“The avoidance of tax is the only intellectual pursuit that still carries any reward.”
—Economist, John Maynard Keynes
While understanding which small business tax deductions you can claim certainly benefits your bottom line, identifying these write-offs isn't necessarily the easiest thing in the world.
In its Small Business Taxation Survey, the National Small Business Association (NSBA), stated that the stress and frustration associated with filing and completing federal income taxes was regularly ranked as one of the top concerns among small business owners.
Of the more than 675 businesses surveyed:
- 1-in-3 reported spending in excess of 80 hours — 2 full work weeks per year on tax compliance.
- 1-in-5 spent more than 120 hours — 2.5 weeks per year.
The Small Business Tax Deductions You Need to Know
While this list can help you prepare for an in-depth conversation with a tax expert, it does not replace the need for working with qualified bookkeeping and accounting professionals in order to keep your business on track and the Internal Revenue Service (IRS) or Canada Revenue Agency (CRA) happy. There's also no better practice than to be proactive by having processes and strategies in place throughout the year in order to prepare for tax time.
“Many of my new clients that I take on come to me to put out fires. In most instances, this consists of years of unfiled corporate and sales tax returns, tax department audits and the worst bookkeeping jobs on the planet. The unfortunate results are backdated interest and penalties and costly unavoidable professional fees. All of this can be avoided by being proactive from the get-go with proper planning and advice. The problem is that many small business owners do not see the immediate value, until it's too late and they are faced with compliance requests or even punitive penalties.”
Daniel Talkins, Future Balance CPAs
“When calculating the cost of working with a qualified bookkeeper, think of what your own time as a business owner is worth. This is one of the hidden opportunity costs that is often overlooked by small business owners. It may be true that a dedicated owner can 'figure it out' when it comes to finding tax exemptions and keeping their own books. But, if your time is more valuable generating new sales or servicing your own customers, the cost of doing it yourself may be much higher than the monthly service cost for a good bookkeeper.”
Wade Farquhar, Lean Teams
Let's face it, we all like to skim. Here's a quick list of all the deductions. Simply click on the link you want to be taken to that section.
- Health Insurance Premiums
- Moving Expenses
- Retirement Plans
- Self-Employment Taxes
- Student Loan Interest
Standard Business Expenses
- Bad Debt
- Bank Fees
- Car and Truck Expenses
- Charitable Donations
- Conventions and Trade Shows
- Home Office Deductions
- Legal, Accounting and Professional Fees
- Maintenance, Repairs and Renovations
- Meals and Entertainment
- Non-Cash Gifts and Rewards
- Office Supplies, Tools and Services
- Rent and Property Leases
- Research and Development (R&D)
- Salaries and Wages
Capital expenses are costs that represent an investment in your business, such as start-up costs or assets like buildings, furniture and machinery. (Another way to define capital expenses is that they are items with values that span more than one year. ) In terms of claiming them on your taxes, capital expenses aren’t taken all in one lump sum. Instead, the deductions are made over time allowing for a process of depreciation or amortization.
According to legal advice site, Nolo, depreciation, as it relates to taxes, is a deduction taken in incremental amounts over a number of years. When considering the acquisition of capital assets, it is best to plan ahead, considering the pros and cons of the immediate investment and the long-term benefits, including depreciation.
Under certain conditions, small businesses may deduct:
- First-Year Bonus Depreciation — intended as a form of economic stimulus, this deduction gives small businesses the opportunity to write off a higher percentage of a new, long-term asset’s cost.
- Rates are 50% through 2017; 40% in 2018 and 30% in 2019 (when the program is set to expire).
- Section 179 Depreciation — allows for the full cost of items (qualifying equipment, software, vehicles, furniture, etc.) up to a $500,000 with a $2 million investment limit, in the year in which the purchase(s) is/are made.
- These items must be long-term, tangible property that you use in your business more than 50% of the time.
- This rule cannot be used for land, permanent structures attached to land, inventory, patents, copyrights or trademarks, air conditioning or heating units or foreign, leased, inherited or gifted property.
- You may also not deduct an amount greater than your net taxable income.
