Tax Deductions that Every Small Business Owner Should Know
You have taken the brave step of being the master of your own destiny by becoming your own boss. The first year has come with a fair share of challenges but you survived and are now ready to thrive.
Enter the taxman. Like death, taxes cannot be avoided and can strike fear into even the boldest entrepreneur. Many new small business owners often unknowingly leave valuable deductions on the table or think it is a matter for their accountant to handle. The truth is an informed leader is usually a successful leader.
The following is a list of tax deductions that if overlooked can be a costly mistake for any new small business owner.
The Internal Revenue Service allows you to deduct mileage that is used for business purposes.
They are as follows:
- 58 cents per mile for business miles driven, up from 54.5 cents for 2018
- 20 cents per mile driven for medical or moving purposes, up from 18 cents for 2018
- 14 cents per mile driven in service of charitable organizations, unchanged from 2018
As you can see the mileage amounts allowed for deduction actually increased in 2019 regarding two of the three categories. It is important to note that mileage deductions do not kick in when you go from personal residence to your place of business. In other words, your commute mileage cannot be used as a deduction.
You might be wondering how do you accurately keep track of mileage used for business purposes? This website has some of the best mileage tracking apps on the market that should fit most everyone’s budget.
Business Travel Expenses
The Internal Revenue Service defines a business expense as the ordinary and necessary expenses associated with traveling away from your home for your business, profession, or job. These expenses cannot be extravagant or used for personal purposes.
The following are valid business expenses:
- Travel by airplane, train, bus, or car between your home and your business destination. (If you’re provided with a ticket or you’re riding free as a result of a frequent traveler or similar program, your cost is zero.)
- Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel, and the work location, and from one customer to another, or from one place of business to another.
- Shipping of baggage, and sample or display material between your regular and temporary work locations.
- Using your car while at your business destination. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking fees. If you rent a car, you can deduct only the business-use portion for the expenses.
- Meals and lodging.
- Dry cleaning and laundry.
- Business calls while on your business trip. (This includes business communications by fax machine or other communication devices.)
- Tips you pay for services related to any of these expenses.
- Other similar ordinary and necessary expenses related to your business travel. (These expenses might include transportation to and from a business meal, public stenographer’s fees, computer rental fees, and operating and maintaining a house trailer.)
- Your tax home is defined as the entire city or general area where your main place of business or work is located. Your tax home and where you maintain your family can be totally different for taxation purposes. You usually are going to be away from your tax home for a substantial period of time for business purposes and this includes getting sleep to meet the obligations of your work assignment. The work assignment itself should be for a certain amount of time but not indefinite. Any work assignment that is over a year is considered indefinite.
- Many apps have come on the market that makes it exceptionally easy to scan and track receipts for travel-related expenses. Some of these apps also automatically categorize expenses which is very nice for accurate bookkeeping.
Home Office Deduction
Using part of your home for business allows you to deduct expenses for the business use of your home. This can be applied to all types of homes including business owners who rent.
If you use your home exclusively and regularly for conducting business you can deduct the following:
- Mortgage Interest
- Depreciation for that area
In order to qualify for the home office deduction, you must show that your home is used regularly and exclusively for conducting business and is the principal place of business.
For a full explanation of tax deductions for your home office refer to Publication 587, Business Use of Your Home. In this publication you will find:
- Requirements for qualifying to deduct expenses (including special rules for storing inventory or product samples).
- Types of expenses you can deduct.
- How to figure the deduction (including depreciation of your home).
- Special rules for daycare providers.
- Tax implications of selling a home that was used partly for business.
- Records you should keep.
- Where to deduct your expenses (including Form 8829, Expenses for Business Use of Your Home, required if you are self-employed and claiming this deduction using the regular method).
Any expenses that are work-related education expenses can be deducted.
To be deductible, your expenses must be for education that;
(1) maintains or improves your job skills or
(2) the law requires you to keep your status or occupation. However, even if the education meets either of these tests, the education can’t be part of a program that will qualify you for a new trade or business or that you need to meet the minimal educational requirements of your trade or business.
Expenses that you can deduct include:
- Tuition, books, supplies, lab fees, and similar items
- Certain transportation and travel costs, and
- Other educational expenses, such as the cost of research and typing
To determine if your work-related expenses are deductible, see Are My Work-Related Education Expenses Deductible?
Tax Resale Certificates
Up until now, we have been primarily talking about deductions at the level of the Federal government. It is important to also remember that there can be many money-saving deductions at the state level as well.
A tax resale certificate is a signed document that indicates that the purchaser intends to resell the goods. In some states, resale certificates are also used to purchase taxable services that become a part of the property for resale.
Tax resale certificates can provide great savings that are fantastic for a business’s bottom line. However, the rules and regulations can vary greatly by the state which may cause a lot of confusion. Luckily there are websites that take the headache out of the process.
You can read our handy article titled Everything You Need to Know About Tax Resale Certificates in order to get a comprehensive understanding of how they save your business money if you are a seller of goods. Visit taxresalecertificate.org to apply for your resale certificate as soon as possible.
We know how hard you have worked to start up your business. Being knowledgeable about tax deductions can help keep your hard-earned profits in your business so you can grow and thrive. Once again knowledge is the greatest asset one can have on the path to success.