In the winter of 2016, the Internal Revenue Service released data on Schedule C filers. This information showed us the most popular and common tax deductions of that year. It is important to note that although other business entities (C corporations, S corporations, Limited Liability Companies, and partnerships) can deduct these as well, there may be some subtle differences. Enjoy!
1. Salaries and Wages
Payments to employees are deductible. While payments received by sole proprietors, partners, and LLC members, from the business, are not salaries and therefore nondeductible.
2. Contract Labor
Wages that are paid to independent contractors can be deducted from your taxable income. It is important to provide the contractor(s) with the IRS Form 1099-MISC, as well as the IRS Form 1096. Consult your tax and accounting professional to determine exactly which forms and procedures are required.
3. Rent on Business Property
Renting a property such as an office, factory, storefront, or a facility is fully deductible.
The deduction is essentially an allowance for purchasing property, instead of renting. It includes the Section 179 deduction for equipment purchases up $500,000 as well as a 50% bonus depreciation.
Beyond your computer and other work-related equipment, you may claim a tax deduction for your desk, chair, coffee table, and even the expensive art on your wall. Make sure that any decorative item you deduct stays in your office, to avoid potential audit woes down the line.
If you have a facility or office in which your business operates, the electricity is fully deductible. Cell phones charges are also deductible. If you have a home office, the first landline is not deductible is not a deductible utility cost, but the second one is.
Deduct state and local sales tax you charge on your goods and services; the amount you collect from your customers is part of your gross receipts, so this deduction is merely a wash. You can also deduct licenses and regulatory fees and taxes on real estate and personal property. Your employer taxes, including the employer share of FICA, FUTA, and state unemployment taxes, are fully deductible. However, for self-employed business owners, the deduction for half of your self-employment tax is not a business deduction; it is an adjustment to gross income on your personal income tax return.
Ordinary repairs and maintenance are fully deductible. But if you remodel, for example, and improve the property value then those costs must be capitalized and recovered through depreciation. Note, there are some exceptions here.
The cost of your business owner’s policy, malpractice coverage, and business continuation insurance is fully deductible. However, there are two rules to note for health coverage. A small business may qualify to claim a tax credit for up to 50% of the premiums (a better tax break than a deduction). Also the cost of health coverage for self-employed individuals and more-than-2% S corporation shareholders is not a business deduction. Instead, the premiums are deducted on the owner’s personal tax return.
Commissions of any kind are fully deductible.
Ordinary advertising costs are fully deductible.
If you or staff members travel out of town on business, the cost of transportation (e.g., airfare) and lodging is fully deductible. If you are driving, the current 2017 deductible rate is 53.5 cents per mile. Local commuting costs usually are nondeductible.
13. Home Office
A percentage of rent, mortgage interest, and real estate taxes are subject to deduction if your home is used as the primary place of business. Which would include the place which you meet and deal with clients or customers. Any improvements to the home office, such as painting, would also be deductible.
14. Legal and Professional Fees
Legal and accounting fees are fully deductible.
15. Meals and Entertainment
These costs are deductible only up to 50%. A business lunch would then be half on you, and half on our government. And the deduction can only be claimed if you substantiate the expense (see IRS Publication 463).
Determine which of the tax deductions for small business on the list you can take on your 2017 business return. Discuss your situation with your CPA or other tax advisor to make sure you have done all that is required to qualify for a specific deduction.