Every time you lick a stamp for your business, write a check for an insurance premium or buy a box of paper clips, you're incurring a legitimate business expense that may be tax–deductible. By keeping close tabs on those business deductions allowed by the Internal Revenue Service and adding up all those seemingly incidental purchases, you may be able to lessen the bite at tax time.
The Internal Revenue Code allows you to deduct all "ordinary and necessary" expenses of operating your business — these can vary depending on the type of business. Below are some of the most common deductions small businesses take. You should speak with your tax advisor to see what other deductions your company can take advantage of.
Health insurance
Self–employed people can deduct up to 100 percent of their health insurance payments. If the health insurance is a high–deductible health plan, they can also contribute to a health savings account on a tax–deductible basis.
Home office deduction
If you meet the IRS guidelines for operating a home office, you can get a significant tax break. Be sure to separate your expenses into direct and indirect expenses. Direct expenses are fully deductible. Those are things like painting or decorating your office; cleaning services for the business portion of your home and insurance on business equipment. Indirect expenses are those that apply to your entire home. Calculate the square footage of your office as a percentage of the square footage of your whole home to calculate how much you can deduct from rent, mortgage utilities and other expenses.
Retirement plans
Self–employed business owners have a wide variety of retirement plans available — Individual Retirement Accounts (IRA), Simplified Employee Pensions (SEP) and Keogh accounts. You can deduct contributions made to these plans, and their income is tax deferred.
First year expense deduction
You can deduct up to $102,000 (rising to $105,000 by 2005) worth of business equipment — computers, fax machines, copiers, phone systems, or other fixed assets — as a current expense using the first year expense deduction. Otherwise, you would have to deduct the cost of the equipment over several years via the tax code's depreciation schedules.
Rent, phones, utilities
Your office rent or mortgage payments; your electricity, water or gas bills; your phone charges are all deductible.
Auto expenses
If you use your car for business, you can choose from two different methods to deduct business–use charges. The most common method is to deduct the amount per mile that the IRS allows in any given year for business travel — 37.5 cents/mile in 2004, and 40.5 cents/mile in 2005. Alternatively, you can itemize: take a depreciation deduction on the cost of your vehicle and add to that all the costs of running and maintaining your car (gas, oil, parking fees, repairs, insurance premiums, tolls, tires, license and registration fees). You can switch between methods from year to year, so it may pay to calculate both and choose the one that provides you with the greatest deduction.
Education
Don't neglect deductions for education expenses that relate to your business, trade or occupation. Under IRS regulations, the education expense must maintain or improve skills required in your present employment or required by your employer or as a legal requirement of your job or profession. You can't deduct education expenses for a career change or to start a new business.
Entertainment
You can deduct 50 percent of ordinary and necessary business expenses for entertaining a client, customer or employee if it is directly related to your business or associated with your business. It is essential to keep excellent records for business entertainment expenses. For example, if you take someone out for a meal, be sure to document the date, the amount, the place the meal took place, the business purpose of the meal, and the business relationship. If you hold a party, you should keep a copy of the guest list, noting your respective business relationships.
Gifts
You can deduct gifts valued at up to $25 per person per year. So if you give out Christmas gifts to clients, or give presents to your staff after you've won a new contract, you may be able to deduct at least part of the cost.
Public relations, promotion and advertising
These important marketing costs shouldn't be forgotten at tax time; they are all deductible business expenses. If you send out free samples of your product, that's a deductible cost of promotion. So is hiring someone to write your press releases or leaflet the neighborhood.
Trade shows, conventions and seminars
Whether you're exhibiting at a trade show, or just attending, costs you incur can be considered legitimate business expenses.
Professional publications
Magazines, newspapers, newsletters or books related to your profession or operating your business are deductible. Some professionals, particularly those who work in media or communications fields, can legitimately deduct a newspaper subscription, cable television fees and other expenses if they can show they are professionally necessary.
Interest payments on business credit cards
If you have a separate business credit card, you can deduct interest payments.
Internet and email services
Don't forget to deduct your monthly bill for your online service providers (particularly if you're using the information on this page to help you run your business).
Professional associations
You can deduct dues for joining a trade association, your chamber of commerce, or any other professional group. On the other hand, you cannot deduct dues for a private club such as social and athletic clubs.
Local travel
This includes taxi, train or bus fare related to your business. Keep track of your travels in a datebook, and get receipts. One caveat — you can not deduct expenses related to commuting to and from your office.
Business travel
If you go overnight for a convention or business trip, you may deduct all expenses related to the trip, including transportation, lodging, meals, laundry expenses, cleaning, fax or phone charges, tips, etc. If you take a trip that combines business and pleasure, you can deduct travel expenses and business expenses only if 50% or more of your trip is devoted to business.
Parking
While the meter is running, your tax deductions are growing too. Don't forget to deduct those garage, parking lot and meter charges. But if you get a ticket for letting the meter run out or running a red light on the way to a business meeting, you're out of luck; the IRS doesn't let you deduct fines from your taxes.
Postage
Every letter you send for your business is worth a mini–tax deduction. Try buying your postage stamps over the phone from 1–800–STAMP–24 or online, so you can pay with your business credit card and keep better track of the purchase.
Office furniture
Desks, chairs, lamps, filing cabinets, couches and plants in your waiting room can be included in your business expenses.
Business cards and stationary
Did you print new business cards this year? Did you create new stationary and envelopes? Those costs are deductible.
Office supplies
Keep track of money spent on paper clips, legal pads, pens, toner cartridges, file folders and all other office supplies.
Insurance
You can deduct premiums for all your business insurance, including equipment coverage, property insurance, liability coverage, etc.
Local business taxes and fees
If you have to pay city, county or state business taxes or incorporation fees, these charges are deductible.
