15 Often Overlooked Tax Deductible Business Expenses
Business owners mistakenly take a hands-off approach to accounting and bookkeeping, opting to leave all finances in the hands of their CFO, CPA, accountant, and bookkeepers. It’s smart to rely on experts who specialize in certain areas of the business. Somewhere in between the long hours trying to generate sales and lower costs, it’s critical for successful business owners to stay involved and check in with their accounting team at least monthly to review tax deductible business expenses.
It’s not always possible or cost effective to go back and try to recoup missed deductions from previous years, so staying informed and planning ahead can help you save time and money. Here are the top 15 overlooked tax deductible business expenses.
1. Purchases with petty cash
Generally, items or services purchased with petty cash involve small dollar amounts. For this reason, it’s common for business owners to misplace receipts or forget to save them at all. Petty cash expenditures may be small, but they add up quickly over the course of the year.
2. Research and development
Don’t dismiss Research & Development (R&D) deductions just because you have a new small business not in a scientific or academic field. Many expenses small business owners incur in research and development of a new product or service is deductible. This could include testing new products involved in your services, or you may buy parts or items involved in your production process just to see if you get a better result. If you’re a startup, read our article “Startup R&D Tax Credit: What is it and how can you claim it?”
3. Home office deduction
Based on the dedicated space in your home’s square footage, you can deduct expenses as a percentage of items like mortgage interest, utilities, etc. The space must be dedicated solely to the business. And, as Lantern describes, you can typically deduct expenses in one of two ways: simplified method or regular method.
4. Startup and organization costs
For many businesses, there are local licensing fees, permit fees, and costs to meet local government requirements. The business can also deduct professional fees, such as accounting and legal to help get your business started.
5. Debt interest
A large percentage of new or young businesses grow through debt. It can be interest on credit cards used for business, bank loans, signature loans, or other indebtedness. Tax deductible business expenses include interest on debt.
6. Loss carryovers
There are several categories of expenses that don’t allow deduction in the current tax year over the amount of profit. So, if the business has losses that can’t be deducted that tax year, they could be carried over into future tax years.
As American Express describes, depending upon the type of inventory and the nature of the business, some inventory can be reclassified as materials and supplies. The cost of materials and supplies are tax deductible business expenses in the current year.
8. Accounting & tax preparation fees
This seems obvious, but when it is almost a year between a one-time expense and taking the deduction, it can be forgotten.
9. Bad Debts
If you loaned money through the business or have unpaid accounts receivable, you may be able to write off the amounts as bad debt expense.
10. Self-employment taxes
As a self-employed individual, you can deduct one-half of the Medicare and Social Security amounts paid. This is a personal deduction, not a deductible business expense, however. Depending on your business entity structure and filing status, there are ways to reduce self-employment tax further. We cover some of this in our article about tax planning and how it helps minimize taxes.
11. Cell phone bill
Determine the amount of time and the overall usage percentage of your personal cell phone used for the business. Deduct that portion of the bill as one of your deductible business expenses.
12. Educational expenses
Those seminars you attended to help with your management skills, or training you paid for to do a better job or produce a better product or service are tax deductible business expenses.
13. Home Internet bills
Small business owners never stop working. How much time do you spend on your home Wi-Fi and Internet systems to monitor your business, or to communicate with customers, vendors, or employees? You can deduct a portion of these costs as valid tax deductible business expenses.
14. Parking and tolls
All of that running around you do for business will generate expenses for parking and tolls. Keep receipts, as these add up.
15. Local travel expenses
Even if you do not use a personal or company vehicle for local travel, if it is for business, you can deduct Uber, taxi, and public transportation costs.
Those are the most often-overlooked tax deductible business expenses, so keep track to save money. And it’s always helpful to rely on experts as you work to keep more money in your business.