Common Deductions For Business Owners - Part 1 of 2

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Within the day-to-day life of your small business, you will incur ordinary and necessary expenses that you can deduct when filing your taxes

So what does that mean?

“Ordinary” means they are common and accepted in the general industry in which the business owner is working. “Necessary” means they are appropriate and required in operating your small business.  Keep reading for more information on specific expenses you can deduct as a business owner. 

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Categories
Advertising

These expenses are incurred to promote a business, such as newspaper ads, flyers (including the cost of distributing them), television and radio promotions and business cards.

Commissions and Fees

Referral fees or occasional amounts paid to individuals who are not employees or independent contractors may be deductible. This does not include commissions paid to employees.

Contract Labor

Payments that are paid to independent contractors (non-employees) for services rendered are deductible.

Employee Benefit Programs

Contributions to employee benefit programs include those to education, recreation, health and welfare programs.

Insurance

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. Types of insurance for which premiums are deductible include fire, theft, flood, merchandise and inventory, credit, public liability, workers’ compensation, business interruption, errors and omissions, disability (for employees), malpractice, display window and product liability.

Mortgage Interest
The interest portion of mortgage payments on property used in the business is deductible.
 
Note: If the small business is located in the proprietor’s home, the business portion of mortgage interest is not included here but is part of the business-use-of-home deduction. There are strict requirements on home offices; make sure you understand the restrictions.
 
Other Interest
Other interest includes all interest on business indebtedness for which the business owner did not receive a Form 1098. This includes finance charges on credit card purchases made for business purposes, interest paid on installment sale purchases and other types of loans for the business.
 
Legal and Professional Services
Costs for legal and professional services such as attorney, accounting, and tax preparation fees that are ordinary and necessary to the operation of the business are deductible.
 
Office Expense
Office expenses are the costs of consumable office supplies such as pads, pens, pencils, order books, receipt books, supplies for equipment (for example, cash registers, computers, and copiers), postage and record books and related supplies.
 
Pension and Profit-Sharing Plans
Amounts paid by the business as employer contributions to a pension, profit-sharing, or annuity plan for employees are deductible.
 
Rent or Lease
Rent or lease payments of business property are deductible in the tax year for which the rent is due.
 
Repairs and Maintenance
Repairs and maintenance includes amounts necessary to maintain property in an ordinary, efficient operating condition, such as labor, supplies, the yearly portion of the cost of service contracts, and other items incidental to the repair.  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.
 
Supplies
Any supply items necessary to the proprietor’s business are tax deductible, including gift wrapping materials, cleaning or maintenance supplies, and maintenance of a watchdog on business property or electronic security system.
 
Taxes and Licenses
Licenses, such as occupation, liquor, chauffeur, building, and regulatory fees paid annually to state or local governments in connection with the business are deductible.
 
Taxes that are directly attributable to the trade or business are deductible, including:
     • Real estate tax imposed on business property. (Real estate taxes paid on a personal residence with a qualified home office are deducted as business-use-of-home expenses.)  
     • Any state or local tax on gross income (as distinguished from net income) directly attributable to a trade or business.  
     • Personal property taxes imposed on property used in a trade or business other than those for vehicles.  
     • Sales taxes imposed on sales of property or services at retail and measured by gross sales price or gross receipts. If this tax is collected from the buyer, the amount must be included in gross receipts. Note: Sales taxes paid on supplies or depreciable property are added to the cost basis of the property.  
     • Compensating use taxes that are generally imposed on the use, storage, or consumption of an item brought in from another taxing jurisdiction.  
     • Federal highway use tax.   
     • Payroll taxes.  
 
Payroll Taxes
Employment taxes that a business must pay on behalf of its employees are deductible, including:
     • Social security tax of 6.2 percent on each employee’s wages up to $142,800.
     • Medicare tax of 1.45 percent on each employee’s wages.
     • Federal unemployment tax (FUTA) ranging from 0.8 percent up to 6.2 percent on each employee’s wages up to $7,000.
     • State unemployment tax, which varies by state.
 
Travel
Expenses incurred while you or your employees are away from home on business may be deductible. An individual is away from home if he or she is required to be away from his or her tax home substantially longer than for an ordinary day’s work and he or she needs to get sleep or rest to meet the demands of the work while away from home. The tax home is the entire city or general area in which an individual regularly works, no matter where he or she lives. Deductible travel expenses include:
     • The cost of airplane, train, bus travel or car and truck expenses for traveling between the tax home and the destination.
     • The cost of local transportation, including bus, taxi, or limousine fares, while working at the destination location.
     • The cost of renting a car at the destination location.
     • The cost of sending baggage or shipping samples or display materials to the temporary work location.
     • The cost of lodging and related tips, cleaning, laundry, telephone, and fax expenses.
 
Part 2

Now, you already have some information on specific expenses you can deduct as a business owner. But we are not done yet! There are a lot more which are also important that you get to know and be familiarized with. So stay tuned for Part 2!


If you have any questions or need help with your small business, please don’t hesitate to call 502-867-1827 or email katherine@kmjohnsoncpa.com

I’m Katherine Johnson and own Katherine M. Johnson, CPA. I have had my business since 1996 and an office on Main Street since 2014. I specialize in helping small businesses get their accounting/bookkeeping set up, and in some cases do it for them if they prefer. We do payroll and other business related tasks as well. I do taxes and tax planning for individuals and small businesses, and also try to help people with issues with the IRS or state/local agencies. I’ve been in Scott County since college and made it my home for many years. I just recently moved to Frankfort. I raised a son that is now 21 at WKU and a senior. I remarried in 2020 to a wonderful man from Frankfort and now have two stepdaughters and two grandkids. Life is good!