Understanding Small Business Tax Deductions

Use this Small Business Tax Deductions Checklist to see how tax savvy a businessperson you are.

Many of these items require special consideration when deducting, so always consult with your accountant when preparing tax forms.

General Business Tax Deductions

• Home office expenses which includes insurance, real estate taxes, mortgage interest, repairs and maintenance, annual cost of utilities; limited to net business income.

• Insurance - Casualty and liability

• Mortgage Interest & Mortgage Interest (PMI) (except home or auto)

• Legal and Professional Services

• Meals and Entertainment (limited to 50% deduction.

• Magazines and Books for business purposes

• Medical expenses reimbursed to employees

• Office Expenses - Ongoing costs of doing business, including utilities, shipping, office supplies, rental or lease payments (property and equipment), telephone and internet charges, software licenses, travel expenses, janitorial maintenance, landscaping and grounds maintenance. Also, consumable office supplies such as pads, pens, pencils, order books, receipt books, supplies for equipment (for example, cash registers, computers, and copiers), postage and record books and related supplies.

• Pension and Profit-sharing plans

• Publications

• Office/building repairs and equipment repairs

• Services performed by independent contractors

• Advertising and Marketing. These expenses are incurred to promote a business, such as newspaper ads, flyers (including the cost of distributing them), television and radio promotions and business cards.

• Bad Debts From Sales or Services

• Bank charges related to business, including check charges, monthly charges, bank wire fees or overdraft fees.

• Auto expenses either for actual miles driven or for all actual expenses related to business, including gasoline and repair costs.

• Car and truck expenses (the standard mileage method and the actual cost method).

• Commissions and fees

• Credit card annual fees

• Cost of goods sold

• Depreciation

• Dues for trade associations and other not-for-profit, business related organizations.

• Education expenses reimbursed to employees such as seminars, classes, educational tapes or CDs and conventions.

• Gifts to customers, suppliers, etc. (limited to $25 per customer per year).

• Supplies & Materials (not included in cost of goods sold)

• Trade-show exhibition and/or attendance, including travel, meals, admission fees and costs of booths/exhibitions.

• Trade-related journal subscriptions, books and other literature.

• Fees paid to credit bureaus, better business bureaus, chambers of commerce and trade associations.

• Printing, Copying, and fax charges.

• Telephone (business line)

• Cell phone

• Moving expenses.

• Losses from theft, fraud, business-property/contents damage not covered by insurance.

• Voicemail

• Pager

• Uniforms or special work clothing (i.e. steel toed boots or coveralls)

• Meals and entertainment (limited to 50% deduction)

• Losses from theft, fraud, business-property/contents damage not covered by insurance.

• Contract Labor - Payments that are paid to independent contractors (non-employees) for services rendered are deductible.

• Legal and Professional Services such as attorney, accounting, and tax preparation fees that are ordinary and necessary to the operation of the business are deductible.

• Pension and Profit-Sharing Plans paid by the business as employer contributions to a pension, profit-sharing, or annuity plan for employees are deductible.

• Supplies necessary to the proprietor's business are tax deductible, including gift wrapping materials, cleaning or maintenance supplies, and maintenance of a watchdog on business property or electronic security system.

• Travel Expenses - The cost of airplane, train, bus travel or car and truck expenses for traveling between the tax home and the destination. The cost of local transportation, including bus, taxi, or limousine fares, while working at the destination location. The cost of renting a car at the destination location. The cost of sending baggage or shipping samples or display materials to the temporary work location. The cost of lodging and related tips, cleaning, laundry, telephone, and fax expenses.

• Trash removal fees

• Laundry and cleaning expenses for uniforms.

• Business Start-up Expenses

Possible E-Commerce Business Tax Deductions

• Internet Access

• Web Hosting

• Supplies

• Software

• Postage, Delivery, and Freight Costs

• Seminars and conferences

• Printing, copying and fax charges

• Small Tools

• Small Tools

• Permits and fees

• Telephone (business line)

• Cell phone

• Voicemail

• Pager

Record Keeping - A very important part of your business tax deductions.

If you use part of your home as a business office, and you want to use it as a business tax deduction, take a photograph of your office to prove that is actually existed. To prove when it existed, have the film developed by an establishment that includes the processing date on the back of the photograph.

