Years ago, the fellow running the IRS told Kiplinger’s Personal Finance magazine that he figured millions of small business owners overpaid their taxes every year by overlooking some of the money-saving tax breaks listed here. With some additional help from Forbes, American Express, and, of course, the IRS, we bring you seven of the top tax deductions many small business owners miss:
1.Out-of-Pocket Charitable Deductions
Beyond your direct contributions to charity, remember that the little things add up, too, and you can write off out-of-pocket costs incurred while doing work for a charity. For example, ingredients for casseroles you prepare for a nonprofit organization’s soup kitchen and stamps you buy for a school’s fund-raising mailing count as charitable contributions
2. Advertising & Promotion Costs
You’re allowed to deduct the costs associated with getting the word out about your business. This can include not only obvious advertising like newspaper, magazine, TV or radio advertising, but also less in-your-face promotions like the cost of printing business cards and promotional swag. And it’s not just the final product that’s deductible: you can also deduct the costs of coming up with ad copy or slogans, as well as creating graphics and logos. The costs associated with your website are deductible, including the cost to purchase and maintain the site and hosting fees. Think outside of the box, too: the costs of creating and hosting seminars and workshops meant to attract customers can be deductible as are, for example, Chamber sponsorships.
3. Professional service fees.
This includes the fees you pay your lawyer, accountant and/or tax preparer. Also deductible: the costs associated with payroll services, insurance brokers, consultants, HR personnel and other professionals you hire to keep your business going.
4. Home office deductions.
This is one of those business deductions that people either abuse or, more often, lose. According to American Express, of the 23.4 million returns filed by sole proprietors for tax year 2015, only 7.6 million filers claimed a home office deduction. This is only about 32% of eligible filers, a figure well below the 52% of all small businesses that operate from home. Why the discrepancy? Many believe that claiming a home office deduction is an audit red flag, so they forego a deduction they’re legally entitled to. Here’s what you need to know: to qualify for the deduction, you must use the part of your home attributable to business “exclusively and regularly for your trade or business” and that part of your home must be your principal place of business. In other words, to be deductible, your home office must be your actual office and not a convenient spot in your home.
Bad debts can be a good deduction. If you lent money to an employee, a vendor or someone else and haven’t yet been repaid, you may be able to deduct the loss.
Charges for checking accounts, ATM withdrawals and other bank services are fully deductible.
7. Deduction of Medicare Premiums for the Self-Employed
For those of you who continue to run your own business after qualifying for Medicare, you can deduct the premiums you pay for Medicare Part B and Medicare Part D, plus the cost of supplemental Medicare (medigap) policies or the cost of a Medicare Advantage plan.
If ever in doubt about the deductibility of business expenses, ask yourself these two questions:
- Is this for business use?
- Is it an ordinary (common and accepted in your industry) and necessary (helpful and appropriate for your trade or business) expense?
If you can answer “yes” to both, you can legally claim the expense as a business-related tax deduction. And if you are still not sure? Seek the advice of an accountant, like fellow Chamber member Tax Pros Plus, who has experience working with small businesses. Good luck and happy tax returning to all!