Small Business Tax Deduction Checklist for 2017
Tracking revenue and getting paid with FreshBooks is a piece of cake. But what about finding your business’ bottom line… and calculating what you owe Uncle Sam?
That’s where Profit & Taxes for Freshbooks comes in.
The app automatically calculates your on-going profit and estimated taxes, in real-time. With Profit & Taxes for FreshBooks, you’re able to easily and instantly sync all your FreshBooks revenue and expenses.
If you don’t use FreshBooks for expenses, no problem – just sync your business expense account. You can even track your deductible business mileage with the built-in mileage tracker, so you never miss another deduction.
In a small business, maximizing your tax deductions are critical to generating a healthy bottom line. Some deductions are obvious – rent, cost of sales, employee salaries – but many small businesses are leaving money on the table by not writing off everything available under the U.S. tax code.
Here are some lesser-used deductions to reduce your taxable income and increase what we call your True Profit – what small business owners really keep after taking out expenses and taxes.
1. How To Get 35% Off Your Next MacBook
Section 179 is a “true” small business tax deduction, designed to allow businesses that purchase qualifying property during the year to fully write off the purchase price rather than depreciate over time. The value? The Section 179 deduction makes investing in new equipment more attractive since it reduces the effective purchase price. For an illustration of how this works, see the example below.
What qualifies as Section 179 property? Business equipment, computers, office furniture, publically-available software, vehicles over 6,000 lbs.
- Can only expense up to $500,000 in one year
- Property must be purchased and put into use by 12/31 of that year
- If total qualifying purchases exceed $2 million, then deduction is reduced dollar-for-dollar up to $2.5 million
- 50% “bonus depreciation” in first year on remaining balance if over $500,000 limit
Example: Danielle started a marketing consulting business during the year. For her small team of 6, she outfitted her new office with desks, chairs, computers, and in the break room even installed an espresso machine, air hockey table, and couches. The total cost was $90,000 and all purchases were delivered and installed during the year. Danielle is able to deduct the entire $90,000 purchase on her Year 1 tax return rather than the first year’s depreciation under Section 179. Assuming Danielle’s tax rate is 35%, she effectively saves $31,500 on her new office equipment.
2. Business Insurance
Insurance premiums related to your business are generally fully deductible. If you provide healthcare benefits to your employees as a small business owner, those are subject to other limitations not discussed here.
Certain insurance premiums are not deductible, including: self-insurance, life insurance where you are directly or indirectly the beneficiary, life insurance to secure a loan, and loss of earnings insurance.
Generally, insurance premiums are deductible in the year they apply. In other words, if you pre-pay for a policy that covers you in multiple tax years, your premiums will only be deductible during the year of coverage (i.e. 2017 premium deducted in 2017, 2018 premium in 2018, etc.).
Example: Joe recently began operating a food truck, serving sloppy joes to customers who line up around the block to try his secret recipe. In January 2016 Joe prepaid $12,000 for two years of general liability insurance to limit his liability in the event a customer falls ill from his food, slips on ice while waiting to order or suffers burns from his piping hot food, among other things. When Joe prepares his tax return, he can deduct $6,000 on line 15 of his Schedule C for his 2017 coverage. When he prepares his 2018 return, he can deduct the remaining $6,000.
3. State & Local Taxes
State and local taxes are generally imposed in the jurisdiction you do business in. The state and local taxes your small business pays are generally fully deductible on your federal tax return. Note that you can never deduct federal income tax as a business expense.
Example: Sarah is a sole proprietor photographer from New York City who covers the fashion world. Sarah physically does business in New York and Los Angeles each for six months out of the year. Even though Sarah lives in NYC, she will owe tax in both California and New York for the portion of her income earned while she was working in each state. The good news is when Sarah prepares her federal income tax return, if she chooses to itemize her deductions she will be able to deduct the state income taxes she paid to New York and California on line 5a of her Schedule A.
Commissions you pay to employees or third-parties for your small business are fully-deductible expenses.
Commissions are frequently paid in the industries of real estate and consumer goods where sale proceeds are split between different parties based on predetermined contracts, like affiliate marketing.
Example: Yoked Supplements, LLC is a small business that sells pre-workout energy mix and protein powder to fitness enthusiasts. They negotiated an affiliate marketing deal with Jack Swole, a celebrity bodybuilder, to promote their products. Mr. Swole receives a fixed payment for every supplement that’s sold using his unique affiliate code. Yoked paid Swole $24,000 during the year for affiliate sales. Yoked would be able to deduct the entire amount of affiliate payments as a business expense on its Schedule C.
5. Meals & Entertainment
As a business owner if you entertain your customers, clients, or employees the cost of your meals may be deductible as a business expense, as long as the meal was directly related to or associated with your business. Generally, the deduction for business meals is limited to 50% of the total cost – including tax and tip – however, there are certain circumstances where your meals could even be 100% deductible.
The 50% rule applies if the meal is directly related to business. Meals to discuss things like projects, financial results, and partnerships all fall under the 50% category. However, the IRS disallows a deduction for “extravagant or lavish” meals. There’s no specific dollar value to define “extravagant or lavish”, rather, the IRS leaves it up to a reasonable person’s interpretation. Safe to say, discussing weekly tasks with your business partner over a seven-course meal at the nicest steakhouse in town would likely be unpermitted.
Meal and entertainment costs are fully deductible when you provide them for the benefit of your employees at your office or place of business. Examples of this might be buying the team lunch, providing free coffee and snacks on-site, or a company party.
Example: Faruk is a web designer and developer who also monitors and regularly maintains his client’s websites. He has two employees who rotate working double shifts to ensure Faruk’s clients can still be serviced outside of normal business hours. Because his employee working nights has limited time to leave the office during his shift, Faruk orders food to be delivered to this employee every evening. When Faruk is ready to file his taxes, he would be able to deduct 100% of these business meals on line 24b of his Schedule C since the night shift meals purchased were for Faruk’s benefit.
So by now, you have a better understanding of how your invoices and payments flow through FreshBooks and into Profit & Taxes. With the deduction examples above and the powerful categorization tools within Profit & Taxes, small business owners are empowered to maximize their deductible expenses and minimize their tax bill. Using the built-in tax engine, you can always see an estimate of what and when you owe in real-time. Mastering your small business finances has never been easier. Download Profit & Taxes for FreshBooks here and get started today!
About the Author: Aaron Lesher, CPA is part of Hurdlr’s Customer Success and Growth team, where he’s dedicated to helping freelancers and self-employed entrepreneurs succeed financially. Aaron graduated with honors from Tulane University and formerly served Fortune 500 clients at a “Big 4” accounting firm.
This article should not be construed as direct tax advice and is for informational purposes only. For questions about your personal tax situation, we recommend consulting a dedicated full-time tax professional.