Read on to learn about thetax deduction write-offsand deductions you may be missing for your small business and some ideas on how to use them as a means to reinvest in your business.
Not long after launchingThe Loop Loft, Shopify seller Ryan Gruss saw hisprofit marginincrease. But there was a catch.
“我们会有一个非常有利可图的年然后得到nailed with income tax,” he says. “Looking back, we should have reinvested that money into the company.”
Even though those tax hits hurt, they inspired Gruss to put some of profits toward actual expenses he could write off—in this case, marketing—and help turn The Loop Loft into the steadily growing company it is today.
Every entrepreneur can benefit from Gruss’s experience.
What tax deductions can small business owners write off?
If you run an online store, putting some of your profits toward tax-deductible business expenses can help your business grow and give you a break cometax season.
Even day-to-day expenses—car trips to the post office or the electricity bill for your home office—could be saving you money, so long as they’re reported in yoursmall business accountingrecords.
9 key write-off categories you can deduct from your qualified business income this tax year:
- Shipping
- Workspace
- Banking, retirement plans and insurance
- Professional services
- Workers
- Marketing
- Website fees
- Education
- Travel
Shipping
Unless you’re running adropshippingbusiness, it’s your job to deliver the goods. Luckily, the IRS considers the cost of doing so “ordinary and necessary.”
Postage, shipping meter subscriptions, delivery charges—they’re all deductible come tax time. Still, you’re better off paying less for shipping in the first place.
1. Packaging
The cost of allecommerce packagingand of getting your product delivered on time and in one piece can be deducted on your tax return. This includes envelopes, boxes, paper, packing material, tape, labels, markers, and printer ink.
Shipping… is not just Cost of Goods Sold. You need packing material, and there are postage costs as well. When I look at my credit card bill at the end of the month, it’s a huge expense.
Trisha Okubo,Maison Miru
Workspace
2. Home office
If you run your store from home, you qualify for a deduction. The size of this deduction will depend on how much of your home is devoted to doing business.
These are the requirements you need to meet:
- Your work area isused only for business activities. (If you occasionally do paperwork at the kitchen table, your kitchen does not qualify as a home office.)
- Your work area must be theprincipal place of businessfor your ecommerce company. You should be ready to prove this with a consistent, printed schedule.
- Themajority of the time you spend in your home work areamust be devoted to doing business.
Also, you should have no alternative workspace. That means no external office or coworking space from which you run your business.
You have two options for calculating the home office deduction: thesimplified methodand theregular method. Unsurprisingly, one is easier than the other.
Using thesimplified method, you deduct $5 per square foot of your home used as business property, up to a maximum of 300 square feet.
To use theregular method, you calculate the percentage of your home’s square footage that you use for business, then apply that percentage to your home expenses—rent or mortgage interest, property taxes, electricity, heat, water, and anything else that makes it possible to occupy your home.
For example, if you use 10% of your home’s square footage for business, you can deduct 10% of your mortgage interest on your tax return.
To use theregular method,report expenses onForm 8829. To use thesimplified method,fill out the appropriate worksheet onSchedule Cof Form 1040.
One of these methods may give you a better deduction than the other. It really depends on the nature of your business and your home office.
Heads up
The IRS has a reputation for carefully scrutinizing home office expenses. Make sure you have the info you need to back up your claim. Take pictures of your work area and maintain a copy of your schedule for working there. Each financial year, keep them filed with your tax records and receipts.
3. Utilities
If your home qualifies as a workplace, household utilities—heat, water, and electricity—can be deducted on your tax return.
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You get this number as part of theregular methodof calculating home office expenses. So, if 10% of your home’s square footage is used for doing business, you can deduct 10% of your heat, water, and electricity payments.
4. Improvements and repairs
A necessary repair to your home office—for instance, fixing a broken window—can be reported as an expense on your tax return.
An improvement to your home office can also be reported, but it must be depreciated over a period up to 27.5 years. Work done on your home office is classified as an improvement if it involves “betterment, adaptation, or restoration”—for instance, installing a larger window.
Before paying for an improvement or repair, talk to your CPA to make sure you’re classifying it correctly.
5. Coworking space
If you rent coworking space where you contribute to the cost of utilities and office supplies, there’s a good chance those costs may be a tax deduction. Check with your CPA.
Banking, retirement plans, and insurance
6. Business interest and bank fees
If you have a business credit card or asmall business loan, anything you pay in interest during the course of the financial year is tax deductible. The same applies to fees charged by your bank for maintaining or using your business checking account.
7. Business insurance
If you’re operating an ecommerce business—whether you’re an S corporation, self-employed, or anLLC—business insurance is tax deductible.
