Whether it’s your first year as a startup or you’re battle-worn after years in the trenches, you’ve learned to keep a close eye on your company’s bottom line. When tax season rolls around, it’s another opportunity to be strategic about maximizing your tax deductions in order to minimize the overall amount you pay.
However, this is one case in which you don’t have to innovate, as there are a plethora of tax deductions that already exist. All you have to do is take advantage of any or all of the following write-offs that apply to your business.
Startup costs are literally the investments you made to physically start or open your business, including market research and analysis, marketing and advertising, employee training and professional fees associated with establishing your business structure and organization.
If your total startup costs are no more than $50,000, you may deduct $5,000 in business costs and $5,000 in organizational costs. If your costs were between $50,000 to $55,000, your correlating deduction is lowered. And, if your costs were greater than $55,000, you don’t qualify for this deduction.
This tax deduction must be claimed the year that your business opens. If needed, there is also a six-month window for filing an amendment. Finally, if your business posts losses during its early years, you may choose to amortize these costs, deducting them over the course of several years instead.
The Research and Development (R&D) tax credit
If your gross annual receipts are less than $5 million, you can apply to use up to $250,000 of your federal R&D tax credit toward your Social Security and Medicare payroll taxes (employment taxes) each fiscal year for up to five years.
In other words, this dollar-for-dollar credit helps you offset some of the labor costs associated with your R&D process. You can claim your credit starting the first quarter after you’ve filed your tax return for the previous year. You have to specify the amount and unused credits can be carried forward.
Bonus and Section 179 depreciation
In tax/financial speak, depreciation is writing off the cost of large purchases or investments in regular amounts over a number of years. Through a set of incentives designed for small business, you may claim a larger percentage, or, in some cases, all of the costs in the first year.
Through bonus depreciation, you can claim up to 50 percent of the cost of an item for the 2017 tax year. With the new tax law, this will rise to 100 percent in 2018.
Section 179 depreciation (first-year expensing) lets you deduct all or part of the costs of tangible personal property items like software, hardware, machinery and equipment used for your business at least 50 percent of the time.
Living up to the notorious complexity of U.S. tax law, the definition of tangible property is somewhat unclear. While it includes some capital items, it excludes others, like land, buildings and inventory.
For the 2017 tax year, you can claim up to $500,000 with a $2 million investment limit. Beginning January 1, 2018, the maximum annual expense deduction is $1 million, with rates adjusted annually for inflation.
The long and short of it is that with these rules, you can claim larger amounts than otherwise allowed. What to claim as bonus depreciation versus Section 179 depreciation is likely something you should discuss with a tax professional.
Although most entrepreneurs are pretty versatile, no one is an expert at everything. Thankfully, when you consult with professional lawyers, accountants, bookkeepers, growth coaches and others, in most cases, these costs can be deducted.
As the term “professional” is broad, this tax deduction also applies to consultant fees that stem from working with marketing and advertising agencies, engineering firms, software developers and any other type of professional, whose services are relevant to your business.
Office expenses (even a home office)
Small business tax deductions for office expenses include almost any of the physical costs of running an office, like mortgage or lease costs, utilities, office supplies, cleaning services and internet fees.
This even applies if you have a home office. However, there are specific rules in order for you home space to qualify as a legitimate home office. A home office must be a principal place for doing business and a site that you use on a regular basis.
When claiming office expenses, be aware that many of these are partial deductions where you can only write off a certain percentage of the costs. This is especially true when it comes to home office deductions.
Employee expenses (even contractor costs)
If you have employees, your business might be able to deduct the costs of payroll taxes, savings plans and insurance contributions. Even perks, like holiday parties and catered meals, can be written off.
The amounts you are able to claim will likely be in relation to the size of your company and your total earnings. Additionally, if you use contract workers in any capacity, you may also be eligible to claim fees of $600 or more.
Software subscription fees
While larger purchases or investments might ultimately fall under bonus or Section 179 depreciation, as discussed earlier in the article, the costs of subscription fees for cloud-based software as a service (SaaS) applications are often tax deductible.
As more and more startups and small businesses use SaaS apps, this tax deduction will become increasingly relevant. Fast fact: According to Intuit CEO, Brad Hull, the average small business uses 16 to 20 apps.
Nearly any travel you do in relation to growing your business is considered tax deductible. While trade shows and international trips seem pretty obvious, you can also claim the miles you drive to meet clients and for other business purposes.
In order to do this, you need to track these miles and be able to produce records if requested by the tax authorities. The rates at which mileage is reimbursed change each year, so make sure you use the correct rates.
Note: The drive to and from the office each day generally doesn’t count as a deductible cost. This deduction is designed to apply when you make specific trips related to business development.
Marketing and advertising
If you’re seeing a trend throughout this piece, it’s that these tax deductions all pertain to the costs of doing business. The good news is that marketing and advertising fees also fall under this category. This means you can deduct costs associated with creating your website, developing marketing brochures and producing trade show materials.
Even costs for branded stress balls, T-shirts, socks and other tchotchkes can be written off. The only exception of note is political ads.
Banking and lending fees
No one loves ATM fees, but the ones your business incurs can be deducted. As can wire transfers, costs for a safety deposit box and other banking fees. In fact, you can even write off the interest from loans and credit cards.
If your business sells goods and services and incurs bad debt through unpaid invoices or receipts, you may also be able to claim these amounts.
Balancing dollars and cents with common sense
While the prospect of saving money is exciting, it’s strongly recommended that you work with a financial professional, like an accountant and bookkeeper, to ensure that you’re interpreting and applying each tax deduction appropriately. (You know those messages that say, “don’t try this at home?” There’s usually a reason for that. Reading an article that offers helpful suggestions is no replacement for working with a pro).