Top 7 Tax Deductions Often Missed by Small Businesses
Being a business owner is very difficult at times. You should not be expected to also catch all of your potential tax deductions on top of meeting your daily demands as a manager and owner of your company. However, if you do not spot and take advantage of deductions for your small business, you could be paying thousands of extra dollars in tax obligations every year.
Below are some of the most commonly overlooked tax deductions that you should consider as a small business owner. Proper planning will let you take advantage of these deductions effectively.
1. Business Miles
If you travel anywhere for your company, you should be tracking those miles. You can deduct a specific rate per mile at tax time for unreimbursed business use of your vehicle. In 2020, the mileage reimbursement rate is 57.5 cents. That means that if you drive $10,000 miles during the year, then you can deduct $5,750 in mileage costs at tax time.
While you cannot deduct the miles that it takes you to get to and from work from your home, you can deduct just about everything else. Below are a few examples of trips where you should claim mileage reimbursement.
- Driving home from the airport for a business trip
- Driving out to see a client
- Driving to the office supply store
Generally, any time you are traveling for work, you should be tracking miles so you can take full advantage of this tax deduction.
2. Personal Cell Phone Usage
As a business owner, you likely use your cell phone for a wide variety of business reasons, from actually making phone calls to checking emails or texting clients. If you use your cell phone at all for business purposes, you should be able to deduct a portion of your cell phone bill every month.
To determine this deduction, you have to have an idea of how much you use your cell phone for work compared to using it for personal reasons. If, for example, you use your cell phone mostly for work, then you may be able to deduct upwards of 90% of your cell phone bill. That kind of deduction can add up quickly. If your cell phone bill is $100 per month, you could deduct $90 per month ($1,080 per year) for the business use of your phone.
Keep in mind, however, that if you are on a family plan, you can only deduct your portion of the bill—not the entire plan.
3. Education and Training Expenses
If you are required to take additional classes or go through training for your work, those expenses are 100% deductible. This general rule also applies to keeping up with licensing requirements as well. Some examples of these expenses include:
- Tuition for individual classes or continuing education
- Workshops or training related to your craft or business
- Conferences
- Lectures
- Online classes
- Books and reference materials
Anything that furthers your growth and development as a business owner (and is related to your business) can be considered an education expense. It does not have to be a formal class or seminar to be deductible.
4. Parking, Tolls, and Other Travel Expenses
Many business owners know that they can deduct travel expenses when they go on a trip of any length. However, you can also deduct expenses related to local travel as well. Any time you have to pay for transportation, you should be tracking those expenses for a deduction. Parking, tolls, bus fees, Lyft, Uber, etc. can all be included.
Keep in mind, however, that you cannot deduct expenses related to simply getting to work every day. Driving back and forth to work is not deductible, but if you are incurring expenses to go anywhere else, you can deduct those fees.
5. Healthcare Premiums
Many small business owners will qualify to deduct their individual health insurance premiums. The deduction cannot exceed the amount of income that your business brings in, but it can still be a very valuable deduction.
If you have employees, you can generally deduct the amount that you pay for their premiums as well.
6. Depreciation
Nearly every business has equipment that it will use to provide products or services. However, some owners will overlook the fact that the cost of equipment or the deprecation for that equipment can be deducted from your income taxes.
Depreciation deductions account for the gradual decrease in value and the useful life of your equipment; your equipment loses its value as it gets older and is used more.
Section 179 of the tax code allows you to deduct the full cost of equipment purchased up to a certain dollar amount in the same year that the equipment is placed into service. In 2020, that dollar limit is $1,040,000, which is much higher than equipment owned for the average small business. That means that you can often deduct the entire cost of equipment purchase right away, rather than having to wait several years to take a deprecation deduction over time.
7. Taxes and License Fees
You can deduct payment of taxes to state and local taxing authorities on your federal income tax return. Your state will also often let you deduct your federal taxes paid as well. In most circumstances, the tax deduction also extends beyond income taxes, too—it includes any type of tax that you may have to pay, from excise taxes to sales taxes.