Some types ofbusiness insuranceyou can get a tax break on are:
- Data breach insurance
- Commercial property insurance
- Professional liability insurance
- General liability insurance
- Workers’ compensation insurance
If you hold any of these insurance policies to help protect your business, you may be able to write the premiums off. If the insurance policies are common and necessary, you can write off the full amount.
8. Health insurance
If you’re self-employed, you may be eligible for a health insurance premium deduction.
In 2010, the Small Business Jobs Act created a new deduction. This applies to health insurance premiums paid by self-employed individuals. If you’re self-employed, you can deduct 100% of health insurance costs as an adjustment to your taxable income for these people:
- Yourself
- Your spouse
- Your dependents
- Your children under age 27 at the end of the tax year
You can claim the health insurance deduction as an above-the-line deduction on Form 1040, Line 29. Talk to your tax professional for more information.
Note, you can’t claim a tax credit for any month that you had a health insurance plan through you or your spouse’s employer.
9. Retirement plans
If you’re self-employed, you can deduct contributions to your retirement plans as an adjustment to taxable income. Plans include:
- Simplified Employee Pension (SEP) IRA.A retirement savings plan established by employers—including self-employed people—to provide retirement benefits.
- Savings Incentive Match Plan for Employees (SIMPLE.)A retirement savings plan for small businesses with less than 100 employees. SIMPLE IRAs work like traditional IRAs and are easier to set up than a 401(k) but the employee retirement plan contributions limits are lower, compared with 401(k)s.
- Qualified plan:defined-contribution or defined-benefit. A defined benefit plan, also known as a pension, is a retirement account where the employer contributes all the money and promises you a set payout when you retire. A defined contribution plan, similar to a 401(k), requires you to put in your own money.
Professional services
10. Bookkeeper, accountant, and tax consultant fees
Interesting fact: You can actually deduct the cost of meeting with a tax consultant who advises you on which expenses you can deduct.
It’s known as a “professional services” deduction, and this deductible expense actually applies to a range of professionals who help with all thingssmall business finance. When you hire a business lawyer, CPA, bookkeeper, online bookkeeping service, or tax consultant, their fees qualify as deductible business expenses.
I’ve had an accountant for my entire adult life but just recently switched over to a local one who specializes in small business. He’s saved me more money this year than my other accountant ever did.
Caroline Weaver,CW Pencils
11. Legal fees
If you hire or retain an attorney to prepare contracts, file trademarks and copyrights, negotiate leases, defend your business in court, or perform other services for your business, you can write off their fees.
12. Bad debts
Sometimes customers or clients simply won’t pay for the product or service you already provided. It doesn’t matter how many statement reminders you send, you may never get that money. These are known as bad debts.
Bad debts, or uncollectible accounts, are money owed to you by a customer or client that you are unable to collect. You can write off bad debts at the end of the first year if it turns out the debt is uncollectible.
Bad debts can include:
- Loans to suppliers and clients
- Business loan guarantees
- Credit sales to customers
For more information on the bad debt reduction and tax law, refer tothis IRS publication.
Workers
13. Independent contractors
If you hire independent contractors or freelancers for any purpose related to your business—for instance, taking photos of products for your online store—the cost of their services is a tax deduction.
Always be sure to collect 1099 forms from independent contractors before they start working for you, and file them properly (you’ll need to submit one copy to the contractor and another to the IRS before deadline).
Heads up
The IRS is often on the lookout for employers who try to avoid paying employment taxes by classifying employees as contractors.
Because ecommerce businesses are representing themselves online, the visuals tend to be so important. You want to invest in the right people to help you create and realize those.
Trisha Okubo,Maison Miru
14. Employees
If deemed “reasonable” and “necessary,” your business can take a tax cut on providing employee benefits, compensation, and perks, including:
- Employee pay
- Vacation pay and sick time
- HSA employer contributions
- Employee assistance programs
- Life insurance coverages
- Education
- Meals and lodging
How you claim these business expenses depends on yourbusiness structure.
- Sole proprietorships and single-member LLCs use the Expenses section of Schedule C.
- Partnerships and multi-member LLCs use the“Deductions section of Form 1065.
- 公司使用的扣除部分Form 1120orForm 1120S(for S corporations).
Marketing
15. Advertising
Help your business grow and pay fewer taxes while you’re at it. Whether you advertise your business on Instagram or in your local newspaper, the cost of advertising is a tax deduction.
This includes both the price of placing the ad and any fees you pay to have it written and designed. If you hire a designer, copywriter, or other marketing professional to produce ads for you, you deduct their wages as you would any 1099 worker.
16. Marketing tools and services
If you use tools likeKlaviyoorAdEspresso管理你的电子邮件和脸谱网的活动,他们count as “ordinary and necessary” marketing expenses. The cost of your subscriptions can be deducted.
