and annual tax returns for you to allow a smooth, less stressful and rewarding tax season.

The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.

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