- There are various classes of depreciable property for tax purposes, called Capital Cost Allowances (CCA). The asset class and percentage that may be deducted will depend on various definitions and categorizations.
Manufacturers and resellers may capitalize some of the direct and indirect costs of production and resale activities, including raw materials, freight, labor, factory overhead, rent, taxes, purchasing, processing, repackaging, handling and administrative costs.
Pre-planning is always advisable in matters related to taxation. The shared border between the United States and Canada can provide some distinct advantages to businesses (even small businesses) that understand which country offers the most beneficial climate for their particular business activity. Currency differences, different taxation laws and different employee healthcare systems are just a few of the areas where businesses can save with a little forethought.
Wade Farquhar, Lean Teams
Start-up and Organizational Costs
Start-up costs are expenses that result from creating a business. Organizational costs are expenses that come from establishing or organizing a business as a partnership or corporation. Both may be claimed as business expenses.
- If you spent up to $5,000, you may deduct the full amount in the first year without having to capitalize the expense.
- If your costs were more than $5,000, the sum will be amortized over a period of 180 months (15 years).
- Costs greater than $50,000 are subject to certain limitations.
- To claim start-up costs you have to be very detailed about the date that you started your business.
- In order to deduct start-up expenses, you have to prove that they took place during a relevant fiscal period.
Because some businesses are not incorporated and are considered self-employed individuals (sole proprietors, contractors and partnership members who carry on a trade or business), they are allowed certain deductions — taken as part of their personal income tax filings.
Note: Many things, including tax deductions, are determined by how your company is structured. If you plan to grow significantly and add employees, speak with a professional about the proper way to incorporate your business and the resulting tax implications.
Health Insurance Premiums
Here’s to your health and potential deductions for health insurance premiums.
- If you’re self-employed (or own more than 2% of your S corporation), you may deduct premiums paid for yourself, your spouse, your dependents and any child under 27 on your personal income tax.
- If your net self-employed income is more than 50% of your income or your income from other sources is less than $10,000, you may claim private health service plan (PHSP) premiums.
Boxes, boxes and more boxes. On the bright side, if you’re self-employed, you may be able to write off some of your moving expenses.
- Sole proprietors and self-employed people, who have moved more than 50 miles for business purposes, may deduct packing and transportation costs, utility and service connection fees, temporary storage and travel.
- You may not expense meals or security deposits.
- There is also a time test — to qualify for this deduction you must remain a full-time employee for a minimum of 78 weeks out of the following 2 years.
- You may claim moving expenses if you have moved to a new home in order to work or run a new business at a new location.
- If your office is outside your home, your new home must be at least 40 km from your new place of work.
If you have private retirement plans, your contributions may count as write-offs.
- You may claim contributions (up to certain limits) to qualified retirement plans, including SEP IRAs, SIMPLE IRAs and 401(k)s.
- You may deduct eligible RRSP and PRPP contributions.
- You are also required to attach receipts as proof of these contributions.
In both the United States and Canada, you are eligible to deduct portions of your mandatory contributions to government programs.
- You may deduct 50% of the social security and Medicare taxes that you are required to pay on a quarterly basis as part of being classified as self-employed.
- You may deduct 50% of your Canadian Pension Plan (CPP) contributions.
Student Loan Interest
If you’re making student loan payments for yourself or a dependent, you may deduct the interest on your taxes. This applies in both the United States and Canada.
A business expense is a cost you incur as part of doing business. There are lots of fancy words and terminology thrown around this concept, but it basically boils down to common sense. If an expense is a normal, expected cost for your industry, you can generally claim it. If it feels like a stretch, it just might be.
In both the United States and Canada these costs are deductible. However, in Canada, the requirements for deducting advertising costs are more strict.
- You may deduct anything from billboards to business cards, including:
- All the costs related to the creation and maintenance of your website.
- Promotional and branded items like key chains, coffee mugs, stress balls, t-shirts, etc.
- Notable exceptions include political ads.
- Business may deduct expenses for ads placed in Canadian media (newspapers, radio and television).
- Special ratios and restrictions apply for magazine advertisements.
- You may claim 100% if you’re marketing to Canadians and 80% of the magazine is editorial content.
