10 Creative Tax Deductions for Small Businesses to Save Big
Running a small business comes with a long list of expenses, from launching a website to losing a part of your hard-earned money in bank fees.
The good news is that many of your business expenses are tax-deductible. You can use them to reduce your taxable income and minimize the amount of taxes owed to the government.
It’s important to know what tax deductions you can qualify for to make smart and profitable decisions during tax season. In this article, we’ll share a list of creative tax deductions for small business owners to maximize their profits. Grab your favorite beverage and let’s get started.
What Are Tax Deductions?
Tax deductions are specific expenses that businesses can subtract from their taxable income to reduce the amount they pay in taxes. Governments typically provide tax deductions to encourage certain behaviors or activities that they consider beneficial for the economy or society.
Not all business expenses are deductible, but many of them are. As a small business owner, it’s your responsibility to figure out which business expenses you can deduct. The IRS (Internal Revenue Service) provides detailed information on tax deductions on its website. You can also consider working with a tax professional.
What Qualifies as a Tax Write-Off for Entrepreneurs?
The IRS states that all “ordinary and necessary” business expenses are tax deductible. What does this mean?
An ordinary expense is an expense that is common and accepted in your trade, business, or industry. It’s an expense that other businesses in your line of work also typically incur.
A necessary expense is an expense that is helpful and appropriate for your trade, business, or industry. It directly contributes to the operations or profitability of your business. It doesn’t need to be indispensable, but it needs to have a clear purpose.
Quite a few business expenses can qualify for tax deductions. Here are 10 examples of creative tax deductions for small businesses.
Small Business Tax Deductions Checklist: 10+ Creative Ways to Save
Advertising and Promotion
Marketing your services or products is both an ordinary and necessary business expense. The IRS recognizes the importance of these activities and allows companies to deduct expenses related to advertising and promotions.
For example, you can deduct the cost of:
Hiring a designer to create your business logo or website
Running social media campaigns
Contracting a copywriter to write a sales page or an email marketing campaign
Buying ads
Taking brand photos
This is not an exhaustive list. As long as your business expense is used to promote or market your business, you can deduct the cost and save on taxes.
2. Business Use of Your Car
If you rely on your car for business-related activities, you can deduct the costs associated with the use of your vehicle.
To qualify for this deduction, you must meticulously track your business-related mileage and expenses. It’s important to keep detailed records of your business-related trips, noting the purpose, date, and mileage.
3. Hiring Freelancers or Independent Contractors
Hiring freelancers or independent contractors for a particular project or business need is a great way to gain access to specialized skills without the commitment of hiring full-time employees. The even better news is that the costs associated with hiring contractors and freelancers are tax deductible.
It’s important to note that if you pay a contractor $600 or more during the tax year, you need to file a Form 1099-NEC with the IRS by no later than January 31 of the following year.
4. Educational Expenses
Educational initiatives, such as webinars and membership subscriptions, not only help you improve your skills and remain competitive but also provide great tax benefits for entrepreneurs. Educational expenses like classes, webinars, workshops, and masterminds are often tax deductible.
Keep in mind that the educational expenses have to be directly related to your field of work and provide benefits to your business. You can’t deduct the cost of educational initiatives that are related to your hobbies or other interests.
5. Gym Membership
Your gym membership can qualify for tax deductions under certain conditions. It’s a creative small business tax loophole that you may not have thought to take advantage of.
If your doctor has diagnosed you with a certain condition and you’re using a gym facility to manage or treat it, your gym membership can qualify for a tax deduction. However, you need to get your gym membership after your diagnosis. If you belonged to a gym before your diagnosis, it won’t qualify for a deduction.
6. Home Office Expenses
If you run your small business from home, you may qualify for a home office expenses deduction. Home expenses that you can deduct include utility bills, internet bills, mortgage payments or rent, repairs, maintenance, and more.
You can choose how you want to calculate your home office deduction. The first option is to deduct $5/square foot for business use of your home with a maximum deduction of $1,500. The second option is to base the deduction on how much of your home you use for business purposes (for example, your office is 30% of your apartment).
7. Salaries and Benefits
If you have employees, their salaries and benefits can qualify for tax deductions. You can deduct this expense from your taxable income as long as your employees are not sole proprietors, LLC members, or partners and their salaries are reasonable.
8. Bank Fees
Your business bank account fees are tax deductible. Plus, chances are that you use some kind of payment processing software like Stripe or Square. Payment processing fees can be deductible as well.
9. Legal and Professional Fees
Many small businesses will need to invest in the professional services of a lawyer, accountant, bookkeeper, or a tax professional like Desi Tax Service. These expenses are tax deductible. Moreover, purchasing legal contracts or templates also qualifies for tax deductions.
10. Client Gifts
If you send your clients gifts or cards to thank them for choosing your business, you’ll be happy to know that this expense is also tax deductible. However, be aware that there is a $25/per client limit that you need to be mindful of.
Creative Tax Deductions for Entrepreneurs: Do’s and Don’ts
There is no definitive list that shares all of the tax deductions that your small business may qualify for.
There are many opportunities to maximize your business profits if you know how to approach tax deductions for entrepreneurs and small businesses. At the same time, claiming deductions on expenses that are not eligible can result in many complications and headaches.
Collaborating with a tax professional like Desi Tax Service helps you ensure that you don’t miss out on valuable opportunities while staying compliant with the law. Inquire about working together to start optimizing your business finances for tax season and improve your profitability.
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