Can I deduct this? What you need to know in 2020

We're excited to welcome CPA Jaimie Eck to the MOB blog as she shares her list of can't miss business tax deductions. You can learn more about Jaimie and how to work with her at the end of the blog post.

As a CPA who works mostly with small businesses, the question I get asked the most is, “Can I deduct this?” Small business owners work hard for their money and want to save every penny they can from getting taxed.
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The good news is, a lot of the expenses that go into building and growing your business are tax deductible. The bad news is, with so many deductible expenses, it’s hard to keep track, and it can be easy to forget an expense that you should be writing off.

So today I'm sharing a complete guide to small business tax deductions. From Schedule C (for sole-proprietors) to Form 1120 (for corporations). From typical small business costs to pro tips for taking advantage of write-offs.

I strongly recommend having separate business banking and credit card accounts so you can make sure you’re deducting everything.

And I also strongly recommend using some kind of bookkeeping software, something that can keep digital copies of receipts in case you get audited.

Nobody has time to deal the clutter of paper receipts, but bank statements are not enough if you ever get audited, so you’ll definitely want a record of the receipts. Many popular accounting software choices —like Wave, Freshbooks, and Quickbooks—have integrated expense tracking with apps so you can easily keep track of things on the go.

Photo by StellrWeb on Unsplash

Can I Deduct Advertising Expenses?

The money you put into getting your business going and growing can be deducted in full.

After all, how could your business be expected to succeed without a little promotion? These expenses can add up fast, so make sure you’re accounting for everything.

Common expenses in this category for small business owners include:
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• Any type of paid advertising that you can think of - social media, Google, podcast, ads in print or digital publications, billboards, commercials, subway ads, and retrofitting your car with an ad.
  
  
• The costs of building and maintaining a website.
  
  
• Email marketing costs (like upgrading to paid MailChimp)
  
  
• Influencer marketing costs.
  
  
• Business cards, postcards, flyers, other printed materials promoting your business.
  
  
• Any swag with your company name or logo on it.
  
  
• Sponsored content.
  
  
• Sponsoring an event.
  
  
• Paying for or promoting a listing like on Yelp or Etsy.
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• Food and entertainment costs for promotional events.

Photo by Michael Soledad on Unsplash

Can I Deduct My Home Office?

If you have a room in your home that is only used as a home office and you do most of your work there then you can deduct a portion of your home costs as part of your business expenses.

There are two ways to calculate this.

The more complex way is to figure out the percentage of your home that is used for business and then calculate your home costs—like rent or mortgage, utilities, insurance, and repairs—by that percentage.

Or you could go the easy route and use the simplified deduction, multiplying the square feet of your home used for business by $5 to get your deduction amount.

Can I Deduct My Car or Truck and Gas?

If you use your car at all for business expenses, make sure you’re deducting a percentage of those costs from your taxes, either by keeping track of the individual expenses incurred (like gas, maintenance, and even depreciation), or using the IRS’ standard mileage deduction — 58 cents per mile in 2019, 57.5 cents in 2020.

Either way, you’ll need to keep track of your miles (if you’re writing off the individual expenses, you’ll need your business mileage and total mileage of the year to figure out what percentage of costs can be written off for business).

Anytime you drive somewhere for your business—be it a business trip, a delivery, a meeting with a client or investor—make sure you’re tracking the miles and keeping a log somewhere.

The biggest exception to what counts as business mileage is driving back and forth to your office or place of business—that’s considered commuting and no one can deduct commuting expenses.

Whichever method of writing off you’re using, make sure you’re also tracking tolls and parking fees, which can be included whether you’re using the mileage deduction or individual expenses.
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If you purchase a vehicle for business use (like a delivery truck or van), you can depreciate the cost of that purchase over its expected lifespan. That is a separate tax deduction which I talk about later.

Photo by Emma Matthews Digital Content Production on Unsplash

Can I Deduct Charitable Contributions?

​If you’re a sole proprietor, LLC acting as a sole proprietor, or an S-corp, unfortunately, this deduction doesn’t apply to you (though you can still write these off in your personal taxes if you choose to do itemized deductions).

However, if you’re a C-corp and donate money, supplies, or property to a recognized charity, you can deduct it. There are just a few things to note: donations of time aren’t included, you can’t deduct more than 10% of your income for this expense, and the charity must be a recognized charity with the IRS.

Can I Deduct Commissions and Fees?

Any amount that you pay someone else to help sell your product or service can be written off.

