Tax season can be stressful for small business owners. To prevent a massive tax bill, you need to be taking advantage of tax deductions. While you may be already taking advantage of some tax deductions, there are several others you might not know about. Continue reading for overlooked tax deductions business owners make.
These deductions can be utilized by sole proprietorships, C-corps, S-corps, partnerships, and LLCs. Some of the rules may be different for each.
Inventory
If you have an inventory-based business that manufactures their own products or purchases already made items for resale, there's a tax deduction for you. You can deduct the cost of your inventory or the cost of goods you sell. To determine your cost of goods sold, you need to value your inventory at the start and end of each tax year. There are several types of expenses that contribute to the cost of goods sold:
- The cost of products or raw material
- Storage
- Direct labor costs for workers who produce the products
- Factory overhead
Utilities
If you have a brick-and-mortar store or an office space, any utilities used are fully deductible. These utilities include water, electricity, trash, and phone.
Business Property Rent
If you are renting your business property, you can get a tax deduction on your lease or rental payments. However, if you run your business from home, you can complete an eligibility test with the IRS to see if you can utilize any deductions. Some of these deductions include mortgage interest, home insurance, utilities, any repairs, and depreciation.
Insurance
The cost of the owner’s health insurance, business continuation insurance, and the owner’s policy are 100% deductible. Other insurance policies that are deductible include property insurance, liability coverage, malpractice insurance, workers’ compensation costs, auto insurance on work vehicles, employee life insurance provided by the business, and business interruption insurance. If your business has a health insurance plan, the business could qualify for up to a 50% tax credit.
Office Supplies & Furniture
Any office supplies including paper, pens, file folders, and staples can be deducted from your taxes. Since office furniture can also be considered as office supplies, it can be deducted from your taxes as well.
Advertising & Marketing
Any business-related advertising and marketing costs can be deducted as long as you can prove they are related to your business. These costs can include business cards, digital ads, and hiring a freelancer.
Employee Salaries
If your business has any employees, their wages are fully deductible, including any bonuses and commission. This deduction does not apply to sole proprietors, partners, and LLC members since these members are not considered employees.
Contractor’s Wages
If you use any independent contractors or freelancers, the cost of hiring these individuals is fully tax-deductible. However, you must issue a form MISC-1099 to all contract workers who receive $600 or more from you in a given tax year. If you pay the contractor or freelancer with a credit card or through PayPal, the payment processor needs to issue a form 1099-K.
There are many more deductions that you could be able to take advantage of. If you need help completing tax planning for your business or need assistance finding tax deductions that work for you, contact us at Maven Bridge Capital. Our advisors will be able to assist you in taking advantage of the tax deductions that are offered for you and your business. Give us a call today to get started.
Sources:
https://www.nerdwallet.com/article/small-business/small-business-tax-deductions-guide
https://gusto.com/blog/taxes/overlooked-small-business-tax-deductions