If you’re a small business owner, taxes are a lot like sharks. Lurking. Waiting. And ready to take a bite out of your bank account as soon as tax season starts.
Simple time tracking that syncs with payroll.
And while you may have your standard tax deductions as the first line of defense, in the famous words of Roy Scheider in Jaws, “You’re going to need a bigger boat.” Luckily, that’s where this list of tax deductions comes in.
So what is a tax deduction? Tax deductions, or write-offs, directly impact how much you pay in taxes. When you file your taxes, you report your deductions, which are then subtracted from your gross revenue. What’s left are your taxable profits, which is what you’re taxed on.
The more tax deductions you have, the less taxes you’ll pay. That’s why write-offs are so important for small business owners.
This list is based on years of consultations I’ve had with entrepreneurs. And while some of these deductions do take a bit more effort to track, the savings are well worth the extra time.
Here are the seven most common expenses business owners don’t always know they can write off:
1. Business drives
The business mileage deduction is like an indie movie that no one’s heard of…until it sweeps the Academy Awards.
Taking the standard mileage deduction for business trips is one of the easiest ways to write off your car expenses. Every year, the IRS sets a mileage reimbursement rate. When you file your taxes, you report how many miles you drove that were for business purposes. Then, that mileage gets multiplied by the reimbursement rate. The result is how much you can deduct.
Business mileage x IRS standard mileage rate = Your mileage deduction
For 2019, the mileage reimbursement rate is 58 cents a mile. So if you drive 10,000 miles in a tax year, your deduction will be $5,800.
10,000 x $0.58 = $5,800
Whoa! That much?
Yes, that much. Why, then, do people overlook the business mileage deduction?
First, because many business owners don’t understand what business mileage actually is. You rack up business miles anytime you drive your car for work purposes that’s not from your home to your principal place of business.
Or in other words, you can’t deduct your commuting expenses.
|Driving from home to office (principal place of business)||x|
|Driving from office to meet a client||x|
|Driving from office to office supply store||x|
|Driving from home to airport for a business trip||x|
|Driving from home (principal place of business) for any business purposes||x|
A second reason people blow off the mileage deduction is because they’re overwhelmed by how to track it. Most people think tracking business miles means having to write down an odometer reading every single time.
What they don’t realize is that the days of paper tracking are long gone. There are a bunch of apps that can quickly track this information for you.
How to track business mileage
My favorite mileage tracking app is MileIQ. It has a feature called Drive Detection which automatically knows when you’re driving so it can track your travel. Then, you get to relive your online dating glory days by swiping left or right to categorize your mileage as business or personal. At the end of the year, you run a report to see your total mileage. That’s it.
2. Cell phone bill
Back in the early 2000s, when Nokia flip phones were king, cell phone expenses were WAY lower. Nowadays, it’s not uncommon to pay $100 or more a month for your pocket computer.
But while cell phone bills are rising, many business owners overlook this tax deduction because they don’t know how to write it off.
To write off your cell phone bill, first figure out how much you use it for business versus personal purposes. Keep in mind that using your phone includes more than making calls. You may also check emails, text clients, and post to your company’s social media accounts.
The percentage of time that you use your phone for business is the deductible portion of the bill.
Cell phone bill x Business usage percentage = Deductible portion
For example, if you use your phone 50% of the time for business, you can write off 50% of the bill. If your bill is $120 a month, then you can write off $60 a month ($720 a year).
How to track the business portion of your cell phone
You’re probably paying for your cell phone from your personal bank account—which is totally fine! To keep track of the deductible portion, use a simple spreadsheet and every month log the:
- Total amount of your portion of your bill. If you’re on a family plan, you can only write off a percentage of your portion of the bill, not the entire bill.
- Monthly deductible amount. This will be based on your business usage percentage
At the end of the year, add up the deductible portion and give that number to your bookkeeper or tax preparer so they can add it to your tax deductions.
3. Direct home office expenses
By now you’ve probably heard of the home office deduction. This allows you to write off a percentage of your home-related expenses if you have a qualifying home office. These are called indirect home office expenses.
But, what many people don’t know is that there are also direct home office expenses, which are 100% deductible.
Direct home office expenses are related only to your home office, which means they don’t involve other areas of your home or personal living space. Since they only apply to your home office (which is exclusively for business use), you get to write off the whole thing.
Examples of direct home office deductions are:
- Repairs made only to your home office (like painting, reflooring, installing new light fixtures, patching walls, etc.)