Common expenses in this category for small business owners include:

• Commissions you pay to salespeople
  
  
• Affiliate payments to third-party marketers
  
  
• Payment processing fees (like fees for processing credit cards or accepting payments through PayPal)
  
  
• Merchant processing fees (like the additional costs Etsy, Eventbrite, or Patreon take for using their platform)
  
  
• Bank fees on your business account
  
  
• Contract Labor
  
  

If you hire independent contractors or consultants throughout the year to help support your work, the costs of paying them can be written off here.

Common expenses in this category for small business owners include:

• Virtual assistants
  
  
• Second shooters for photographers
  
  
• Seasonal hires for holiday production
  
  
• Freelancers to support in areas where you don’t have expertise
  
  
• Consultants and business coaches
  
  
• Make sure you also file a 1099 Misc form for anyone who you pay over $600 throughout the year!
  
  
• Cost of Goods Sold

Any expenses that went into creating and delivering the products or services you sold during the year can be written off.

This includes direct costs (like raw materials, merchandise for resale, and packaging) and indirect costs (like the labor required to create the product and costs to store the products).

Photo by Georgie Cobbs on Unsplash

Depreciation and Amortization

Large equipment or assets costing over $1,000 that has a useful life of more than one year for your business must be written off over the course of their expected lifetime through the processes of depreciation (for physical assets) or amortization (intangible assets).
You can use Section 179 expense deduction to expense the full cost of qualified business property that was purchased during the year, so long as you also started using it the same year.

Common expensive purchases like computers and furniture count under this, so it’s worth paying attention to for maximum write-offs.

Common expenses in this category for small business owners include:
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• Computers
  
  
• Cameras and lenses
  
  
• Printers
  
  
• Production equipment
  
  
• Vehicles purchased for business use (e.g., delivery vans)
  
  
• Customer lists
  
  
• Copyrights
  
  
• Internet domain names
  
  
• Licensing agreements
  
  
• Patents
  
  
• Service contracts
  
  
• Trademarks
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• Trade secrets (like a secret recipe)

Can I Deduct Employee Benefit Programs?
This is another section that’s not super commonly used in the small business world, but if you do employ others and provide benefits, you can write the costs of those off here.

This can include things like:

• Health plans
  
  
• Life insurance
  
  
• Dependent care support
  
  
• Retirement plan contribution
  
  
• Awards and bonuses
  
  
• Education assistance
  
  
• Pension and profit sharing programs
  
  

The rules of deducting these expenses are pretty nuanced, so if you’re at the point of employing folks and providing benefits, I’d recommend chatting with an accountant.


Can I Deduct Other Types of Insurance?

If you purchase business liability insurance or event insurance, you can write the cost of the premiums off here. If the business owns vehicles that are 100% used for business purposes, you can also write the cost of the car insurance off here.

If you’re self-employed and are looking to write off your health insurance, you’ll handle this on the personal part of your tax return.

Can I Deduct Interest?
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Any interest you pay on credit cards, loans, or other lines of credit can be deducted here.

Note that this applies only to accounts that are strictly for businesses purposes—if you use a credit card for a mix of business and personal, the write off doesn’t apply.

Can I Deduct Legal and Professional Services?

If you don’t have in-house legal or bookkeeping and instead pay an attorney, accountant, bookkeeper, or tax professional to help with your business, you can write off the expense here.

Note that if you pay an accountant to do both your personal and business taxes, you can only write off the expense related to your business taxes—see if the Schedule C is a separate line item on your invoice, or just ask your accountant what the cost for the business filing portion was.

Photo by Jealous Weekends on Unsplash

Can I Deduct Office Expenses?

Anything you purchase to make your work space a more productive place to be can be written off in this section.

Common expenses in this category for small business owners include:
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• Paper, notebooks, pens, pencils, and basically anything from Staples
  
  
• Office furniture that’s under $2,500, as well as office decor
  
  
• Small computer equipment like monitors, keyboards and headphones
  
  
• Shipping expenses like postage, envelopes, and packing material
  
  
• Cleaning services or supplies for your office

Can I Deduct My Rent or Lease Costs?

The cost of anything you rent for your business can be deducted here.

Common expenses in this category for small business owners include:

• Office rental, including co-working space membership
  
  
• Event space rental
  
  
• Rental of special equipment you’re not ready to purchase (e.g., additional camera equipment)
  
  
• Storage rental for extra inventory
  
  

Can I Deduct Repairs and Maintenance?

Any costs you incur repairing or maintaining your equipment or office space can be written off here.

