5 Major Business Tax Deductions Explained
Don’t leave money on the table at tax time! Use this guide to properly claim your deductions.
It’s that time of year again – tax season – and for small business owners, this means a lot of research and number crunching with the hopes of reducing your tax liability. Filing your small business taxes can feel daunting but with the help of an experienced CPA, there are several ways to reduce your tax burden without setting yourself up for an audit. Last year, we identified commonly overlooked tax credits and now, we are hoping to shed some light on some of the most frequently claimed deductions. Every business owner knows that they can write off meals, travel and expenses, but did you know that holiday parties can be 100% deducted from your taxes because they are considered a business event? These are the types of deductions that we want every business owner to be aware of so that you are not leaving money on that table or getting unwanted attention from the IRS. In the article below, we are going to explain some of the frequently-claimed business tax deductions and how you can use these to your advantage.
Percentage: 50%-100% on expense items, $25 on advertising gifts per person.
Eligibility: Advertising expenses must show a clear connection between the business and the advertising.
Almost all advertising expenses can be deducted, with the exception of funds used to influence politics or legislation. You may deduct any item that you expect to receive future business from or “goodwill” items, which are items used to create goodwill in your community that should create additional business for your company. An example of goodwill advertising may include sponsoring a little league team or a golf tournament. To deduct these expenses, you must be able to quantify an actual cost, not including time, labor, or pro-bono activities. Other that marketing items that may be perceived as gifts, there is no limit on advertising deductions. Marketing gifts may include sending gift baskets to clients in which no more than $25 may be written off, per client.
Examples: Web design, SEO, promotional items, temporary display signs, billboard advertising.
Percentage: You may deduct expenses or calculate based on mileage.
Eligibility: Vehicle must be used for business.
If you have a car that is used for business purposes, there are write-offs that can work to your advantage. For starters, vehicle upkeep deductions come in two forms; tracking all business-related expenses or deducting mileage, fees and tolls. If you choose to track all of your expenses, you may actually get more deducted than if you choose to pursue the mileage method because you can also deduct depreciation. Keep in mind that if you deduct accelerated depreciation in previous years, you do not qualify for standard mileage deductions. If you only have one car, be careful not to embellish how often it is used for business as this will certainly flag you for an audit. No auditor will believe that one vehicle is entirely used for business so to correctly account for your expenses, make sure you only calculate money spent on business-related items.
Examples: Parking fees, mileage, lease payments.
Travel, Meals, & Entertainment
Eligibility: Expenses must be directly related to the business or business must be discussed.
Travel, meals and entertainment is one tax deduction sector that literally no CPA will miss. Even though your CPA is ensuring that the proper expenses are being written off in this category, there are some items that can be classified as travel, meals, or entertainment that may not be known to you tax guru. When classifying deductions under travel, meals, and entertainment, rule of thumb is that you may deduct 50% of the total expense if it is directly related to the business or business was discussed during the event.
Examples: Hotel Rooms, Holiday parties, airfare, meals during employee or client meetings.
Education for Employees
Percentage: Up to $5,250.
Eligibility: Education must be required to maintain or improve job related skills.
Employers who sponsor work-related education for their employees may be able to deduct these expenses. The education expenses must be for skills that maintain or improve job skills or that are required, either by law or by the place of employment. Education expenses cannot be used as a deduction if they were for a class or training for an individual who wasn’t already employed. Additional expenses that can be deducted include tuition, books, supplies, certain transportation costs, and more.
Examples: Employee tuition, special trade training, courses required by law in industries such as law, teaching, accounting.
Eligibility: Must own the property in which business is conducted.
Business owners who own the real estate in which their business operates can benefit from a cost segregation study that will lower their tax bill. This study will locate individual pieces of property within the building that can be depreciated faster than the building itself, thus, lessening tax consequences. You CPA can recommend a cost segregation specialist who will analyze your property and business to locate these areas.
Examples: Cars, vehicles, real estate, technology equipment.
Now that we have explained some of the most commonly claimed tax deductions and how to properly utilize them, we want to give some examples of items that are fully or partially deductible from your tax liability. Oftentimes, business owners do not realize that items like local Chamber dues or retirement lunch celebrations are deductible and therefore do not claim them. CPAs often overlook smaller deductions like these but they can add up and save you thousands at tax time.
|Type of Expense||100% Deductible||50% Deductible|
|Employee business-related events|
|Out-of-office meal at training or professional meeting||X|
|Meal & entertainment for highly compensated employees||X|
|Meal for office meeting at the employer’s convenience||X|
|Meal for occasional large group sales or promotional meeting||X|
|Meal during conferences, seminars or training schools||X|
|Occasional in-office working meals||X|
|Nominal food and beverages||X|
|Employee out-of-town expenses|
|Out-of-town travel not treated as compensatory||X|
|Out-of-town travel treated as compensatory||X|
|Travel and lodging||X|
|Client business-related events|
|Client business meetings||X|
|Employee social events|
|Meals for the benefit of employees||X|
|Meals for the benefit of highly compensated employees||X|
|Recognition, mentoring and miscellaneous expenses|
|Events that recognize groups or achievements||X|
|Tickets for employees to a charity golf tournament||X|
|Tickets for employees to sporting event as a reward||X|
|Room charges for using clubhouse for a business meeting||X|
|Club dues included in employees’ compensation||X|
|Dues for public/professional service organization (Rotary, etc)||X|
|Note: These are general guidelines that may vary based upon individual facts and circumstances.|
As a former business owner and CPA, I hope that explaining some of these tax deductions will help lessen your tax burden this season. Every year, millions of dollars are left on the table by middle market business owners who are unaware of deductions and credits that are available to them. Talk to your CPA about potential deductions that you might be missing and how you can save in the upcoming tax season.