If you own a small business, you’re used to the chaos of tax season. Between collecting your receipts and navigating the ever-changing IRS guidelines, the weeks before April 15th can feel like a mad dash to the finish line. At the same time, you know how important it is to maximize your deductions and minimize your tax burden. The more deductions you can claim, the less you’ll owe in taxes.
You may already use an accountant or tax professional to help navigate tricky tax guidelines. Even if you do, though, it’s important to know which deductions you can take so that you can keep track of the right receipts and even maximize your end-of-tax year business spending.
This guide is designed to help you understand what small businesses tax deductions are and which ones you can legally take.
Small business tax deductions
Taxes are based on your income. However, as a small business, your taxable income is not equivalent to the amount that you billed.
Self-employed individuals, sole proprietors of an LLC, and members of an S-corporation or partnership can make some or all of their yearly income from their small business. But that doesn’t mean every single dollar made is taxable when individual returns are submitted. Nor is a business’ total billing equal to its taxable income.
This is where deductions come in. Your business’ taxable income is its total income minus business deductions.
What are the income types?
Total income, taxable income—what’s the difference?
- Total Income – This is the total amount your business takes in, period.
- Taxable Income – This is your income minus business expenses.
If you’re filing individually, your AGI—not your total income—determines your tax bracket. Let’s take a look at an example.
Say you’re a photographer with an LLC who billed $45,000 in 2019. In addition, you’ve made some good investments, and your dividends for the year stand at $5,000. In this case:
Your total income is $50,000.
After taking a standard deduction of $12,200, your AGI/taxable income is $37,800. You only pay taxes on this amount.
Now you can see why small business tax deductions are so important: they can drastically affect the amount of your income that is actually taxable. When your AGI is lower and you’re placed in a lower tax bracket, you pay less in taxes.
What’s tax deductible?
If you’re interested in taking an itemized deduction, you’ll need to take a careful look at your business expenses. All of the following can be tax deductible for small business owners who have an LLC or partnership or hold more than 2% of an S-Corp:
Healthcare costs – If you have an individual insurance plan and pay for it out-of-pocket, your expenses are deductible on your individual tax return. So are the following medical costs:
- Medical bills
- Trips to the dentist
- Prescription pharmaceuticals
Business insurance – As a small business owner, there’s always a chance that something can go wrong, whether you’re a karate instructor whose students kick each other, or a wedding planner who finds herself responsible for ruining a bride’s big day. In our litigious environment, it’s always worth protecting yourself from potential liability, and luckily, your business insurance expense is deductible.
- General liability insurance protects you in the case of your clients’ or third parties’ claims of bodily harm or property damage.
- Professional liability insurance covers you if you’re accused of errors or omissions related to your professional services.
Business use of your home and car – If you work at a home office or drive your car for work, you can deduct part of the cost of rent, gas, and even cleaning.
In the case of your home office, your deduction is based on the square footage of your office vs your total rent or mortgage.
In the case of your car, you’ll need to keep track of business miles, which are defined as miles driven for official business purposes.
If you use a vehicle just for work, the cost of your commercial auto insurance policy will be deductible.
Supplies and equipment – Yes, those are business expenses! Whether you’re an artist paying the cost of the Adobe creative suite or a Pilates instructor investing in a new reformer, equipment that you use for your business is deductible.
Travel expenses – If you travel for work, your flights, accommodations, and even your meals are deductible.
Contract labor – If you ever hire a contractor to help take over your additional workflow, those payments are deductible.
Standard deductions vs. itemized deductions
When you’re filing your business taxes and your business isn’t a pass-through entity (LLC, S-Corp, Partnership, sole proprietorship), there is no standard deduction.
You can skip ahead to the next heading, “What’s deductible?” to find out what you can deduct from your business’ total income to reduce your taxable income.
However, 75% of small business owners report their business income on their individual tax returns. When you’re filing your individual taxes, you’re eligible to take a standard deduction or an itemized deduction.
Regardless of their income level, anyone can take a standard deduction—no questions asked. For individuals, the standard deduction for 2019 is $12,200. For married individuals filing jointly, it’s $24,400.
When you take the standard deduction, that’s it. You won’t be able to deduct other expenses including the cost of donations to charities, medical expenses, mortgage interest, etc.
The other option is taking itemized deductions. This entails keeping track of all eligible costs and expenses. You’ll report your eligible deduction on your tax forms, as well as keep receipts in case the IRS comes knocking.
So which should you take?
As a small business owner, you’re eligible for a wide array of deductions, and if they add up to more than $12,200/$24,400, it’s worth the extra effort to keep track.
The bottom line
As a small business owner, keeping track of your expenses is key. You’ve probably heard the saying “you have to spend money to make money,” and during tax season, this old phrase seems to be true. The more you’ve spent on deductible business expenses, the less you’ll owe in income tax.
If you’re looking for a way to maximize your deductions while keeping your business safe, remember that Thimble’s General Liability and Professional Liability Insurance are the best way to protect your business and your bottom line.
Get your quote in just a minute, and choose from affordable insurance on an hourly, daily, or monthly basis. We hope this article was helpful—it’s just the start of Thimble helping make your business expenses make sense.