- You may only deduct 50% if the editorial content is below 80%.
- You may claim costs for business cards and finders fees.
- Online advertising is fully deductible, including domain name registration and web hosting.
If you have unpaid invoices, you may be able to deduct them. However, you will have to provide documentation that these debts are uncollectible.
- Qualifying for this deduction depends on your whether you sell good or services:
- Funds that you’ve lent to employees, vendors or other businesses that are not repaid may be allowed as a deduction.
- If your business sells goods, you may deduct the costs of unpaid purchases.
- The same rule applies for businesses who sell services.
- The debt must have occurred in the fiscal year.
- You must also count this debt as income.
If you are using your personal car or truck to drive between worksites, visit clients or for other routine business practices, you may write off operating and maintenance expenses including:
- Loan or lease payments
- Parking and tolls
- Registration fees
Note: If you’ve actually purchased the vehicle for the company, it is considered a capital expense.
- You may deduct these costs by using standard mileage rates or actual expenses.
- Mileage rates are updated each year — for 2016, the rate is 54 cents per mile; for 2017 it will be reduced to 53.5 cents.
- You cannot deduct the cost of traveling between your home and your regular place of business. These costs are considered personal commuting expenses.
- If you have an electric car, you may qualify for a tax credit.
- For more information, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses
- You may calculate your business usage of a personal vehicle using Form T2125, Statement of Business or Professional Activities.
- If you own your car, the interest on your payments may be deductible.
- You are required to keep a log of your business mileage
- If you own your vehicle, you may claim a 30% depreciation each year as capital cost allowance.
Tip: Keeping a log of business mileage is a valuable tool for documenting your car and truck expenses. (It’s also required in Canada.) While pen and paper will work, many expense tracking apps also feature mileage logs.
Most businesses choose to make charitable donations as part of a commitment to core values and community service. In addition to the social good, charitable donations can also help at tax time.
- Donations made by self-employed individuals, sole proprietor, partnerships, limited liability companies (LLCs) and S corporations are claimed on personal income taxes.
- Regular (C) corporations, may deduct charitable contributions from business income taxes.
- The maximum amount that can be claimed is 75% of your net income.
Networking isn’t the only perk, you may also write off the costs of trade shows and conventions.
- You must prove that the event is related to your business.
- If you travel internationally, you also have to validate why this travel is required.
- You can deduct up to $2,000 each year for trade shows and conventions held on cruise ships.
- You may deduct the cost of attending up to 2 business conventions, located in either Canada or the United States.
Whether you’re brushing up on some key skills or covering new ground, you may claim most education expenses as deductions.
United States and Canada
- You may deduct education expenses related to your business.
- Seminars, conferences and trade shows are also covered.
- Interest on student loans may be deducted on your personal income tax.
The premiums you pay to protect your business can also be used to reduce your tax burden.
- General business, malpractice, business continuation and any other business risk coverage is fully deductible.
- Under the Affordable Care Act, small businesses may qualify to claim a health care tax credit of up to 50% on their insurance premiums.
- You may deduct the cost monthly of premiums for liability, property and business interruption insurance using Line 8690 of your T2125 Statement of Business Activities form.
- Personal life insurance premiums cannot be claimed as a deduction unless the policy is used to ensure the life of a key operational figure and the beneficiary is the company.
- Deductions for home insurance premiums are filed under the home office deduction.
- Deductions for personal automobile insurance premiums are filed under motor vehicle expenses.
Intangibles — Goodwill, Franchises, Concessions, Licences, Trademarks, Patents, etc.
Expenses related to the purchase, registering or protection of intellectual property are generally deductible.
- Some costs like licensing fees are considered capital expenses that must be depreciated over time.
- Others expenses, like franchises, trademarks and trade names, may be fully deducted in the same year the costs were incurred. However, certain qualifications and restrictions apply.
- In Canada, goodwill, franchises and concessions, are considered “eligible capital property” and must be depreciated over time.
Interest on any loans used specifically for your business is deductible. However, you will need to ensure that you have records proving business use.
- You may deduct the interest paid on funds borrowed for investment purposes.
- You may also deduct interest from business loans and credit cards.
