The Best 10 Tax Deductions Applicable for Small Businesses

The Best 10 Tax Deductions Applicable for Small Businesses

In the best of times, maximizing tax deductions is nothing less than intelligent tax planning. But in today's highly challenging economic environment, using the best payroll software features to legitimately claimable tax deductions will not only put more money into your pocket but — in some cases — mark the difference between business success and failure.

How Do Business Tax Deductions Work?

Small businesses barely starting to profit shouldn’t have to pay unnecessary taxes. Therefore, payroll software helps companies apply local and federal tax deductions by lowering the taxable income with write-offs. Payroll software is mindful of IRS tax forms and instructions

Typically, tax accountants are the ones that used to perform this service for businesses, but payroll software provides easy solutions for businesses to manage their taxes in-house. The best payroll software for accountants can alert companies of potential tax deductions to reduce the tax bill. 

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What are The Three Types of Tax Deductions?

Payroll software can help small businesses and employees efficiently manage tax deductions as per local regulations. The three types of tax deductions commonly used are the following. 

Standard Tax Deductions

Fixed base-level amounts can be applied based on the filing status and income levels. Multiple tax deductions can be applied based on the circumstances and dependencies of an employee. 

Itemized Tax Deductions

Itemized deductions can be applied when multiple qualifying tax deductions are in play. For example, taxpayers paying property taxes can leverage that amount as tax deductions. 

These are some of the itemized tax deductions that can be applied:

  • Personal property tax deductions
  • State and local income tax deductions
  • Mortgage payment as a tax deduction
  • Charitable donations as tax deductions
  • Casualty losses as tax deductions
  • Medical expenses as tax deductions

Above-the-line Tax Deductions

These are tax breaks that can be claimed regardless of whether you file for standard tax deductions or itemized tax deductions. 

Above-the-line tax deductions can include:

  • Education expenses as tax deductions
  • Student loan interest as tax deductions
  • IRA contributions as tax deductions
  • Self-employment taxes tax deductions

Tax Deductions for Small Businesses

When calculating your company's expenses this tax season, pay attention to these top 10 business deductions and pick the right payroll system.

1. Travel

Hitting the road (or air) to either perform or find work is tax deductible as long as the business is the journey's primary reason. Deductible expenses include plane fares, car costs, meals, tips, communications, and other items. Friends and family members may accompany you on the trip, but you can't claim any deductions for them. And don't confuse travel expenses with vehicle expenses (see below).

2. Vehicle Expenses

If your company uses a car or truck to make deliveries, visit clients, or for any other business purpose, you'll want to deduct some of the costs of keeping it on the road and moving. There are two ways to deduct vehicle expenses: the actual expense method and the standard mileage method. The proper expense method generally offers the most significant deduction for newer vehicles. Still, regardless of the vehicle's age or type, you'll want to calculate expenses both ways to determine which approach offers the most significant tax break.

3. New Equipment

Businesses can only survive with new equipment. Capitalizing these costs over several years is both complex and confusing. Still, Section 179 of the Internal Revenue Code lets you deduct up to $250,000 of the cost of new equipment placed into service during the tax year. There are some limitations to Section 179 deductions, so check with your tax professional for details.

4. Bad Debt

As the economy sours, more businesses face a rising pile of bad debt. Some comfort can be found because the cost of goods sold but not paid for can be deducted. On the other hand, service providers are out of luck — deductions aren't allowed for clients who fail to pay for a time-based service.

5. Interest

Interest rates may be at or near rock bottom, but that doesn't mean you can't deduct the cost of borrowing money. Finance costs and carrying charges for business purchases are fully deductible. Interest is also deductible for personal loans that finance business operations.

6. Taxes

Taxes consume a substantial portion of business revenue in good times or bad, so it's essential to keep careful records and deduct allowable taxes. Deduction rules and procedures differ for various taxes, so check with your tax professional for details.

7. Education Expenses

Many businesses and professions require owners to receive periodic training. Education expenses may be deducted if they directly relate to a current business, occupation, or trade. Education costs can't be removed if the training prepares you for a new business or career.

8. Advertising and Promotion

Advertising and promotion can help businesses find new customers and clients in tough times. Advertising costs are fully deductible. So are promotional prices, as long as there's a clear connection between your business and the sponsorship or other activity.

9. Legal and Professional Fees

Every business needs outside advice on legal, financial, training, and various other issues. You can generally deduct fees for any legal or professional service during the tax year. However, any advice on future years must be deducted over the project's lifespan.

10. Business Entertainment

As anyone who has ever had to pitch a product or service to a client at an event knows, business entertainment isn't always the perk that many people imagine. You can deduct up to 50% of entertainment expenses if the event is directly related to your business (such as a catered meal) and business issues are discussed at the event. You can also deduct 50% of the entertainment cost immediately before or after a business discussion. In either case, be sure to keep detailed records.

Now is not the time to ignore money-saving strategies such as tax deductions. Make sure your company audits and records the money spent on the above-listed plan, and you'll be sure to enjoy several tax deductions come tax season. 

Compare the best payroll software for small businesses and select the right solution to maximize your business's tax deductions.  

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