You must be able to prove that you actually operate a business from your home in order to have the business tax deduction. In order to do this, install a separate business phone in your home. Include the home office phone number and address on business stationary and advertising. Use your home address on your business cards too.

If you meet with clients, patients and prospects, have your business visitors sign a guest book each time they come to your office. It doesn't have to be formal but you must make sure to can prove that clients, patients, prospects or colleagues were physically present in your home office.

Keep a time and work activity log (daily diary). It's an excellent supporting document to establish where you spend your work time.

Retain Receipts and Paid Invoices. Canceled checks only prove that you paid the bill. Make sure you back it up with receipts and invoices.

Keeps receipts of home expenses that benefit the entire home and those solely as a result of the home office.

Long Distance Charges are a business tax deduction but you must have copies of your phone bill to support it. Local charges are not deductible unless you install a second phone in your home.

Top 10 Oddball Business Tax Deductions

• Pet food. A couple who owned a junkyard was allowed to write off the cost of cat food they set out to attract wild cats. The feral felines did more than just eat; they also took care of snakes and rats on the property, making the place safer for customers. When the case reached the Tax Court, IRS lawyers conceded that the cost was indeed a business tax deduction.

• Moving the family pet. If you are changing jobs and meet a couple of tests, you can deduct your moving expenses — including the cost of moving your dog, cat, or other pet from your old residence to your new home. Your pet — be it a Pekingese or a python — is treated the same as your other personal effects.

• A trip to Bermuda. This island is more than just a scenic place to visit. It's a great place to schedule a tax write-off, because business conventions held in Bermuda are deductible without having to show that there was a special reason for the meeting to be held there. That's a sweet perk. Other countries in the Caribbean region qualify too, including Barbados, Costa Rica, Dominica, the Dominican Republic, Grenada, Guyana, Honduras, Jamaica, Saint Lucia, and Trinidad and Tobago. Meetings held in Canada, Mexico, and all U.S. possessions also receive this favorable tax treatment. Attend a convention in Paris, Rome, or Beijing, though, and there's no deduction unless you can show it made as much sense to travel abroad as to head to Pittsburgh.

• Body oil. A pro bodybuilder used body oil to make his muscles glisten in the lights during his competitions. The Tax Court ruled that the cost of the oil could be used as as a business tax deduction/expense. However, the Court frowned on his deductions for buffalo meat and special vitamin supplements to enhance strength and muscle development.

• A private airplane. Rather than drive five to seven hours to check on their rental condo or be tied to the only daily commercial flight available, a couple bought their own plane. The Tax Court allowed them to deduct their condo-related trips on the aircraft, including the cost of fuel and depreciation for the portion of time used for business-related purposes, even though these costs increased their overall rental loss.

• Babysitting fees. Fees paid to a sitter to enable a mother to get out of the house and do volunteer work for a charity are deductible as charitable contributions, according to the Tax Court, even though the money didn't go directly to the charity.

• Breast augmentation. To get more tips, a stripper with the stage name "Chesty Love" decided to get breast implants to make her a size 56FF. A Tax Court judge allowed Chesty to write off the cost of her operation, equating her new, um, assets to a stage prop. Alas, the operation proved to be a problem for Chesty. She later tripped and ruptured one of her implants.

• Landscaping. Sole proprietors who regularly meet clients in a home office can deduct part of the costs of landscaping the property. The deductible portion is based on the percentage of the home that is used for business, according to the Tax Court. The Court also allowed a business tax deduction for part of the costs of lawn care and driveway repairs.

• Free beer. In a novel promotion, a gas station owner gave his customers free beer in lieu of trading stamps. Proving that sometimes beer and gasoline do mix, the Tax Court allowed the write-off as a business expense.

• Swimming pool. A taxpayer with emphysema put in a pool after his doctor told him to develop an exercise regime. He swam in it twice a day and improved his breathing capacity. Turns out he swam in the pool more than his family did. The Tax Court allowed him to deduct the cost of the pool (to the extent the cost exceeded its added value to the property) as a medical expense because its primary purpose was for medical care. Also, the cost of heating the pool, pool chemicals, and a proportionate part of insuring the pool area were treated as medical expenses.