- Businesses may claim interest on any funds borrowed for business purposes.
- You may deduct fees for reducing interest rates or early payment as a prepaid expense.
- Standby charges, guarantee fees, service fees or any other similar fees may be deducted in the year you incur them.
- You may deduct interest paid on a loan made against an insurance policy, as long as the interest you isn’t paid to the policy’s adjusted cost base.
- Interest on property improvement loans is capitalized over five years.
- There are limits on the interest you can deduct for personal vehicle loans or vacant land.
If you are using your home as a primary place of business, you may be eligible to claim, interest on your mortgage (or a portion of your rent), utilities, property taxes, upgrades, repairs and maintenance, homeowner’s or renter’s insurance and even cleaning supplies.
- The amount you are able to claim is determined by how much of your home is dedicated to office space.
- For example, if you have a 2,500 sq. ft. home and you use 500 sq. ft. as your office, 25% of direct and indirect expenses are eligible as deductions.
- The rules that apply are fairly similar for both the United States and Canada.
Legal, Accounting and Professional Fees
Legal, bookkeeping, accounting, tax preparation and other professional service fees that you accrue in the course of doing business may be deducted.
- You may also deduct the cost of business books, industry magazines, online subscriptions and professional associations.
- The costs of these professional services must be related to the current fiscal year.
- If the services provided counts to future years, the costs must be deducted over the lifetime of the benefit.
- You may deduct membership dues and fees for professional trade and commercial organizations.
- All professional and consulting fees are fully deductible and must be related to the current fiscal year.
Maintenance, Repairs and Renovations
Depending on the nature of the work, these costs may either be considered standard deductions or capital expenses.
- Routine maintenance and repair costs (those that take place within the fiscal year and don’t have value the extends beyond this time frame) are deductible.
- Enhancements to real estate or the rebuilding of equipment that enhances the asset’s value, increase the length of use or adapts it to a different use must be capitalized.
- Section 179 Depreciation allows for the full deduction of improvements on leasehold properties. (Excluding building expansion and/or adding elevators.)
- You may be eligible to deduct upgrades that improve energy efficiency.
- You may deduct the cost of labor (professional and third-party only) and materials required for minor repairs.
- Renovations or repairs that extend the useful life of your property or improve it beyond its original condition are considered capital expenses.
- Expenses that recur over a short period of time or restore a property to its original condition are considered current expenses.
Meals and Entertainment
All work and no play can make one very hungry and quite lonely. Thankfully, for the most part, the IRS and CRA seem to understand that food and entertainment are part of doing business.
- You may deduct 50% of the amount spent on business meals and entertainment.
- Exceptions include lavish and extravagant meals.
- At least one employee must be present at the meal or outing.
- You may deduct 100% of the costs of:
- Company cafeterias and executive dining rooms.
- Recreational and social activities held for employees.
- Meals provided as compensation or part of the company culture.
- You may deduct 50% of the amount spent on business meals and entertainment.
- Notable exceptions to the entertainment rule include:
- Amusement parks and tourist attractions.
- Membership fees for dinner, sports or recreational clubs.
- Golfing green fees, cart rentals and club memberships.
- You may deduct 100% of the costs for up to six (6) staff events or parties.
- You may also deduct all of the costs for meals and entertainment related to a fundraising event for a registered charity.
- Receipts are required for all of these expenses. (It also helps to make notes on the back of credit card or cash register receipts documenting the business use.)
Non-Cash Gifts and Rewards
A gift or reward doesn’t always have to be cash. You may also be able to claim non-cash gifts and rewards as deductions.
- You may only deduct $25 in non-cash gifts to each employee.
- The maximum deduction amount for non-cash achievement or service awards given to any one employee is $1,600.
- You may deduct up to 2 non-cash gifts valued at $500 per employee per year. (This includes owners.)
Office Supplies, Tools and Services
Did you know that box of paper clips you just bought can actually be claimed as a tax deduction? The costs of many other common business tools and services may also be written off.
- You may claim:
- Day-to-day shipping, courier, postage and other delivery services. (Shipping and freight as part of the manufacturing process is claimed under the costs of goods and services. )
- You may deduct most office supplies and like costs as long as they are used within the year they are purchased.
