When you are a small business owner you spend money on many things to keep your business afloat. Many of these expenses simply sustain your business, and other expenses may help you grow your business. What Small Business Expenses are Tax Deductible in 2021-2022??
This is an excellent question and we will answer this question in detail below.
- 1 IRS Requirement: “Ordinary & Necessary”
- 2 What Expenses are Tax deductible for Small Business?
- 2.1 Advertising & Marketing
- 2.2 Business Car & Truck Expenses
- 2.3 Commissions Paid
- 2.4 Contract Labor & Outside Services
- 2.5 Depreciation
- 2.6 Employee Retirement Plans
- 2.7 Business Insurance
- 2.8 Interest Expense
- 2.9 Legal & Professional Fee
- 2.10 Rent
- 2.11 Office Expenses
- 2.12 License and Permits
- 2.13 Vehicle/Machinery Lease Expense
- 2.14 Employee Wages & Payroll Taxes
- 2.15 Utilities:
- 2.16 Home Office Expense
- 2.17 Business Travel:
- 2.18 Business Meals
- 2.19 Supplies
- 2.20 Cost of Goods Sold(COGS)
- 2.21 Repairs & Maintenance
- 2.22 Janitorial Service
- 2.23 Bad Debts
- 3 When to Issue a 1099?
- 4 Learn More
IRS Requirement: “Ordinary & Necessary”
In order for an expense to be tax deductible, IRS has clear guidelines. Internal Revenue Code dictates that the business expense needs to be ordinary and Necessary.
“Ordinary” simply means that the type of expense is common in particular industry and is generally accepted within the industry.
For example, for an accountant, Office Rent, Paper, Office supplies, Printer, Tax & Bookkeeping Software may be an Ordinary Business Expenses.
“Necessary” simply means that the expense is generally required to perform the type of task.
For example for a plumber his tools, his plumbers license fee or fuel may be required for him to go to job site to perform repairs.
What Expenses are Tax deductible for Small Business?
Here is a General List of Business Expenses. This list will expand substantially based on what type of business you may have:
Advertising & Marketing
Expenses paid to promote your businesses such as Google AdWords, Print Advertising, Post Cards, Door Hangers, Coupons, Digital Advertising and Marketing can all be deductible form you income.
Business Car & Truck Expenses
Expenses pertaining to Business vehicle that is used for work are tax deductible. For example Fuel, Repair and Maintenance, DMV Fee, Vehicle Wash and Cleaning can be deducted from gross income of the business. There are two ways of deducting vehicle expenses. Either you can use Actual Method or Mileage. If you use Actual Method, you get to deduct Fuel, Vehicle Insurance, Repairs, Depreciation of vehicle or you can use IRS Mileage Rate Set for each year.
You can deduct commissions paid to various vendors Such as Merchant Credit Card Commissions paid to American Express, Visa. If you are a restaurant owner, You could be paying commissions to Uber, Door Dash to send business your way. All these commissions are tax deductible as they are all ordinary and necessary for your business to operate.
Contract Labor & Outside Services
If you hire independent contractors to perform certain duties such as direct sales, marketing, or legal work, you can deduct these expenses as Contact Labor or Outside services expense on your schedule c or 1120, 1120s or 1065. Don’t forget to issue 1099 to any vendor you pay $600 or more in one year.
When you purchase assets in business such as Machinery, you can write off a portion of the amount over time. For example if you purchase a machinery for $50,000, you write off the amount over 5 to 7 years. So each year you will write off $10,000. This amount is called depreciation deduction.
Employee Retirement Plans
There are many retirement plans available for small businesses such as 401k, Defined Benefit plan, Pension Plans, SEP IRA. When business pays money in these plans on behalf of employees, small business can deduct the cost as an expense on their business tax return.
Typically most businesses buy insurance to protect their businesses, employees and customers. Hence many type of business insurance is deductible such as Liability Insurance, Workers Compensation Insurance, Fire and Casualty Insurance, and Term Life insurance of employees up to $50,000 death benefit.
