Small Business Tax Deductions | Indinero

Tracking expenses and claiming all the small business tax deductions you qualify for can yield significant savings, especially for startups that aggressively reinvest as they grow. But many entrepreneurs simply do not know which deductions there are.

This guide covers the basics of tax deductions for small businesses and startups, the available deductions, IRS eligibility requirements, and filing requirements.
Many popular tax software, of course, are designed to help you through these start-up tax deductions. But the software is only as good as the data. Documenting these things throughout the year is the really difficult part.

Indineros’ virtual accounting service simplifies record keeping. Paint a financial portrait of your business that will valuable inform your decision making and protect you in the event of an IRS audit. When the time comes, get in touch with us about our virtual accounting services.

What is a small business tax deduction and how does it work?

A small business tax deduction reduces your tax bill by subtracting income from your gross receipts. Since companies only pay taxes on the profits, this reduces the amount one would pay when filing.

Related: How to Calculate Gross Vs Net Income
But what exactly counts as a valid business expense? The IRS paints a broad picture:

To be deductible, business expenses must be both ordinary and necessary. A common expense is one that is common and accepted in your industry. A necessary expense is an expense that is useful and appropriate for your profession or business.

The math behind tax deductions is sometimes misunderstood, so let’s take a look at the formulas.

Incorrect: (Profit x Tax Rate) – Deduction = IRS Invoice

Correct: (Profit – Deduction) x Tax rate = IRS invoice

Properly, the IRS deducts deductions from earnings for multiply by the tax rate. In other words, deductions reduce taxable income before taxes are applied, not after.

The incorrect method would mean a lower total tax bill, but unfortunately this is not how the math is done.

What Small Business Deductions Are There?

The IRS’s definition of ordinary and necessary is intentionally vague. While individuals are limited to a few deductions, the IRS makes fees much freer for businesses.
Remember, as long as you keep proper records for what you deduct and can justify these claims as ordinary and necessary for your business, you’re probably free. That said, it’s always best to have a certified small business tax professional take a look.

The rules vary, but the following deductions are available for LLCs, sole proprietors, C-corps, S-corps, and partnerships.

• Inventory: If the asset value has decreased since the last tax year, you can deduct that in addition to the acquisition costs.
• Utilities such as internet, electricity or household waste collection are fully deductible.
• interest paid on business loans is fully deductible. You must go through a traditional lender; friends and family don’t count.

Rental prices from offices to printers and heavy machinery; the rental of real estate for your business is fully deductible.

It all starts with getting your books in order. Taxes aren’t that hard when you have your bookkeeping squared away.

– Jessica Mah, co-founder and CEO of indinero

Whether you’re struggling to meet your 2016 tax deadline or unsure of what expenses you can deduct, well-organized bookkeeping is your best friend. Not only does it make it easier for you to reference data if you file yourself, but having easy access to detailed data also makes it easy to get help from a tax advisor or CPA who needs to understand your business and the year – long activities.

• Property: If your business owns your office or other property, the full interest on the loan, property taxes, maintenance and repair costs are fully deductible.
• Insurance such as health, malpractice or unemployment is fully deductible.
• Car costs: tax authorities form 463 explains that owners can deduct a certain amount per kilometer driven. You may also deduct interest on car loans, maintenance and depreciation. The Tax and Customs Administration provides more information about travel costs here.

• office supplies, both small and large may be deducted. This includes everything from paper and pens to furniture, printers and coffee machines.

• Software subscriptions are deductible.
• Marketing costs of materials to outsourcing labor are fully deductible.
• trip expenses such as airline tickets, accommodation and conference tickets are fully deductible. Meals while traveling can also be offset against your taxes, but only up to 50%. To qualify, you must leave your home for longer than a normal workday and spend most of your time doing business.
• Bad debts: If you have taken out a loan for business purposes that has not been repaid or if a customer has not paid an invoice, you may be able to write them off as bad debt subject to specific IRS guidelines. If you lend money to friends or family with a bad debt and understand that they may not pay back, this should be considered a gift and not deductible.
  
• Taxes: You can deduct state, local, and foreign income taxes from your federal tax liability. In addition, state and local property and sales taxes can also be deducted.

• Salaries of employees are deductible if they are not partners or LLC members.

• Employee Benefits such as health care premium contributions, 401(k) matching, and tuition reimbursement.
• Gifts to Employees up to $25 per person per year.
• Contract Work: As with employee salaries, money paid to contractors is deductible. If you have paid a person more than $600 in a year, give them a MISC-1099 form.
• Legal and Professional Fees from accountants to lawyers are all 100% deductible.
• Business meals: If you go out for dinner with a business relation, up to fifty percent of the costs of food and drinks are deductible.
• IRA contributions reduce your taxable income by the whole amount in the year you pay the premium.

What if I use my private home or car for business?

You can deduct the part of your car or living expenses that relates to business use. For your car this is measured in kilometers traveled and for your house it is measured in square meters.

Suppose, for example, that 10% of your home is intended for office space for business use. Then 10% of your annual mortgage interest, rent, utilities or other expenses such as repairs to your home are deductible business expenses.

If you drove 10,000 during the year and 6,000 were business, 60% of your car expenses, such as gas, oil changes, repairs, or insurance, are deductible.

Tax Deduction vs. Tax Credit

Tax credits are different from tax deductions. They both reduce tax liability by lowering taxable income, but the difference is that if you get enough credits, you get a refund. Tax credits are efforts made by legislators specifically to incentivize certain businesses and behaviors. They are serious enough about the incentive they sometimes pay you instead of the other way around.

You will find a comprehensive list and filing instructions on the business tax credits page of the website of the Tax and Customs Administration.

In addition, we have written about the employee retention tax credit. We also provide R&D tax credit services to companies seeking to apply for these potentially complex deductions.
Startup Taxes: Requirements for deductions

If you ever get an IRS audit, you’ll need to prove that your claimed expenses were deductible. You need:

1. Receipts and documents documenting all expenses

2. An accounting system

That is it! It may sound simple, but keeping track of all your expenses becomes more challenging and time consuming as your business becomes more complex.

You can make this process easier and save yourself the mess of the shoebox method. Choose an accounting solution that allows you to upload and store your receipts.

Among the many accounting solutions, the best give you concrete financial data to make the best decisions for your business and taxes.

Find out what we mean by booking a call with an indinero expert today.

Please note that sometimes a receipt is not enough. Certain expenses require specific records. The deduction of a private car is an example. In that case, keep a logbook with the kilometers traveled and the receipts.

Conclusion

Whether you’re in a hurry to meet your next tax deadline or unsure of what expenses you can deduct, well-organized bookkeeping is your best friend. Not only does it make it easier for you to reference records if you file independently, but having easy access to detailed records also makes it easy to seek help from an accounting service provider.