How Can I Maximize Deductions in My Business?Apr 19, 2023
This is part of a bigger series that we did for our Ultimate Guide to Maximizing Business Deductions and Write-Offs. Be sure to check out everything that we discussed in that.
We discussed deep into Pre Tax vs After Tax Dollars and what you can deduct as a business expense (ordinary and necessary) in an article last year, How Can I Maximize Business Deductions and Write-Offs? so definitely check that out as it's a great precursor to what we talk about today.
Today we are going to be running though various expenses that may be deductible for your business.
Contract Labor or Outside Services
Payments that are paid to independent contractors/subcontractors (non-employees) for services rendered are deductible. Examples include:
- Freelancers/Independent Contractors (to support in areas you are not an expert)
- Business Coaches
- Virtual Assistants
Note: Employees would be separate and recorded under Wages and Salaries. For contractors, remember to collect a W9 before you pay them and then send a 1099 at year-end if necessary.
Premiums paid to protect the business against losses are deductible as an operating expense. Current or prior-year premiums may be deducted in the year paid for a cash-basis business owner. Whether the cash or accrual method of accounting is used, advance payments may be deducted only in the year to which they apply.
Examples include premiums for: Fire, Theft, Flood, Merchant and Inventory, Credit, Public Liability, Workers Compensation, Business Interruption, Errors and Omissions, Disability (For Employees), Malpractice, Display Window and Product Liability, Health, Dental, Vision
Note: Life insurance covering your officers and employees is generally deductible IF you aren’t directly or indirectly a beneficiary under the contract.
This is usually reported on a 1098 but all interest on business indebtedness for which the business owner did not receive a Form 1098 would also be included.
- Mortgage (Business Location)
- Credit Card / Finance Charges
- Loan Interest
Repairs and Maintenance
Repairs and maintenance includes amounts necessary to maintain property in an ordinary, efficient operating condition. It is important to distinguish between repair expenses and improvement expenses because an improvement must be depreciated. A capital expenditure increases the value of the asset, the productivity of the asset, prolongs the asset's useful life, or adapts it to a different use.
- Cost of Service Contractors
- Laundry and Cleaning Expenses for Uniforms
Taxes and Licenses
Licenses or taxes that are directly attributable to the trade or business are deductible.
- Job Related Licenses (Occupation, Liquor, Chauffeur, etc)
- Regulatory Fees
- Real Estate Taxes on Business Property
- State or Local Gross Income Tax
- Personal Property Tax on Business Items
- Sales Tax - Note: If sales tax is collected from the buyer, the amount must be included in gross receipts. Sales taxes paid on supplies or depreciable property are added to the cost basis of the property.
- Compensating Use Taxes
- Federal Highway Use
Wages and Salaries
To be deductible, compensation must be an ordinary and necessary expense of carrying on the business, reasonable in amount, for personal services actually rendered, and actually paid or incurred during the tax year.
- Gross Salaries
- Other Compensation
- Children on Payroll
- Spouse on Payroll
Note: The employER portion of payroll taxes typically are a separate expense account but are fully deductible. This includes social security, medicare, federal unemployment (FUTA), state unemployment, etc.
- Bad Debts - Client/Customer not paying you, this would only be available for accrual basis filers.
- Bank Service Charges - Examples include: Monthly Account Fees, Annual Credit Card Fees, Transaction Fees, Overdraft Fees, etc.
- Charitable Deductions - Made for business purposes to a qualified organization.
- Commissions and Fees - Examples include: Sales Company or Affiliate Payments
- Cost of Goods Sold and Materials
- Dues to Trade or Professional Organizations
- Education & Training - Examples include continuing education to maintain licensing or improve skills and education and training for employees.
- Franchise Fees and Royalties
- Freight, Shipping, or Postage Costs
- Legal and Professional Services - Examples include: Attorney, Accountant / Tax Advisor, Architect, Collection Expenses or Fees, Creative services, Event Management, IT Services, etc.
- Loss Due to Theft
- Moving Expenses
- Rent or Lease - Examples include: Office, Storage, Shop, Postage Box, Equipment Rentals, Safety Deposit Box, etc.
- Subscription to Publications - Examples include: Newspapers and Magazines
- Supplies - Examples include: Gift Wrapping, Cleaning or Maintenance Supplies, Computer or Tech Supplies, etc.
- Utilities - Examples include: Electricity, Gas, Telephone, Water, Sewer, Garbage, Internet, etc.
We have full blog post and podcast episodes on many other deduction topcs including:
- Board Meetings
- Depreciation and Asset Purchases
- Employee Benefit Programs
- Office Expenses
- Pass-Through 199A Deduction
- Research and Development
- Start-Up Expenses
Again, this is just a nibble into some planning opportunities to help you maximize your business deductions. I want to encourage you to check out our full series on this in our Ultimate Guide to Maximizing Business Deductions and Write-Offs to also understand what you need to ensure you are doing to protect yourself and provide full documentation as well.
Remember, do not get greedy and always do the sniff test. If I was explaining this business purpose to an IRS auditor, would it sound legit?
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