In order to start, build or grow, small business owners take business loans. Interest paid on these business loans and business credit cards can be deducted as an ordinary and necessary expense.
Legal & Professional Fee
In course of doing business you have to hire many professionals who can help your business such as Attorney & Accountants. You can deduct the professional fee you pay to these professionals.
In order to run a business such as dental clinic, mechanic shop or an accountants office, these small businesses rent these facilities from landlords.
Rent paid for these facilities such as Office, Warehouse, or Repair Shops is tax deductible as these facilities are required in order to conduct business.
Many general office expenses that pertain to office can be deducted in this category. These include Apps, small software expenses.
License and Permits
License and permits required to operate business can be deducted. For example for a restaurant A city License, County License and Health permits may be required.
Vehicle/Machinery Lease Expense
If you lease Machinery, business truck or car you get to expense these amounts.
For Example, if you lease a forklift and pay $500 dollars a month, then you can deduct $6000 for the year from the total taxable income.
Employee Wages & Payroll Taxes
If you hire employees and pay them wages, you get to deduct these from your gross income. In addition to employee salary
Such as Water, Garbage, Electricity
Home Office Expense
If you’re like many people, you may be wondering if you can deduct your home office expenses on your taxes. The answer is maybe. The IRS has a specific set of criteria that must be met in order for your home office to qualify as a deduction.
Basically, the space must be used exclusively and regularly for business purposes. So, if you have a dedicated room or area in your home that you use solely for work, you may be able to deduct a portion of your rent or mortgage, utilities, and other expenses.
However, if you only occasionally work from home or use a shared space for both business and personal purposes, you likely won’t be able to take the deduction.
Therefore, it’s important to check with your Tax accountant or CPA to see if your situation qualifies before taking any deductions on your taxes.
If you need to travel for business you get to deduct Airline Tickets, hotel stay and meals during travel
If you conduct business during, after or before the business meal you get to deduct it. Depending upon the year they may be deductible 50% or more. Please verify this with your accountant as this category is changing all the time.
Any business supplies such as paper, pads, staples, printer toner are all deductible as long as they are used for business purpose.
Cost of Goods Sold(COGS)
For businesses that sell products, that amount is reported in COGS. For example if you have a repair shop and you sell parts along with providing repairs, you can put the cost of parts as COGS.
COGS is typically calculated:
Beginning Inventory Plus Purchases(during the Year) Minus Ending Inventory.
Repairs & Maintenance
If you have business vehicles, assets and premises you need to repair and maintain them. For example you may need to call a plumber to fix a leaking faucet or fix a broken glass door. You can deduct any general repairs pertaining to the business.
You can also deduct maintenance as well such as Window cleaning, or Gardner service.
If you have business car, you can deduct Repairs and Maintenance for business vehicles.
Most business has professional janitorial companies come and clean their clinics or offices at night. This is a necessary and ordinary expenses that is required to have professional presence and clean environment. Hence this expense is tax deductible.
Like many business owners a portion of your revenue is usually uncollectible, either due to fraud or customers inability to pay. If you use accrual based accounting, then the portion you are unable to collect can be deducted as Bad Debts.
For example, If you are an architect and you billed 10,000 and the client only paid you $7000, the remaining $3000 will be considered bad debt. In this example, using accrual method, the Architect will report $10,000 as income and $3000 as bad debt expense.
If you are self employed and are looking to find more information about small business and self employed, we highly recommend you check out IRS Publication 334
When to Issue a 1099?
Per IRS guidelines, If you pay Any one vendor $600 or more during one year period, you are required to issue a 1099 to them either a 1099 NEC or a 1099 M.
We recommend you have the vendor fill out a W9 form at the beginning of relationship and keep in your permanent file. You can download form w9 from the IRS website.
1099 has long list of rules and regulations. We highly recommend you check out Comprehensive 1099 Guide by, Clicking Here