Common Tax Deductions for Businesses

Deducting Ordinary and Necessary Business Expenses

One of the most fundamental tax benefits for businesses is the ability to deduct ordinary and necessary business expenses. According to the IRS, an ordinary expense is one that is common and accepted in your trade or business, while a necessary expense is one that is helpful and appropriate for your business. This broad category encompasses a wide range of day-to-day operational costs. Common examples include employee salaries and wages, rent paid for business property, the cost of office supplies, utilities, business insurance premiums, and professional fees such as those paid to accountants or lawyers. Keeping meticulous records of these expenses is essential to substantiate your deductions during tax time.

Understanding Depreciation Deductions

When businesses purchase long-term assets like equipment, machinery, vehicles, or buildings, they can’t typically deduct the entire cost in the year of purchase. Instead, the cost of these assets is deducted over their useful life through a process called depreciation. This allows businesses to recover the cost of these assets gradually. The specific depreciation method and the asset’s useful life are determined by IRS regulations. Understanding depreciation rules can lead to significant tax savings over several years, as it allows you to deduct a portion of the asset’s cost each year it is in use.

Deducting Business Interest

Many businesses rely on loans to fund operations, purchase equipment, or invest in growth. The interest paid on these business loans is generally tax-deductible. This can include interest paid on mortgages for business property, lines of credit used for working capital, and loans taken out to acquire business assets. The ability to deduct interest expenses helps to offset the cost of borrowing and reduces the overall tax burden on the business. It’s important to properly classify the loan as a business loan and to keep accurate records of interest payments.

Deducting State and Local Taxes

Businesses often pay various state and local taxes, and many of these are deductible on the federal income tax return. Deductible state and local taxes can include real estate taxes on business property, personal property taxes, and state and local income taxes or sales taxes (businesses typically choose to deduct either income taxes or sales taxes, not both). The ability to deduct these taxes helps to reduce the overall cost of doing business and lowers federal taxable income. Keep detailed records of all state and local taxes paid throughout the year.

Utilizing the Qualified Business Income Deduction

The Qualified Business Income (QBI) deduction, introduced by the Tax Cuts and Jobs Act, allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income (QBI), plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. QBI generally includes the net amount of income, gains, deductions, and losses from your qualified trade or business. However, there are income limitations and specific rules that may apply depending on your taxable income and the type of business. Understanding and correctly calculating the QBI deduction can result in significant tax savings for many small business owners.

By understanding and strategically utilizing these common tax deductions, businesses can significantly reduce their taxable income and ultimately lower their tax liability. However, it’s crucial to remember that tax laws can be complex, and it’s essential to maintain accurate records and consult with a qualified tax professional to ensure you are claiming all eligible deductions correctly and in compliance with IRS regulations.

Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.