Business owners, whether big or small, have to pay their dues on the revenue generated by their businesses. If you are a small business owner, keeping your taxes in check is something you have to do all through the year, not just the filing time.
Taxes are more than just an inconvenience for small business owners. It is something that could take away a chunk of their hard-earned profit without any big reason. When the tax season comes, most business owners face a huge shock as they look at the amount they have to pay.
Fortunately, there are many easy ways available for you to reduce your tax bill. This is where deductions come in. There are many tax deductions available for a small business owner, and in this article, we’re going to dive deep into them.
Here are the 15 best tax deductions small businesses can apply to lift their tax burden.
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1. Business Utility Costs
Business utility costs such as electricity bills, water bills, telephone bills, etc. are all eligible for a tax deduction. These expenditures are claimable and can help reduce your tax load. Section 35D of the Income Tax Act states that all tariffs made before the establishment of an enterprise are permitted for deductions, which does include most of the business utilities.
2. Digital Transactions
Paying your workers digitally and accepting digital payments can significantly decrease your taxable income. Rates of income tax are much lower on digital turnovers in comparison to cash payments. Paying your workers digitally has many other benefits as well. This makes digital transactions one of the best tax deductions available for a small business.
3. Home Office Deductions
Tax deductions for the home office can include depreciation, utilities, and homeowner insurance. To apply for home office deductions, you must only include costs exclusive to your business. For example, if 20% of all your home’s utilities are occupied by your home office, then 20% of your annual utility costs will become tax-deductible.
4. Charitable Donations
Under Section 80G of the Income Tax Act, donations made to relief funds and charitable institutions can be claimed for tax benefits. You will, however, need to be registered under Section 12A to qualify for the 80G certificate. Once you’ve registered, you’re good to go. With this method, not only do you get tax deductions but also get your bit to contribute to trusty institutions.
Related Article: 5 Tax Tips to Get a Bigger IRS Refund
5. Marketing Expenses
If you are a small business owner, you might already be spending a huge amount on marketing and promotion. Marketing and promotional costs related to business activities are also tax-deductible. This is mainly allowed to help small businesses generate more customers.
These costs include website expenses, social media expenses, special promotion expenses, and more. Therefore, you can consider claiming marketing expenses for a tax deduction.
6. Insurance Costs
You may already know that the insurance premiums you pay for individuals are tax-deductible to a great extent. This applies to small businesses as well. Insurance policies held by the business owner or the business itself are tax-deductible. These insurance policies can include health insurance, home insurance, and compensation costs.
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7. Travelling Costs
Are you a small business owner who does a lot of traveling for business purposes? If so, you are in for a luck. You can claim deductions on the money spent on traveling.
Traveling costs for long-distance travel do qualify as tax deductions. To make them eligible, you must book all your travel tickets from the company’s account or under business expenses. If you do this, you can easily gain tax benefits for specific travels related to your business.
8. Retirement Plans
Self-employed retirement plan contributions, IRAs, or other retirement plans are tax-deductible. They can lower your tax burden while also helping you build tax-deferred income in the process. And even though different retirement plans have different taxation limits, almost all of them provide decent deduction amounts.
9. Health Insurance
Healthcare insurance policies, dental insurance policies, and LTC policies can also help lift your tax load. If you are already providing them for your workers, you can easily claim deductions for these expenses.
Under section 80D of the Income Tax Act, every individual can claim a deduction for medical insurance. This tax deduction is available for most medical insurances and can be applied by anyone.
10. Internet Expense-Deduction
Internet and fax expenses related to your business are also eligible for a tax deduction. The local internet broadband connections, however, aren’t. According to IRS, only the business portion of your internet and fax connection is deductible. You still can deduct 100% of the internet expenses related to your business.
11. Transportation Costs
Apart from business traveling, transportation of goods can also avail you of tax benefits. If you are a small business owner in the transportation industry, this can benefit you greatly.
While transportation costs in the industry have become huge in recent years, the tax benefits they offer can help you cushion the blow of increasing fuel prices and other charges. These benefits, however, can be applied only in the transportation-related to your business. Individual transports are not covered here.
12. Advertising Deduction
All the advertising costs related to your business are tax-deductible. And yes, it does include digital advertising as well. Everything from TV commercials and billboards to Google ads and social media advertising can all be claimed for a tax deduction. It is, however, important to note that your advertising claim must be directly related to your business marketing.
13. Meals Deduction
A meal related to business can be claimed for a tax deduction. Though for that you’ll need to keep your receipts and records. The objective of this deduction by the government is to stimulate the restaurant industry.
According to the Consolidated Appropriations Act, 2021, the cost of food and beverages spent in a restaurant for business reasons has been increased from 50 percent to 100 percent in 2021 and 2022, if certain conditions are met.
14. Interest Deduction
The interest amount on a business loan can be claimed for a tax deduction. Though you would have to make sure that the entire loan is only used for business-related activities, or otherwise, your claim won’t be considered valid.
15. Depreciation
Lastly, we have depreciation which is most useful for businesses in the manufacturing sector. With this method, businesses installing new machinery in their ventures can claim up to 20%-40% of additional depreciation. So, every year, you get to claim a portion of your machinery expenses as depreciation.
This deduction, in particular, is similar to real estate property depreciation. With depreciation, you can distribute the deduction across the useful life of the property.
Perks of Being a Small Business Owner
Running a business is not an easy task. Governments across the world love to promote entrepreneurship in their countries in whatever ways they can. These tax deductions exist for that exact reason.
Applying tax deduction practices to your business can provide you with many benefits. Besides helping with your tax burden, it also helps with your business growth.
So, make sure to implement these tax deductions the next time you reimburse your business income tax.
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