As tax season swiftly approaches and your anxiety starts to grow, it’s the perfect time to strategize how to maximize savings for your small business or franchise through tax deductions.
What are tax deductions? They’re ordinary or necessary business expenses the IRS allows you to deduct from your taxable income.
From business insurance and business loan considerations to retirement contributions and depreciation, we’ll help shed some light on potential deductions. At Ceterus, we aim to replace any apprehension you may have with confidence so you can approach tax season with a solid plan.
Tax Deductions For Small Business and Franchise Owners
Business Vehicle & Use of Car
If you use your car exclusively for work-related purposes, you can claim a deduction for all expenses associated with operating and maintaining it. This includes fuel, oil changes, repairs, registration fees, and insurance costs. However, if you use your car for both business and personal reasons, you need to divide expenses based on the exact mileage used for business purposes. Use actual expenses or the standard mileage rate (65.5 cents per mile driven).
As a small business owner, you must fund your own retirement plan. The good news is that your contributions are tax-deductible. Nonetheless, your retirement savings accounts must adhere to IRS rules and be considered tax-qualified to be eligible for the deduction. You can contribute to tax-qualified retirement plans like a Roth IRA, Simple IRA, or Solo 401(k) and deduct the contributions from your taxable income.
The retirement plan you select must be beneficial to all your employees, not just for yourself. It’s important to keep these special considerations in mind when planning for your retirement.
Depreciation is a strategy for franchise and small business owners to gradually recover the costs of fixed and tangible assets. This approach takes into account the age, wear and tear, and decay of an asset over its lifespan. These depreciable assets cover a wide range of items commonly used in business operations, including computers, machinery, office furniture, and business vehicles.
To qualify for depreciation, you must own the asset, use the asset within income-generating operations, and the asset must have an estimated useful life beyond one year.
Pro Tip! Don’t forget about bonus depreciation! This tax concept can be incredibly beneficial for business owners who purchase assets during the tax year. If an asset qualifies for business use, bonus depreciation allows the owner to claim a larger portion of depreciation, up to 100% of its cost.
Home Office Expenses
If you are a small business owner who uses a part of your home to conduct your business, you can claim certain expenses related to the maintenance and furnishing of that space on your tax return. The IRS allows you to deduct a portion of the expenses based on the square footage of the area used as a home office.
Pro Tip! This space must be solely dedicated to your business, even if it is just a part of a room used for other purposes.
If you purchase office supplies for work purposes within the year, you can write them off as business expenses. Deductible supplies include:
- Printers and printer ink
- Computers and software subscriptions
- Work-related postage and shipping
- Cleaning supplies
Pro Tip! If you purchase supplies at the end of 2023, you cannot deduct that cost from your taxes for that year since it’s improbable that you would use them all before EOY.
Employee Wages and Benefits
Salaries, bonuses, commissions, vacation pay and benefits paid to employees are deductible business expenses.
The following conditions must be met to be eligible for this deduction:
- Cannot be the exclusive owner, a member of an LLC, etc.
- The wages and benefits provided must be reasonable, ordinary, and necessary, and they must have been paid in the same year for which you are claiming the deduction.
When it comes to business-related travel, you can deduct your travel expenses such as plane, train or bus tickets, parking and toll fees, fares for taxis, Uber or Lyft, and the cost of lodging.
As a franchise or small business owner, you have the opportunity to claim deductions on food and beverage expenses that are directly associated with your business. This includes meals and events for your employees, potential customers or vendors.
Meals bought from restaurants were fully deductible in the 2021 and 2022 tax years. However, from tax year 2023 onwards, the regulations outlined by the Tax Cuts and Jobs Act will be in effect:
- Office parties for employees are fully (100%) deductible.
- Office meals and snacks for employees are partially (50%) deductible.
- Business dinners with a client are partially (50%) deductible.
A helpful practice is to save your receipts and note down the date, meal location, and who was there on the back.
Rent or Lease Payments
Rent payments made for office space, parking garage, or any other type of business property you use for your business and don’t own can be considered a business expense on your taxes.
Pro Tip! Expenses are not deductible if you have or will receive equity/title.
In many states, most businesses are mandated to have certain types of business insurance, including:
- Worker’s compensation insurance
- General liability insurance
- Professional liability insurance
These types of insurance are essential for operating a business and can be deducted from your taxable income.
You can deduct any professional service fees that are necessary to keep your business running! This includes:
- Accounting and bookkeeping services (like Ceterus)
- Bookkeeping software
Business Interest and Bank Fees
When you take out a loan to finance your business, the bank will charge you interest on the amount borrowed. You can deduct the interest on business loans and credit cards.
Plus, you can write off any fees and extra costs associated with your business bank account and credit cards, such as monthly service fees and annual credit card fees.
Advertising and Marketing
Expenses associated with promoting your business can be deducted, including:
- Physical advertising (billboards, print, etc.)
- Radio, TV, digital and influencer marketing
- Public relations and even sponsoring local events
When it comes to charitable contributions, you can deduct cash donations that you make to organizations that fit the following:
- Religious establishments
- Civil defense organizations formed under federal, state, or local legislation
- US-based veterans’ organizations
If you have a sole proprietorship, LLC, or partnership, include these expenses on your personal tax forms. But if your company is a corporation, you can report charitable donations on your corporate tax return.
Repairs and Maintenance
You can deduct the costs of any necessary repairs and maintenance that are required to maintain the building in its ordinary working condition. For instance, painting the exterior or interior of the building and sealing leaks or cracks are considered maintenance and are tax-deductible.
Pro Tip! It’s crucial to remember that only repair and maintenance expenses incurred to keep the building in its original state are tax-deductible. Expenses incurred on improving the building, such as adding a new room or renovating the interior, are not tax-deductible.
Franchise Specific Tax Deduction Tips
Franchisees should consider all the tax deductions mentioned above while calculating their tax liability. There are deductions specific to franchise businesses, such as royalty fees, franchise training expenses, regional marketing provided by the franchisor and more.
Note: Franchise fees are categorized as Section 197 Intangibles by the IRS and are not immediately tax-deductible. The IRS requires you to amortize the franchise fee over 15 years. This allows you to recover the cost over time for tax purposes.
Ceterus As Your Tax Resource
Ceterus is your trusted partner for clear financial insights, tech-enabled bookkeeping, and tax prep, helping franchise and small business owners build a stronger future. Our experts manage tax forms for corporations and partnerships, and can also handle personal taxes.