As part of an effort to mitigate the effects of the spread of the coronavirus known as COVID-19, the Internal Revenue Services has chosen to delay the April 15, 2020 tax filing deadline for most individual taxpayers and businesses to July 15, 2020. Regardless of the deadline, one thing that isn’t expected to change anytime soon is what a business can and cannot claim as a tax deduction. And in today’s post, we offer insight into exactly that — what small businesses can and cannot deduct, regardless of the tax filing deadline.

A deduction (or write-off) is an expense or portion of an expense subtracted from your company’s gross income that reduces the income on which taxes are calculated. Every dollar you claim as a deduction is a dollar less that is subject to federal, state, and local income tax and self-employment tax (Social Security and Medicare).

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For example, if your effective federal income tax rate is 25 percent, and you pay 15.3 percent in self-employment tax and 5 percent in state and local income tax, every thousand dollars less you report in taxable income is over 450 dollars you save in taxes: (0.25 + 0.153 + 0.05) x $1,000 = 0.453 x $1,000 = $453.

The Tax Cuts and Jobs Act (TCJA), which became effective in 2018, made it less advantageous for taxpayers to itemize personal deductions. However, if you own a small business — such as a sole-proprietorship, limited liability company (LLC), or partnership — you can deduct a broad range of business expenses to lower the taxable income you earn from that business.

Here are a couple tips for claiming business deductions without getting into legal trouble:

  • Seek confirmation from a tax specialist or certified public accountant (CPA) before claiming any business expense as a deduction.
  • Keep accurate, detailed records, including invoices and receipts for all business expenses. (Your CPA can help you find accounting packages and apps to simplify your record-keeping.)

In the following sections, we present a long list of common small-business tax deductions.

Advertising and promotion

Any money you spend promoting your business is 100 percent deductible, including money spent for the following:

  • Hiring someone to design and print a business card, brochure, menu, etc.
  • Buying print advertising in a local, regional or national publication
  • Building, hosting, and maintaining a business website or blog
  • Running an e-mail or social media marketing campaign
  • Buying online advertising on platforms like Facebook, LinkedIn, and Instagram
  • Sponsoring a promotional event

Business meals

Costs for business meals (food and beverage) are generally deductible up to 50 percent, but expenses must meet the following conditions:

  • Business meals must be “ordinary and necessary”
  • The meal must not be “lavish or extravagant”
  • An owner or employee of the business must be present at the meal
  • If the meal is part of an entertainment event, only the cost of the meal is deductible

When meals are provided for employees (for example, donuts and coffee for a morning meeting or pizza and soft drinks for a team that’s working late on a project), the costs are 100 percent deductible.

When deducting the costs of food or beverages, keep detailed records, including the following:

  • Date
  • Location
  • Cost/receipt
  • Purpose of the meal/meeting
  • Names/occupations/positions of people attending the meeting/meal

Business insurance

Any amount you pay for business insurance is 100 percent deductible, including the following:

  • Coverage for your physical office and its contents (furniture, equipment, supplies)
  • Liability or malpractice insurance
  • Group health, dental, or vision insurance for employees
  • Workers’ compensation insurance
  • Insurance to cover business vehicles
  • Life insurance for employees (note: business owners cannot be a beneficiary, and there are limits as to how much is not taxable compensation to an employee)

Bank fees and financial transaction fees

Bank fees and financial transaction fees related exclusively to your business are 100 percent deductible. Here are a few examples:

  • Annual or monthly service charges to maintain a bank account for your business
  • Annual or monthly service charges for a credit card for your business
  • Fees for printed checks
  • Transfer or overdraft fees
  • Merchant or transaction fees, such as fees from Strips, PayPal, and Venmo

Note that any fees related to your personal bank accounts or credit cards are not deductible.

Business use of your car

If you use a vehicle for your business, you can deduct the costs associated with its business usage. When claiming this deduction, you can choose one of the following two options, whichever gives you the most advantageous deduction:

  • Standard mileage rate: Multiply the miles driven for business during the year by a standard mileage rate ($0.58 per mile for tax year 2019).
  • Actual expense method: Total all vehicle costs for the year, insurance, maintenance, registration fees, and lease payments and multiply the total by the percentage of miles driven for business. (If you used the vehicle exclusively for business, you need not multiple the total by the percentage of miles driven for business, because that percentage is 100 percent.)

Be sure to keep detailed records, including the following:

  • Total miles driven for the year. (Pro Tip: Write down the odometer reading at the beginning and end of the year.)
  • A breakdown of miles driven for business and for personal use (unless you use the vehicle exclusively for business). The best method is to keep a mileage log documenting every business trip, including destination, miles driven, and business purpose. Another option is to note these details on your calendar or in an appointment book or day planner.

Depreciation

Depreciation enables you to deduct the costs of qualifying business assets such as computers, office equipment, and furniture the year the items were purchased or over several years. You have two ways to accelerate depreciation to claim more of the cost of business assets as a deduction in the year in which the assets are placed in service:

  • Section 179 deduction. You can deduct the entire cost of qualifying business assets in the tax year in which they were placed in service up to the lesser of $1 million or the business’s total taxable income in that year.
  • Bonus depreciation. You can deduct up to 100 percent of the cost of machinery, equipment, computers, appliances, furniture and other qualifying assets with a recovery period of 20 years or less in the year the asset was placed in service.

The Section 179 deduction is taken as a dollar amount, whereas bonus depreciation is calculated as a percentage. The two methods differ in other ways, as well. Consult your tax specialist or CPA to determine which method is most advantageous to your business-related tax situation.