- Maintenance only for your home office (like hiring a cleaner just to service your office)
- Office furniture and decor
Remember, the key to writing off direct home office expenses is that you need to make sure they’re expenses that you only use for the business portion of your home.
Here’s an example of the difference between a direct and indirect home office deduction:
- Indirect: If you have the inside of your entire house repainted, that will only be partially deductible because non-business areas of your home are affected.
- Direct: If you hire someone to repaint your home office only, then that’s 100% deductible.
How to track direct home office expenses
Since direct home office expenses are completely deductible, pay for these expenses directly from your business bank account. Then, treat it like any other business expense when you’re doing your bookkeeping.
4. Educational expenses
You can deduct any educational workshops or trainings that relate to your industry or the skills you need while running your business. You can also write off mastermind groups, conferences, lectures, online classes, and books and other reference materials.
For tax purposes, the format of the educational experience is less important than how relevant it is to your business.
Remember, for an educational expense to be considered a tax deduction, it needs to connect to your business. So if you run a dog grooming business, a flower arranging class is going to be a hard sell. But a class on standard poodle grooming or even Facebook advertising makes a lot more sense.
If you’re having trouble figuring out if something really relates to your business, ask yourself these questions:
Will learning about this topic…
- Strengthen an existing skill set I have?
- Give me a new skill set that will expand my business offerings?
- Help me understand my customers better?
- Help me run my business more effectively?
And don’t forget to write off your mileage (see #1) if you’re driving to an educational event.
How to track educational expenses
This one’s easy! Pay for the educational expenses from your business account like any other business expense.
5. Home internet bill
Just like cell phone bills, the business portion of your home internet bill can be written off. This is good news if you work from home all or some of the time.
And, before you start lamenting that you don’t qualify for the home office deduction, don’t worry. Many business owners don’t know that you can deduct your home internet regardless if you have a home office or not.
Writing off your home internet is just like writing off your cell phone. First, you need to figure out the percentage of time you use your internet for business versus personal purposes. So if you use your internet for TV and music streaming services, that time will most likely count towards your personal internet usage.
Then, take the business percentage and multiply it by your total home internet bill. If your internet and cable bill are bundled, you’ll need to figure out just the internet portion.
Home internet bill x Business usage percentage = Deductible percentage
For example, if your home internet bill is $80 per month, and you use your home internet 50% of the time for business, then you can deduct $40 per month ($480 a year).
How to track the business portion of your home internet
Just like your personal cell phone, you can continue to pay your home internet through your personal account and track the business portion using a spreadsheet. Every month log the:
- Internet portion of the bill: If you have your TV and internet bundled together, you’ll need to split out the internet portion
- Deductible amount of the bill: This will be based on your business usage percentage
At the end of the year, total the deductible amount and hand that number to your bookkeeper or tax preparer.
6. Local travel expenses
Even if you don’t have a car, you can still deduct transportation costs like Lyfts, Ubers, taxis, and public transportation.
The rules for writing off your local travel expenses are similar to writing off your business mileage. You have to be traveling for business and it can’t be to your principal place of business. Or in other words, commuting to work doesn’t count.
As a reminder, if your home office is your principal place of business, then all of your local business-related travel is deductible.
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How to track local travel expenses
- Ride-sharing apps: Add your business credit card to the app and pay with that card every time you take a ride.
- Public transportation: If your city has a reloadable card system, get two cards—one for business and one for personal use. Pay for your business one out of your business account and—voila—you’re tracking your local travel expenses.
7. Parking and tolls
Parking doesn’t really seem like it would add up to a substantial tax deduction, but when you throw in highway tolls and a year’s worth of feeding meters, you’d be surprised at how much you actually spend on parking.
Writing off business parking and tolls works the same way as writing off business mileage. If you’re parking at your principal place of business (or incur tolls traveling there), you can’t write it off. But, if you’re parking anywhere else (including the airport for a work trip), then the parking is deductible.
If your home office is your principal place of business then you’re in luck because you can write off all of your business parking and tolls.
How to track it
The easiest way to keep track of your business parking is to use your business card in a meter that accepts credit cards. If that’s not an option, you can track the cash you spend on parking or tolls in an app like MileIQ. MileIQ lets you add parking and toll costs to any drive, making it easy to track.
With so many untapped tax deductions out there, where do you begin? Start by incorporating a few into your tax strategy and every year, see if you can add a few more.