Tax deductions are important tools for small business owners that can help them maintain efficient operations while reducing their tax obligations. The more deductions you can take, the less income the Internal Revenue Service (IRS) can tax you on, which means greater savings and more capabilities to grow your company.
The following are a few common tax deductions of which every small business owner in the United States and its territories should be aware:
- Vehicle expenses: If you regularly use your motor vehicle for business, or your company has its own car, you may deduct a portion of the costs associated with using it. There are two different methods for doing so. The first is the actual expense method, where you track and deduct every business-related expense associated with your vehicle. The other is the standard mileage rate method, in which you deduct a certain amount of money for every mile driven, plus all tolls and parking fees related to business.
- Traveling: Whenever you travel for business reasons, you may deduct many of the expenses, including plane fare, car costs, taxis, meals, lodging, cleaning clothes, phone calls, tips and taxes. As long as business is the primary purpose of the trip, these costs are deductible. However, if you take family members along, only your expenses may be deducted, as only you are there for business purposes.
- Business formation expenses: The cost of actually starting up a business are considered capital expenses. You are allowed to deduct $5,000 of these expenses in your first year of business. Remainders must be deducted equally over the course of the next 15 years.
- Books and professional fees: Business books for your finances are fully deductible as business expenses. You may also typically deduct fees you pay to attorneys, consultants, tax professionals and accountants in the year those expenses were incurred. But if the work they performed was related to future years, those expenses may need to be deducted over the amount of years in which you expect to benefit from those services.
- Business entertaining: If you pay to entertain current or prospective customers or colleagues, you may deduct 50 percent of those costs, as long as they meet certain stipulations. The entertaining must be directly related to business, with business discussed at the event—or it must be somehow associated with your business. The entertainment must also take place immediately before or after business discussions.
- Interest: If you finance purchase for your business, all interest incurred is completely tax deductible. This is also true if you take out a personal loan, but use its proceeds for business purposes.
Navigating the complexities of the IRS and U.S. and territorial tax law can be complicated. Be sure to meet with a skilled business planning attorney to make sure you are getting the most out of your deductions.
Attorney Adam Marinelli is an Associate in the Corporate, Tax and Estate Planning Tax Group at BoltNagi, a respected and well-established business law firm serving clients throughout the U.S. Virgin Islands.