Owners of small businesses often shoulder a substantial tax burden. Since tax rules can be challenging to understand on your own, you may not be aware of the various deductions that you can take. The IRS does not have a duty to advise business owners about all of the potentially available deductions.
The most notable deduction involves any ordinary and necessary expenses accumulated as part of running the business. For example, the deduction can apply to rent for physical property where the business is located, as well as salaries and benefits paid to employees. (Read more here about ordinary and necessary business expenses.) Even if you hire an independent contractor, you can deduct payments to the contractor as a business expense. You also can deduct half of the cost of many restaurant meals related to your business, although you will need to meet certain requirements to qualify for this deduction.
Some deductions relate to transportation costs that are ordinary and necessary, regardless of the type of transportation used. However, the IRS may take a closer look at a substantial travel deduction and try to separate any personal driving from business driving. You also can get a deduction for overnight travel related to your business, which covers the costs of plane tickets, hotels, and more. Some overnight trips will qualify for this deduction even if the purpose of the trip combined business with pleasure. A business owner must make sure to keep records carefully so that they can use this deduction to the fullest extent.
A home office deduction may apply to business owners who work at home. It may even apply if a business owner does the majority of their work at an office outside their home. The nature of the deduction varies according to the business form that you choose. Read more here about the requirements for taking a home office deduction.
Another type of deduction applies to rent, repairs, maintenance, improvements, insurance, and other expenses related to an outside office that you use for your business. You may qualify for a deduction regardless of whether you rent or own this office.
Legal and Accounting Fees
You can generally deduct any fees that you pay to lawyers, consultants, accountants, and other professionals for business purposes. (This does not include fees paid for estate planning that involves business property.) If you are buying a long-term business asset, you can add legal or other fees related to it to the cost of the property. If you pay legal and accounting fees when you are starting a business, you can deduct them as part of your business start-up expenses. These can be deducted in the amount of $5,000 in the first year of a business, while any remaining amounts can be spread over the ensuing 15 years. Fees paid to form a business also fall into this category.
Fees paid to accountants and tax advisers for a business can be deducted, including any fees for assisting you with the business part of your tax return. However, you cannot deduct any fees billed by these professionals for helping you prepare the personal part of your tax return. To claim the deduction, you would need to get an itemized bill from the professional to show how much of the fee related to the business part of the return.
Artwork and Antiques
You cannot claim a deduction for paintings, sculptures, or other artwork because these are not worn out or rendered obsolete during their regular use in a business. However, you may be able to claim a deduction for antiques if they are physically used in the normal course of business for more than a year. The antiques would need to be items that could be worn out or could become obsolete. If an antique is a collectible that is not actually used, it would not qualify for a deduction.
If you have business property that is reasonably expected to last for more than a year, you may be able to deduct that cost in a single year if the asset qualifies for the Section 179 safe harbor. Alternatively, you can spread out the deduction as depreciation over multiple years. These types of business property may include computers, furniture, medical devices, vehicles, and books. Commercial real estate also may qualify for a deduction, although it cannot be deducted in a single year.
A deduction may apply to some of your health insurance costs, as well as certain uninsured medical costs like prescription glasses and non-prescription drugs.
While this is not technically a deduction, owners of small businesses get useful tax breaks by creating certain types of retirement accounts. These tax-deferred accounts can shield substantial amounts of funds throughout the course of a professional career.
Prepaid Business Expenses
In most situations, you cannot prepay business expenses for a future year and apply the deduction related to them to the current year. You generally will need to deduct an expense in the year to which the expense applies. Under the 12-month exception, however, a business owner can deduct a prepaid business expense in advance in certain situations. For this exception to apply, the expense must cover a right or benefit that will last for no more than 12 months or that will end by the end of the tax year after the tax year in which the expense was made.
The 12-month exception often applies to business leases, rent, and licenses, as well as insurance premiums or the cost of terminating a contract. It does not apply to interest payments, loan payments, or the cost of purchasing long-term assets like office furniture or equipment. You should keep records of the advance payment so that you can provide this documentation to the IRS if needed. Also, you should explain why you are paying in advance to the entity receiving the payment so that they deposit it properly.