Our best deductible expense goes into paid marketing—toward lead generation and filling the top of our funnel.
Ryan Gruss,The Loop Loft
Website fees
17. Shopify
Shopify gives you all the tools you need to run an online store. As such, for any ecommerce business, Shopify fees definitely qualify as an “ordinary and necessary” business expense.
18. Domain and web hosting
You can’t run an ecommerce business without an online presence. Domain andecommerce hostingare tax deductible. If you purchase webdesign templatesorstock imagesto use on your site, you can also deduct their cost. The same applies if you pay to upgrade your store’s theme in Shopify.
19. Services
Beyond operating an online store, the services you use to engage with current or potential customers can be deducted.
So, if you publish a newsletter, you can deduct the cost of youremail marketing solution. If you schedule social media posts, you can deduct the cost ofHootsuite. Or, if you’re optimizing your site for search engines, you can deduct the cost of SEO tools, such asSEMRush.
Education
20. Classes
If you take classes to upgrade your skills in a way that is relevant to your business, you can deduct their cost.
The class qualifies for a deduction if you take it in order to obtain a certification—such as becoming aCertified E-commerce Consultant.
But even less specific forms of education—for instance, a photography class that helps you take better pictures of the products you sell—can be deducted. So long as the class directly improves your day-to-day business operations, it’s tax deductible.
Also, the cost of transportation to any business-related classes qualifies as a travel expense. Read Bench's guide onHow to Deduct Education, Classes, and Workshopsto learn more about reporting this expense.
I use the education expense quite a bit. One thing that’s important to me is the Japanese idea ofkaizen, of continuous education—and of having an experimental mindset.
Trisha Okubo,Maison Miru
21. Magazines
Subscriptions to trade magazines related to your industry are tax deductible too. Make sure they’re specifically connected to your industry, though. General interest business magazines do not qualify.
Travel
22. Business travel and vehicle expenses
As an entrepreneur, you’re probably mobile.
If you use your vehicle to transport packages (to the post office, for instance), meet with clients, or carry out any other business operations, you have a range of business expenses you can choose to claim.
When your vehicle is used exclusively for business purposes, you can deduct the full expense of its operation. But if you use it for both business and personal purposes, you’ll need to calculate the percentage of the cost of operation that applies to business.
You have two options for claiming a business mileage deduction:
- Thestandard mileage rate deduction,as of 2017, is $0.535 per mile. Track this throughout the year with an app likeMileIQ, and checkthe relevant IRS pageevery financial year in case the rate has changed.
- Theentire costof what you paid in vehicle costs over the course of the year—including fuel, maintenance, and repairs.
Other travel expenses you incur in the course of doing business—parking fees, cab fares, or conferences tickets, for example—can be claimed.
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Calculate cash flowWhat about other business expenses?
根据您的业务的性质,有马y be other expenses you can claim on your tax return.
The IRS deems a business expense to be tax deductible if it is “ordinary and necessary.” Meaning, it is an expense you would incurordinarilyin the course of conducting business, and it isnecessaryfor your business to operate.
When in doubt, remember this guideline, and hang onto the receipts attached to any business related expenditure. That way you can (and should) double check with your CPA to confirm what is, and what isn’t, tax deductible before you file your return.
你可能会得到创造性与税收扣除ions. Instead, focus on strategic tax planning for bettercash flow management. The world of business expenses is full of grey areas, and it can be easy to overstep the boundaries set by the IRS. As always, talk to your CPA or tax adviser before claiming any expenses on your return.
Small business tax deduction FAQ
What can be written off as business expenses?
All basic expenses needed to run a business are tax deductible, including employee salaries, equipment and supplies, rent, utility costs, legal and accounting fees, business cards, subscriptions to business publications, and online services. Use Shopify's freebusiness card makerto save a bit of money also.
How do you maximize tax deductions as a small business?
- Take as many tax deductions for small businesses as possible.
- Plan ahead for the tax season.
- Track and organize your business expenses.
What are non-deductible business expenses?
Non-deductible business expenses are any expense that can not be subtracted from your tax bill. While non-deductible expenses vary by state and country, they typically include:
- Taxes
- Fines and penalties
- Insurance
- Capital expenses and equipment
- Commuting costs
- Personal expenses
- Political contributions
- Illegal expenses (bribes, kickbacks, salaries paid to workers who can't work legally)
- Gifts over $25
- Business attire
- Business meals and entertainment expenses
- Legal fees
- Club memberships
- Travel expenses for friends and family
What are some home business tax deductions?
If yourhome businessmeets the IRS guidelines for business use of your home, you can deduct the following expenses:
- Homeowners insurance
- Homeowners association fees
- Mortgage insurance and interest
- Real estate taxes
- Utilities, including internet, electricity, heat and phone
- Cleaning fees used in your office space