- You may deduct phone, internet or utility (gas, oil, water, etc.) expenses related to your business. (Note: If you office at home, these items are claimed under the home office deduction.)
- You may claim:
- Phone, internet and utilities.
- Day-to-day shipping, courier, postage and other delivery services. (Shipping and freight as part of the manufacturing process are claimed under the cost of goods and services.)
- Rental fees for leased computers, fax machines, etc.
- Indirect supplies like medicines for veterinary practice or cleaning supplies for a carpenter.
- Cleaning supplies.
- Small items like pens, paper, paperclips, etc.
- The following should be claimed as capital expenses:
- Office furniture, including desks, chairs and filing cabinets.
- Computers and software.
Rent and Property Leases
You may claim rent paid on office space and other business properties.
- If you work from a home office, a percentage of the rent on your home can be claimed under the home office expense.
- It is recommended that you keep copies of the lease agreements and rent receipts, as you will be required to provide these documents should you be audited.
- The rules are fairly similar in the United States and Canada.
- In the United States, you may not claim this deduction if you own any equity in the building where you rent.
- You may also claim rental payments on machinery and equipment.
Research and Development (R&D)
In order to spur innovation and economic development, both the United States and Canada offer research and development credits, which are like tax deductions, only better.
- Small businesses (those with an average of less than $50 million in gross revenue over the prior three years) may now offset previously restrictive requirements with R&D credits generated after January 1, 2016, in order to better access the Federal R&D Tax Credit.
- Start-ups (with less than $5 million in gross receipts and no more than five years of gross receipts) may also now allocate up to $250,000 of federal R&D tax credits generated after January 1, 2016, to offset the FICA portion of their payroll taxes.
- Through the Scientific Research and Experimental Development (SR&ED) Tax Credit Program, Canadian-controlled businesses (including small businesses and startups) can earn an investment tax credit (ITC) of 20-35%.
- It is a refundable tax credit, so even if your business fails to make a profit, you will still receive a cash refund.
- It allows you to deduct the full amount of expenditures in the year they were incurred.
- Unused deduction amounts may also be carried over to the following year.
Salaries and Wages
The wages and benefits you provide for employees are not a one-way street. In addition to rewarding a job well done, certain components of payroll and other compensation are deductible.
- Employers may deduct:
- Employer-paid taxes (payroll taxes) including:
- Employer contributions paid for social security and Medicare (FICA) taxes
- Employer contributions for federal (FUTA) and state (SUTA) unemployment taxes.
- Salaries and wages
- Bonuses, commissions and awards
- Benefit programs — life insurance, education reimbursements, etc.
- Meals and lodging provided as part of the workplace
- Per diems and allowances
- Fringe benefits
- Contract labor — if the contractor was paid $600+ during the year. (Documented by Form 1099-MISC.)
- Payroll taxes (source deductions) including:
- Canada Pension Plan (CPP) and/or Quebec Pension Plan (QPP) contributions.
- Employment Insurance (EI) premiums.
- Workers' compensation accounts.
- Any premiums paid for employee illnesses, accidents, disabilities or income insurance plans.
- Any salary you pay your child, spouse or common-law partner.
In both the United States and Canada, you may deduct phone, internet or utility (gas, oil, water, etc.) expenses related to your business. (Note: If your office is home-based, these items are claimed under the home office deduction. )
You can actually deduct taxes from your taxes. It may sound like double-speak, but it’s true.
Employers may deduct:
- Employer-paid payroll taxes.
- Sales tax on day-to-day items (included in the cost of the items — sales tax on larger assets will be added to the total cost and depreciated as a capital expense).
- Excise and fuel taxes.
- State income tax — as an itemized deduction.
- Real estate taxes on business properties.
- Employer-paid payroll taxes.
- You may deduct the cost of property taxes.
- If you office at home, property tax claims are taken under the home office deduction.
- The goods and services tax (GST) and harmonized sales tax (HST) paid on business expenses are considered input tax credits (ITCs).
When you travel overnight for business, you may claim the costs of transportation (car, bus, train, plane, etc.), accommodations, meals, shipping materials, phone calls and tips.
