10 Tax Deductions That Most Small Businesses Miss Out On

Tax season can be a stressful time for small business owners, but it doesn't have to be. There are numerous tax deductions that small businesses can take advantage of to reduce their taxable income and increase their refund.

However, many business owners miss out on these deductions, either because they are unaware of them or they don't keep accurate records.

In this LinkedIn article, we will explore 10 of the most commonly missed tax deductions for small businesses, and provide tips on how to ensure you are claiming all that you are entitled to.

1. Home Office Deduction

If you run your business from home, you may be able to claim a deduction for the use of your home office. This includes a portion of your rent or mortgage interest, property taxes, insurance, utilities, and repairs. To qualify, you must regularly use part of your home exclusively for business purposes.For example, let's say you own a consulting business and use one room in your house as your office. You can calculate the square footage of that room and deduct a corresponding percentage of your home expenses.

So, if your office takes up 10% of your total home square footage, you can deduct 10% of your rent or mortgage interest, property taxes, and so on.It's important to keep accurate records of your home office expenses and to be able to demonstrate that the space is used regularly and exclusively for business purposes.

2. Vehicle and Travel Expenses

If you use your personal vehicle for business purposes, you can deduct the business use of that vehicle. This includes travel to meet clients, suppliers, or to attend conferences. You can deduct actual expenses, such as gas, insurance, repairs, and depreciation, or you can take the standard mileage rate, which is a set amount per mile driven for business purposes.In addition to vehicle expenses, you can also deduct travel expenses when you are away from home overnight for business purposes. This includes airfare, hotel costs, meals, and other incidental expenses. Make sure to keep detailed records and receipts for all travel-related expenses.

3. Startup Costs

Many new business owners are unaware that they can deduct certain startup costs when they first launch their business. These costs might include legal and accounting fees, market research, employee training, and advertising to announce the opening of the business.You can deduct up to $5,000 in startup costs in the year that your business launches, and any remaining costs can be amortized over a period of 15 years. To qualify, your total startup costs must be $50,000 or less. If they exceed this amount, the $5,000 deduction will be reduced.

4. Operating Losses

If your business incurs a loss for the year, you may be able to use that loss to offset income from other sources or carry it back or forward to other tax years. This is known as a net operating loss (NOL).For example, let's say your business had a tough year and ended up with a loss of $30,000. You can use that loss to offset income from a side job or investments, reducing your overall taxable income. If you don't have any income to offset, you may be able to carry the loss back two years or forward up to 20 years to get a refund in those years.

5. Health Insurance Premiums

If you're self-employed and pay for your own health insurance, you can deduct the cost of those premiums from your taxable income. This deduction is taken above the line, which means you don't have to itemize to claim it, and it reduces your adjusted gross income (AGI).

Additionally, if you pay for health insurance for your employees, you may be eligible for a tax credit known as the Small Business Health Care Tax Credit. This credit is designed to help small businesses offset the cost of providing health coverage and is worth up to 50% of the premiums paid (35% for tax-exempt employers).

6. Retirement Plan Contributions

Contributions you make to your own retirement plan, such as a solo 401(k) or a Simplified Employee Pension (SEP) IRA, are generally tax-deductible and can help lower your taxable income. In addition, if you employ others, contributions you make to their retirement plans are also deductible as a business expense.For example, if you set up a SEP IRA for yourself and your employees, you can deduct the contributions you make to those accounts as a business expense. In 2023, you can contribute up to $64,500 to a SEP IRA, and the entire contribution is tax-deductible.

7. Education and Training Expenses

Expenses related to education and training for yourself or your employees may be tax-deductible. This includes courses, workshops, seminars, and other types of training that maintain or improve skills needed for your business.For example, if you own a web design business and take a course to learn a new programming language, you can deduct the cost of that course as a business expense. Similarly, if you send your employees to a conference to learn about new industry trends, those expenses are also deductible.

8. Business Entertainment and Gifts

Entertainment and gift expenses that are directly related to your business can be deducted, but there are some important limitations to keep in mind. For entertainment expenses, such as taking a client out to a baseball game, you can generally deduct 50% of the cost. For gifts, you can deduct up to $25 per person per year.Let's say you take a potential client out to a nice dinner to discuss a new project. You can deduct 50% of the cost of that meal as a business entertainment expense. If you give your top clients holiday gifts, you can deduct the cost of those gifts, up to $25 per person.

9. Office Supplies and Expenses

Don't forget about the day-to-day expenses of running your business. Office supplies, postage, shipping costs, and other similar expenses are all deductible. This includes items like paper, pens, ink, computers, software, and even coffee for the office.Keep good records of these expenses throughout the year, as they can add up quickly. Many small businesses miss out on these deductions simply because they don't keep track of their smaller purchases.

10. Professional Services

The fees you pay for professional services, such as accounting, legal, or consulting services, are generally tax-deductible. These expenses are considered ordinary and necessary for running a business and can help lower your taxable income.For example, the fee you pay to your accountant to prepare and file your business tax return is a deductible expense. Similarly, if you hire a lawyer to review contracts or provide legal advice, those fees are also deductible.

Maximizing Your Deductions

To make sure you're claiming all the deductions you're entitled to, it's important to keep accurate and detailed records throughout the year. Here are a few tips to help you maximize your tax deductions:

• Separate business and personal expenses: Keep a separate business bank account and credit card to make it easier to track business expenses.
• Save all your receipts: Use a receipt scanner app or a simple folder to keep track of all your receipts.
• Track mileage: Use a mileage tracking app or a logbook to record all your business-related travel.
• Consult a tax professional: Consider hiring a tax professional or accountant who can help you identify all the deductions you're eligible for and ensure you're claiming them correctly.

By taking advantage of these often-missed tax deductions, small business owners can reduce their tax liability and keep more of their hard-earned money. Remember to keep good records, consult with a tax professional, and stay informed about the latest tax laws and regulations to maximize your deductions and minimize your stress come tax time.