Education

Education costs related to maintaining or improving work-related knowledge or skills for an existing business are fully deductible, including the costs of the following:

  • Seminars, webinars, workshops, and classes
  • Trade publications (hardcopy books, eBooks, and magazines)
  • Transportation expenses to and from seminars and classes

Home office expense

You can deduct the cost of any workspace you use regularly and exclusively for your business, whether you rent or own it. If you use a portion of your home as your office, calculate the size of your office in total square feet and calculate that space as a percentage of your home’s total living space. For example, if your office is 10-by-20 feet, it is 10 x 20 = 200 square feet. If your home is 2,000 square feet, your office is 200/2,000 = 10 percent of your home.

Choose one of the following methods to calculate your home office expense:

  • Simplified method: Deduct $5 per square foot of your home that is used for business, up to a maximum of 300 square feet.
  • Standard method: Total all expenses of maintaining your home, including mortgage interest or rent; utilities; property taxes; homeowners association fees; and repairs, cleaning, and maintenance that apply to the entire home, not just a portion of it. Multiply the total by the percentage of your home used exclusively for business to calculate your deduction. (Note that any repairs or improvements to the office space, such as the cost of new carpeting in the office, are fully deductible, whereas the cost or repairs or improvements to other rooms in the home, such as a living room are not deductible at all.)

Keep in mind that in order to qualify for home office deduction, the office space you’re claiming must be your principle place of business.

Business loan or credit interest

While you can deduct all interest on loans or credit cards used to cover expenses exclusively related to the business, you cannot claim interest on personal loans or personal credit as a business expense.

Legal and professional fees

If you hire professionals, such as a lawyer, accountant, or consultant to help with business matters, their fees are fully deductible.

Moving expenses

The cost of moving to a new location is fully deductible.

Office expenses

The cost of office supplies used exclusively for your business are fully deductible, including the following:

  • Printer/copy paper
  • Printer ink/toner
  • Postage and shipping costs
  • Pens, pencils, markers
  • Staples, paperclips, rubber bands

You can also deduct many other office expenses, including costs associated with the following:

  • Office furniture
  • Computers and peripherals (desktop, laptop, and tablet computers), monitors, keyboards, mice, printers
  • Computer software and subscriptions
  • Office and equipment maintenance and repairs

Note: Refer to Depreciation above for further details on exactly how to manage these types of deductions.

Rent expense

Payments for renting a business location or equipment are fully deductible, but if you rent your home and use a portion of it exclusively as an office for your business, deduct the rent as part of your home office expense as explained above.

Salaries and benefits

Employee compensation in the form of salaries and benefits (including vacations) are generally tax-deductible if they meet the following conditions:

  • The salary is reasonable, ordinary, and necessary
  • The employee is not the business owner, a partner, or an LLC member
  • The benefit was provided

If you hire contract workers, be sure to issue them IRS Form 1099 at the end of the year to report the amounts you paid them. If you have hourly or salaried employees, consult your tax specialist or CPA to ensure proper documentation and reporting.

You can also deduct the costs of certain employee benefits, such as the following:

  • Health, dental, and vision insurance premiums
  • Bonuses
  • Payroll taxes
  • Retirement contributions

Self-employment tax

When you’re self-employed, you pay both the employer and employee portion of the Federal Insurance Contributions Act (FICA) payroll taxes, which amounts to 15.3 percent of an employee’s gross pay. You do get a little beak — you get to deduct the employer portion of that amount from your adjusted gross income (AGI) when you file your personal tax return.

Telephone and internet expenses

If telephone and internet services are essential for your business, you can deduct the portion of these services used exclusively for business as business expenses.

However, if your home has a landline, you’re not allowed to deduct its cost or even a portion of it as an expense. If you have a second landline used exclusively for business, the cost of that landline is fully deductible.

Travel expenses

Travel expenses that are ordinary and necessary for your business and take you outside the confines of your tax home (i.e., the city or area in which you conduct business) for longer than a normal business day generally qualify as deductions. Deductible travel expenses typically include the following

  • Lodging
  • Meals, including tips
  • Business phone calls
  • Laundry/dry cleaning
  • Parking and tolls
  • Shipping of baggage, samples, or presentation materials to and from the destination
  • Train, plane, bus, or car fare
  • Use of your car during the trip

If you plan to claim travel expenses, keep a detailed record, including the following:

  • Departure and return dates and locations
  • Description of the trip’s purpose
  • Dated receipts for all expenses
  • Mileage log (if you used your own or a business vehicle for the trip)

Other taxes and licenses

To take the sting out of other taxes and government fees, small-business owners can deduct a variety of taxes and the costs of certain licenses, including the following:

  • Business licenses
  • Excise taxes
  • Fuel taxes
  • Payroll taxes
  • Personal property taxes
  • Real estate taxes paid on business property
  • Sales tax
  • State income taxes

Although this blog post provides you with a long list of business deductions, it is not exhaustive and does not go into enough detail to ensure compliance with the complex U.S. tax code. We encourage you to consult a tax specialist or CPA for detailed guidance so you can maximize your tax savings through deductions and other techniques used to reduce your business-related tax liabilities.

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About the Author: Laura Stees, CPA is a partner and business strategist with Stees, Walker & Company, LLP — a San Diego, Calif.-based boutique tax consulting firm focused on personalized tax and financial guidance to individuals and businesses.

Disclaimer: The information in this blog post about tax deductions for small businesses is provided for general informational purposes only and may not reflect current financial thinking or practices. No information contained in this post should be construed as financial advice from the staff at Stees, Walker & Company, LLP, nor is the information contained in this post intended to be a substitute for financial counsel on any subject matter or intended to take the place of hiring a Certified Public Accountant in your jurisdiction. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate financial planning advice on the particular facts and circumstances at issue from a licensed financial professional in the recipient’s state, country or other appropriate licensing jurisdiction.