- If you bring friends or family along, you may only expense your costs related to your business. (Unless your friend or family member is an employee.)
- Factors like the percentage of time spent on business, destination (domestic or international) and length of stay all affect the claim amounts.
- For detailed information, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.
- You may deduct most transportation and accommodation fees.
- Expenses related to your personal vehicle must be taken under the motor vehicle deduction. (As this can be complicated, this is definitely one area where you should consult with an expert.)
- Meals are subject to a 50% limit.
It’s hard to imagine a business that doesn’t require at least one type of software for day-to-day operations. The good news — software costs can be deducted.
- Enterprise software is considered a capital expense and must be depreciated over 36 months.
- When software comes with a computer, the costs are not separated. They stay bundled.
- Subscription fees for cloud-based software and apps are deductible. (As an online payroll service, Wagepoint wholeheartedly endorses this deduction.)
- Software purchased from January 1, 2003, through December 31, 2014, is eligible for a Section 179 Deduction.
- What you are able to claim depends on how the software is categorized:
- The cost of systems software for tools like photocopiers and faxes (Class 8) is depreciated over five years.
- System software for computers and data-processing (Class 10) is depreciated at an annual rate of 30%.
- Electronic process control or monitor equipment, electronic communications control equipment and data handling equipment (Class 50) is depreciated at an annual rate of 55%.
- You may claim 100% of the costs of non-system software (Class 12) in the year that it’s purchased.
Best Practices for Managing Small Business Tax Deductions
“We generally engage in a 30-minute education session upfront with our new small business and self-employed clients to provide a basic outline of all expenses applicable to their specific business. This helps them keep track of records to support expenses proactively all through the year.”
Phani Ilapakurty, Less Accounting
An ounce of prevention is worth a pound of cure. A stitch in time saves nine. The clichés abound, but the truth remains. If you want to maximize deductions and avoid last-minute mistakes, you must put best practices in place right from the start:
- Determine your accounting method — cash or accrual
- Cash — revenues and expenses are counted when they are actually received or paid.
- Accrual — revenues and expenses are recognized when the transaction occurs.
- For the most part, Canadian and U.S. companies are required to use the accrual method.
- In the United States, businesses may only use the cash method if their revenue is less than $5 million.
- In Canada, businesses can apply the cash method then make a single adjusting entry at year end to account for outstanding receivables and payables.
- Use credible accounting software
- Categorize expenses
- Set up categories within your accounting software for the types of expenses you plan to track and claim.
- Scan receipts and document expenses
- Keep business and personal expenses separate
- Open and utilize business banking and credit card accounts.
- Work with professionals
- Partner with qualified bookkeepers and accountants to help you keep your books up to date and your filings compliant.
- Stay informed
- Even if you’re working with professionals, small business owners are expected to stay informed.
- Find out more about small business tax deductions using the following links:
- Internal Revenue Service (IRS)
- Canada Revenue Agency (CRA)
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A Special Thanks To...
Wagepoint (@Wagepoint) would like to sincerely thank Daniel Talkins at Future Balance CPAs (@FutureBalance), Wade Farquhar at Lean Teams and Phani Ilapakurty at Less Accounting (@LessAccounting) for lending their time and expertise to this post. If like me, your mind begins to liquefy after a certain amount of time spent on the IRS or CRA websites, these folks can make your life a whole lot easier.
Whew! You made it through the list! If you think there’s something we missed, let us know. Or, share your small business tax deduction stories and advice in the comments below.
Disclaimer: The information in this post does not constitute or replace the need for professional bookkeeping, accounting or tax advice. Wagepoint has gathered this information from several sources and has done its best to ensure accuracy. Any errors or omissions will be corrected in a timely manner. Note: This post was originally published in October 2016. As tax laws are constantly changing, it's important to ensure that you have the most accurate and up-to-date information.
About the Author
Blogmaster, content expert and marketing guru at Wagepoint, Michelle is having fun (seriously I am) extolling the virtues of small business payroll and generating articles with actionable advice for small businesses and startups. Michelle probably needs to get out a little more often.Follow on Google Plus Follow on Twitter More Content by Michelle Mire