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Summary of Small Business Tax Deductions
Table Of Contents
By Jason Watson, CPA
Posted Saturday, November 4, 2023
This chapter is huge, and has a ton of information in it and perhaps it is overwhelming. To reiterate information from the beginning of this chapter there are some over-arching themes and concepts for all small business deductions. The business expense must be-
- Ordinary and necessary (IRS Publication 334), and
- Paid or recognized in the current tax year, and
- Directly related to your business, and
- Reasonable, and not lavish or extravagant (IRC Section 162 and IRS Publication 463).
We want to give you this table to help summarize the business deductions that are clearly not allowed (black), the ones that clearly are allowed (white), and the gaggle of exceptions (grey).
| Business Expense | Deduction? |
| 401k Plan | Get $500 tax credit from IRS for starting one. Great way to defer taxes. We can set this up. |
| Advertising | Yes. |
| Automobiles | Business use only. Use decision tree to see if you should own it or the business. Depends on price, turnover, miles driven, business use and marginal tax rates. Personal use added to W-2 Box 1, 3 and 5 using Lease Value rates in IRS Pub 15-B. |
| Business Travel | All kinds of rules. Mix pleasure with business under some circumstances. |
| Business Meals | 50% if business discussion with client, prospect or associate. 50% if traveling away from your tax home on business. 100% for business social gatherings or convenience of the employer (lunch). |
| Cell Phone | Business use only. Never 100% unless you have second phone. Reimbursed through Accountable Plan. |
| Client Gifts | Max $25 per recipient per year. |
| Commissions | Yes. |
| Commuting Expenses | No. If you have a home office, then commuting becomes business travel and subsequently Yes. |
| Copier Lease | If the lease can be considered a capital lease, then No. If the lease is an operational lease, then Yes. Depends on the facts and circumstances. |
| Country Club Dues | No. Don’t throw the book. Not our fault. |
| Defined Benefits Plan | Get $500 tax credit from IRS for starting one. Great way to defer taxes. We can set this up. |
| Education | Only if improves your current work skills or necessary for professional credentials (see Tax Court cases above). |
| Food | 50% if business discussion with client, prospect or associate. 50% if traveling away from your tax home on business. 100% for business social gatherings or convenience of the employer (lunch). |
| Golf Outing | No. Seriously. Let it go. |
| Guard Dogs | If you are a high risk defense attorney on the East Coast and need a security detail, then Maybe. Must be a bona fide occupational qualification. |
| Health Reimbursement Arrangement (HRA) | Yes. Need a HRA plan. There are rules. Added to your W-2 Boxes 1, 16 and 14. |
| Health Savings Accounts (HSA) | Business contributions, Yes. Added to your W-2 Boxes 1, 16 and 14. |
| Home Office | If regularly and exclusively used for business then Yes. Multiple locations OK provided home office is primarily used for substantial administrative activities. Reimbursed through Accountable Plan. |
| Insurance | Business liability insurance, Yes. Auto insurance, Yes if the business owns the car. Health insurance, Yes and added to W-2 Box 1. Dental insurance, Yes and added to W-2 Box 1. Eye insurance, Yes and added to W-2 Box 1. Long Term Care insurance, Yes but limited. Disability insurance, No. Otherwise your benefits become taxable income. Life insurance, No. Only in C corporations where the corporation is the owner and beneficiary (no S Corp election!). |
| Kids On Payroll | Great way of reducing tax liability for the same amount of cash. Must do it correctly and follow state child labor laws. |
| Legal, Professional Fees | Yes. |
| Merchant Card Fees | Yes. |
| Per Diem | Maybe. If employees own more than 10% of a corporation, then No. Sole proprietors and single-member LLCs including partners in partnerships, Yes. |
| Professional Attire | If the clothing is suitable for everyday use then No. If the clothing is a uniform then Yes. Possible advertising expense. No dry cleaning unless clothing otherwise qualifies. |
| Profit Sharing Plan | Get $500 tax credit from IRS for starting one. Great way to defer taxes. We can set this up. |
| Retirement Plan | Get $500 tax credit from IRS for starting one. Great way to defer taxes. We can set this up. |
| Taxes | Sales tax, Yes. Payroll tax, Yes for business portion. Estimated tax payments, No. Nice try. |
| Utilities | No, unless you have a separate office location. If using home office, utilities is a part of the deductible basis. |
| Website | Yes. |
There you go. There are tons of variations, exceptions, rules to follow, interpretations, positioning, and many more modifiers that we can’t think of right now. Please contact us if you have any questions or concerns- we love to run through small business tax deductions with owners. And like a good parent, we try to find ways to say Yes. Yes, you can go to Johnny’s house right after you clean your room. Yes, you can deduct that expense provided you document it this way.
Jason Watson, CPA, is a Partner and the CEO of WCG CPAs & Advisors, a boutique yet progressive tax, accounting and business consultation firm located in Colorado serving small business owners and taxpayers worldwide.
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