How can you keep more of your money in business?
If you’re like most entrepreneurs and business owners out there, then you’re leaving a significant amount of money on the table each year, without even knowing about it.
According to TaxGPT, over 90% of small businesses miss out on valuable tax deductions annually. This could add up to hundreds or even thousands of dollars that go unclaimed every year.
The good news? Tax deductions are entirely free, easy to implement when you know what to look for, and have immediate implications for your business bottom line. Mastering business tax services and working with accountants who focus on tax prep for small businesses can make all the difference in how much you pay Uncle Sam.
In this post, we’ll cover everything you need to know about tax deductions.
We’ll highlight some of the most overlooked and lucrative deductions small business owners take advantage of. We’ll also cover a few of the most common pitfalls that result in businesses leaving money on the table.
Contents
What You’ll Learn:
- What Are Tax Deductions and Why Do They Matter?
- The Most Overlooked Business Tax Deductions
- How to Claim Deductions the Right Way
- Common Mistakes That Cost Business Owners Money
What Are Tax Deductions and Why Do They Matter?
Tax deductions are business expenses that you can subtract from your gross income to arrive at your taxable income.
For example, if your business earned $100,000 and you have $20,000 in deductible business expenses, you only have to pay taxes on $80,000.
This is important because each tax deduction you overlook is essentially giving the IRS free money. The IRS isn’t looking to make life hard on small business owners. Deductions are specifically in the tax code to incentivize business owners to invest in their businesses.
If you have legitimate business expenses that are “ordinary and necessary” to running your business, then they are 100% deductible. The IRS definition of “ordinary and necessary” is quite broad. Ordinary expenses are those common in your industry. Necessary expenses are helpful and appropriate for your business operation.
It’s that simple.
The Most Overlooked Business Tax Deductions
This is where it gets exciting…
Business owners often miss deductions that are staring them right in the face. Let’s go through some of the most commonly overlooked deductions.
Home Office Deduction
Home offices have never been more relevant than they are today. According to Pew Research, roughly a third of workers who can work from home do so all the time.
This allows those business owners to claim the home office deduction.
If you have a dedicated home office, you can deduct $5 per square foot of your home office space. You can do this up to a maximum of 300 square feet. That’s a maximum deduction of $1,500 just for working from home!
The catch? The home office must be used regularly and exclusively for business. You can’t claim the home office deduction for a kitchen table you occasionally use as a desk. You can claim it for a converted spare bedroom or even a garage, however, provided the space is exclusively and regularly used for business.
Vehicle and Mileage Expenses
You can’t believe how fast those business trips start to add up…
For 2024, the IRS standard mileage rate is $0.67 per mile. If a business owner logs 10,000 miles in a year for business use, they can write off $6,700 on their taxes.
The key is to record every single business-related trip. Meetings with clients, supply runs, bank visits, etc. all count as business miles.
Without adequate recordkeeping, this deduction will get disallowed. A log of date, mileage driven, and business purpose is required for each business trip.
Professional Development and Education
This one is commonly missed year after year…
Every class, workshop, conference, or seminar that maintains or improves the skills required to operate the business is fully deductible. That includes all registration fees, travel expenses, and materials purchased for the educational purposes.
Investing in your knowledge is a twofer. You benefit once from the improved skills and again come tax time.
Marketing and Advertising Costs
Marketers will be excited to hear that 100% of marketing and advertising expenses are deductible.
This includes social media ads, Google ads, printed flyers and business cards, website development and maintenance, and even the cost of hiring a graphic designer or marketing consultant.
Software Subscriptions and Technology
Business owners often forget to track their monthly software subscriptions.
Software as a Service tools like QuickBooks, Zoom, Slack, project management software, cloud storage, and website hosting are all deductible. Each small monthly charge can add up to significant deductions over a year.
Business Insurance Premiums
Insurance is an expense of running a business. The good news? Insurance premiums are deductible expenses.
General liability insurance, professional liability insurance, and commercial property insurance all qualify. Business owners should track their insurance expenses to ensure they’re not missing any deductions at tax time.
Bank Fees and Interest Payments
Any fee you pay from a business checking account or payment processing account like PayPal or Stripe is deductible.
Interest paid on a business loan or credit card used for business purposes is also deductible. These fees and interest charges quickly add up to substantial deductions at tax time.
How to Claim Deductions the Right Way
Let me let you in on a secret…
Knowing what is and isn’t a deductible expense is only half the battle. The other half is having the proof to back it up in case the IRS ever asks.
Proper documentation is critical. This means saving every receipt, maintaining detailed records of every expense, and using accounting software or expense tracking apps throughout the year instead of trying to recreate the wheel at tax time.
Vehicle expenses will require a mileage log of date, mileage driven, and business purpose for each trip. Home office deductions will require measurement of the square footage of the home office as well as home expense records.
Business owners who save the most on taxes are those who track their expenses throughout the year.
Common Mistakes That Cost Business Owners Money
Here are some of the biggest money-draining errors business owners make during tax time…
Mixing personal and business expenses. Never commingle personal and business finances. Use separate business checking accounts and credit cards for your business purchases. Mixing personal and business together is a headache at tax time and could raise red flags with the IRS.
Forgetting to deduct startup costs. Most entrepreneurs don’t know you can deduct up to $5,000 in startup costs. This includes any costs incurred before a business officially opened like market research, legal fees, and initial advertising.
Forgetting the Qualified Business Income deduction. Eligible small business owners can deduct up to 20% of their qualified business income. For many small businesses, this pass-through deduction alone can result in savings of thousands of dollars annually.
Poor record-keeping. If you don’t have the receipt, you can’t deduct it. Receipt tracking tools make organizing and storing receipts easier than ever before.
Tying It All Together
Tax deductions are in place to help business owners keep more of what they earn.
The most successful businesses are the ones that fully understand the tax code and utilize every tax deduction available to them. They track expenses throughout the year, maintain year-round organization, and work with qualified business tax professionals who know the tax code inside and out.
Not claiming deductions is the same as throwing money away.
Nobody grows a successful business by throwing money away.
Quick recap:
- Track every business expense throughout the year
- Maintain proper documentation and record-keeping for all expenses
- Don’t forget deductible business expenses like home office, vehicle, and education
- Keep personal and business finances completely separate
- Work with tax professionals who are experts in small business taxation
