Tax Filing Season: Top Deductions for Small Business You Should Know in 2022
Filing taxes is essential for every business, regardless of size—so self-employed and small business owners are no exception. With the filing deadline to submit 2021 tax returns or an extension to file and pay tax owed quickly approaching on Monday, April 18, 2022, many entrepreneurs are looking for ways to take advantage of all available tax deductions.
One of the simplest ways to reduce your income tax liability is to ensure you’re claiming all of the tax deductions applicable to your small business. Let’s discuss tax deductions, tracking deductible expenses, and breakdown some of the write-offs that you don’t want to miss!
Defining Tax Deduction
A small business tax deduction (or write-off) is an IRS-qualifying expense that you can deduct from your taxable income. You take the amount of the expense and subtract that from your taxable income. Essentially, tax deductions allow you to pay a smaller tax liability. However, the expense has to fit the IRS criteria of a tax deduction.
Tracking Deductible Expenses
Not tracking deductible expenses is one of the most common tax problems encountered by self-employed businesses that are organized as sole proprietorships or partnerships. Many struggle to stay on top of deductions year-round, so they are left trying to piece things together during tax season. This bookkeeping challenge can lead to missing out on a lot of tax savings and result in an overpayment of taxes.
If you're eating, sleeping, or thinking about your business, chances are what you're doing is tax-deductible. Therefore, a fundamental piece of the tax prep process is making sure that you have all of your financial records intact. Bookkeeping platforms such as QuickBooks, Neat, ZoHo are leading tools for keeping track of small business finances. Ongoing bookkeeping is important to help you tally up your deductions. The IRS requires all business owners to keep previous returns and associated documentation supporting any deductions and credits for a minimum of three years.
Deconstructing 10 Top Deductions
Below you’ll find a list of 10 small business tax deductions that are commonly available to sole proprietors, partnerships and LLCs. The majority of these are directly related to running a business, whereas some are more personal deductions that a small business owner should remain cognizant of.
Please note that all of the deductions listed may not be available to your small business so please consult with your tax advisor or CPA before claiming a write-off on your tax return.
1. Advertising and Promotion
The cost of advertising and promotion is 100% deduction. This can include things like:
Website expenses
Marketing and advertising expenses
Consultant or marketing agency retainer
Social media expenses
Technology and marketing software expenses
Print advertising expenses
Multimedia advertising expenses
Special promotions
2. Business Meals
The business meals deduction is up from 50% to 100% if the food and beverages are from a restaurant. To be eligible for this deduction:
The expense must be an ordinary and necessary part of carrying on your business.
The meal cannot be lavish or extravagant under the circumstances.
The business owner or an employee must be present at the meal.
3. Business Insurance
You can deduct the premiums you pay for business insurance. This may include:
Liability coverage
Property coverage for your furniture, equipment, and buildings
Group health, dental and vision insurance for employees
Professional liability or malpractice insurance
Workers comp coverage
Auto insurance for business vehicles
Life insurance that covers employees, as long as the business or business owner is not a beneficiary on the policy
Business interruption insurance
4. Contractors and Freelancers
If you hire independent contractors or freelancers to help in your business, you can deduct their fees as a qualified business expense. Just remain cognizant that whenever you pay a contractor $600 or more during the tax year, you’re required to send them a Form 1099-NEC by January 31st of the following year.
5. Education
As someone who constantly invests in continuing education as a business investment, this deduction has become a staple for me during tax season.
You may be able to deduct work-related education expenses paid during the year as a small business deduction. Education costs are fully deductible when they add value to your business, plus increase your expertise.
According to Topic No. 513 on work-related educational expenses, expenses that you can deduct include:
Tuition, books, supplies, lab fees, and similar items.
Certain transportation and travel costs.
Other educational expenses, such as the cost of research and typing.
6. Home Office
The home office deduction is one of the most popular ways to write off rent, utilities, and other house-related expenses. There are two ways to deduct home office expenses.
Simplified method: You can deduct $5 per square foot of your home that is used for business, up to a maximum of 300 square feet.
Standard method: Track all expenses of maintaining your homes, such as mortgage interest or rent, utilities, real estate taxes, homeowners association fees, and repairs. Multiply these expenses by the percentage of your home devoted to business use.
To qualify for the home office write-off, you need to measure up in two areas:
Regular and exclusive use: To pass the regular and exclusive use requirement, you must regularly use your home office exclusively for conducting business activities. You don’t need to dedicate an entire room to your business, however, your work area should have clearly identifiable boundaries.
Principal place of business: Your home office must be your principal place of business. This means you spend the most time and conduct important business activities here.
Note: If you use the standard method for calculating your home office deduction, you’ll need to file Form 8829 along with your Schedule C.
7. Office Supplies
You can deduct office supplies including printers, paper, pens, computers, and work-related software, as long as you use them for business purposes within the year in which they were purchased. You can also write off work-related postage and shipping costs.
8. Taxes and Licenses
You can write off various taxes and licenses related to your business. This may include:
Business licenses
Sales tax
State income taxes
Payroll taxes
Real estate taxes paid on business property
Excise taxes
9. Telephone and Internet Expenses
If telephone and internet services are integral to your business, they can be deductible business expenses. If you use your cell phone and internet connection for both personal and business reasons like most entrepreneurs, you can only deduct the percentage allocable to business use. The best rule of thumb is to keep detailed records to prove the amount of business use in case your return is audited.
10. Travel Expenses
For a trip to qualify as business travel, it has to be ordinary, necessary, and away from your tax home. Your tax home is the entire area in which you conduct business, regardless of where you live. You need to travel away from your tax home for longer than a normal day’s work, requiring you to sleep or rest en route.
Deductible business travel expenses include:
Travel to and from your destination by plane, train, bus, or car
The cost of taxis and other methods of transportation used on a business trip
Meals and lodging
Tips
Laundry and dry cleaning while on a business trip
Business calls
Shipping of baggage and sample or display materials to your destination
Other similar ordinary and necessary expenses related to your business travel
Taking Advantage of Savings This Season
Tax deductions are a key way to minimize the amount of tax liability you have to pay this season, and consistent recordkeeping will ensure you get to keep those deductions going forward. Understanding which business expenses qualify can help you avoid overpaying and also help inform your business decisions throughout the year.
