Learn about the most beneficial and critical tax deductions for your small business in 2020.
Deductible business expenses can significantly reduce the cost of running a business. Most entrepreneurs know about general deductions, but many categories have limitations. We sat down with accountant Juan Llantin, a member of the FINSYNC Services Network, who shared eight key tax deduction areas for small businesses.
Meals and Entertainment
Do you ever take out current or potential clients for a business lunch or dinner? You can deduct 50% of those meals on your taxes, given that they aren’t too lavish or extravagant. Beware that meals purchased together with entertainment events cannot be deducted unless they are on a separate bill from the cost of the entertainment event.
For example, if you invite a client to a football game, you may deduct 50% of the cost of any hotdogs or beverages you and your client enjoy during the game, but not the cost of the tickets.
If client dinners are common in your business, be sure to save all receipts. Juan says, “Some people have trouble remembering the details about the meals. This makes it difficult to claim those meals as a deduction later on. Make sure to save the receipts and take notes on them.”
All travel expenses, including airfare, hotels, rental cars, tips, dry cleaning, meals, etc., are deductible for a small business. For a trip to qualify as a deduction, it must:
- Be necessary for business. This can be a business meeting with a client or an investor, or a tour of a potential supplier.
- Take you out of your local area, which for most business owners means outside of their home city.
- Last for more than a normal workday, which means that day trips don’t qualify.
“It’s better to stay the night and then come back in order to deduct the expenses for that trip,” says Juan.
If you have a vehicle you only use for your small business, the deduction process is very straightforward: you can deduct 100% of your expenses related to that vehicle. However, if you use your vehicle both for personal and business purposes, you need to split the expenses.
There are two ways you can do that. Calculate your expenses using both methods, then choose the one that provides a greater tax benefit for your business.
The first method entails calculating how much you use your vehicle for your business, and then multiplying that percentage with all vehicle-related expenses. That includes gas, repairs, oil, tires, washes, insurance, and registration.
The other method entails taking the same percentage and multiplying it with the standard mileage rate. For 2019 that rate is 58 cents per mile, while for 2020, the rate is 57.5 cents per mile.
If your business is home-based, you can deduct home office expenses as long as your office is not bigger than 300 square feet. For every square foot, you can deduct $5.
It’s important to make sure that the room you are using for your home office is solely dedicated to your business, which means you can’t use your dining or living room. When it comes to office supplies, you can deduct the total costs.
Many businesses invest in software in addition to physical assets. In those cases, the software expenses can be amortized over three years. For example, if you’re an architect and you just invested in design software that costs $1,000, you divide that cost by three and write off the software as $333 a year.
Internet is another essential expense that all small businesses can deduct. If you also use your phone a lot for business purposes, you can deduct 50% of your total phone bill.
Financial and Insurance
If you use a debit or credit card for your small business, you can deduct any card or service fees that you incur. If you have business loans, you may also deduct the interest paid on those loans. Many businesses also have different types of insurance, which are fully deductible as well.
Small businesses that own a lot of assets, which have a determinable useful life over one year, can depreciate those assets over the course of their useful life. However, there are a number of rules that dictate what can and can’t be depreciated.
For example, you own a piece of land with a building from which you run your coffee shop. You can depreciate the value of the building, but not the value of the land.
Education and Training
Sometimes the investments you make in your small business do not look like equipment or software. You need to take courses or workshops to maintain your professional expertise or improve your skills to stay current in the market. As long as the training adds value to your business, you can deduct all of the expenses.
How to Get the Most Out of Your Deductions
The one thing Juan Llantin stresses above all else is to be organized. Every expense you want to deduct on your business tax statement needs to be well-documented, especially for tricky areas such as vehicle expenses.
Sync up your business finances with software like FINSYNC to keep track of all your expenses digitally, which can help you stay organized and save you hours of work at tax time.