Common examples of small business expenses in this category include:

• Plumbing and electric repairs to an office or business space
  
  
• Maintenance to critical creative equipment (e.g., taking a camera in to get it cleaned and calibrated)
  
  
• Repairs to equipment critical to your business (e.g., getting a laptop fixed)
  
  

What Other Supplies Can I Deduct?

All those things you feel like you’re constantly using and replacing to keep your business running smoothly? Those can be written off as supplies.

For small business owners, this can include things like:

• Art supplies or other materials needed for hand-crafted goods
  
  
• Stock photos, fonts, website themes and other digital supplies
  
  
• Disposable utensils and dinnerware for a restaurant or event

Photo by Thought Catalog on Unsplash

Can I Deduct Taxes and Licenses?

Any taxes or fees you need to keep your business legally up and running can be written off here.

This can include things like:
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• The cost of a local business license
  
  
• Professional licensing fees
  
  
• Trademark fees
  
  
• Business formation or renewal fees (such as to become an LLC)
  
  
• Employer portion of payroll taxes

Can I Deduct Business Travel and Meals?

While unfortunately, you can’t deduct your summer vacation, the costs of travel and meals related to business can save you some tax cash.

For travel expenses, you must be on the trip primarily for business purposes.

Then, you can write off pretty much every cost of the trip, including:

• Lodging, be it a hotel or Airbnb
  
  
• Transportation around the city, including public transportation costs or taxis, Ubers and Lyfts
  
  
• Airfare, train, or bus tickets to get where you’re going
  
  
• 50% of meal expenses (either by tracking actual costs or using the per diem rate)
  
  
• Laundry and dry cleaning while traveling
  
  
• Tips for service providers at the hotel

As for meals, you can write off 50% of the cost of food and drink as long as it’s for a true business purpose.

When tracking these expenses, record the full cost of the meal, and then report 50% of the total cost on your tax return.

Meal costs that can be written off include:

• Lunch, drink, or coffee meetings where you discuss business with someone else such as clients, mentors, employees, etc. Keep notes about who you met with and what you discussed.
  
  
• Food purchased for your staff

Unfortunately, this does NOT include getting yourself lunch during the day, or going to a coffee shop to get work done by yourself.

Can I Deduct Utilities?

Utilities you pay for running your business can be deducted here, including:

• Electricity, water, and the like for your office space
  
  
• The cost of internet, both in-office and any costs incurred on the go (like mobile hotspots or paying for internet on airplanes or at hotels)
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• Any phone costs used for business. If you’re self-employed and use your phone both personally and professionally, deduct the percentage of the costs you used for work.

Can I Deduct Wages?
If you have employees, you can deduct their wages here.

Unfortunately, you cannot deduct the wages you pay yourself as a sole proprietor or LLC business owner. You are considered to be taking Owner's Draws in those circumstances and they are not considered business expenses.

However, if you are an S-Corp owner then you MUST pay yourself a reasonable wage through payroll and in that case your wages are considered a business expenses.

Photo by Plush Design Studio on Unsplash

What Other Expenses Can I Deduct on My Business Taxes?

Other expenses include anything that doesn’t fit in the categories above, but that is still ordinary and necessary for your business to function.
Some common extra expenses I always make sure my small business clients include are:
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• Education and conference costs – Anything that improves your skills related to your business, including e-books, physical books, online courses, and conferences.
  
  
• Clothing – While most clothing is not deductible (even if you truly only wear that horrible pantsuit for work), uniforms that cannot be worn anywhere else can be deducted (such as scrubs).
  
  
• Software subscriptions – All you Adobe Creative Cloud subscribers and avid app users, this one’s for you—if the software you use is specifically for your business, you can write off the cost here.
  
  
• Startup expenses – If this is your first year in business, you can deduct up to $5,000 in costs incurred to get your business ready to open its doors, like advertising, paying employees for training, construction, etc. Put those expenses here, and depreciate anything over the $5,000 limit.
  
  
• While I’ve done my best to cover the most common deductions for small businesses here, this list is by no means exhaustive. If there’s something that seems like you should be able to write it off because it’s critical to your business function, but you can’t find it on this list, chat with a CPA, like me!

Jaimie Eck is a CPA in Oregon and Washington and owner of Green Taxes, Inc. Her goal is to be your year-round tax partner for your tax and accounting needs. Her first consult is always free, and she promises to get your taxes done quickly and accurately and wants to help you find every tax deduction and credit you are entitled to. Connect with Jaimie.

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