To Deduct or Not to Deduct: A Definitive Guide to Commonly Missed Small Business Tax Write-offs
To Deduct or Not to Deduct: A Definitive Guide to Commonly Missed Small Business Tax Write-offs
Keeping track of small business deductions throughout the year is crucial to reducing the amount of taxes you owe come April. But with so many possible write-offs, how are you supposed to keep everything straight?
The clearer you are on what does and does not count as a write-off for your small business, the bigger your refund will be at the end of the year.
Check out some of the most commonly missed and misunderstood small business deductions, and start tagging your receipts today!
Don’t you hate it when you’re stuck in an airport or hotel, and you need cash, like, now? Even if your only choice is a competitor’s bank, don’t sweat those ATM fees! ATM fees are considered banking fees, and for small business owners, banking fees are part of what the IRS considers regular operating expenses.
Make your life—and the life of your accountant—infinitely easier by having separate bank accounts for business and personal transactions. That way you’ll be able to easily track ATM fees for your business account each month.
Keep in mind that regular people (non-business owners) are not allowed to deduct ATM or bank fees, so take care to only claim those charges associated with your business accounts. So the next time you see a Wells Fargo machine when you bank with Chase, relax! Uncle Sam is ready to foot the bill for that $3 (or $5, or $7!?) fee.
Mileage, parking, and tolls
This category is completely separate from the travel deductions you claim while away on business. If you’re staying somewhere overnight or are out of your local area, be sure to tag those receipts in a way that differentiates them from your regular business mileage.
There are two ways to calculate deductions for the use of your car. First, you can take a standard mileage deduction that’s set by the IRS each year. After tracking your qualified business miles*, you’ll multiply the total number of miles by an amount determined by the IRS.
For the final 6 months of 2022, the standard mileage rate is 62.5 cents for every business mile driven. (By the way, did you know the Shoeboxed app can help you track your miles?)
You can also claim what’s known as the actual expense of driving your vehicle. This is the total cost of owning and operating your vehicle each year. This number is calculated by adding up all of your mileage, the cost of repairs, vehicle depreciation, etc., and then determining the percentage of time you used your car for business vs. personal travel. Ask your tax professional which option will get you the biggest deduction.
So what counts as qualified business miles? Believe it or not, driving to and from the office each day does not count as a deduction. Driving to an off-site meeting or temporary workplace does. It’s important to claim a regular place of business so the IRS can easily see why certain trips away from the office qualify as business miles.
Happily, all cab fares, public transit costs, tolls and parking fees that are related to your business are 100% deductible. Again, make sure to separate the cost of parking while attending an in-town conference from the cost of parking your rental car while traveling in another state.
Meal deductions are some of the most commonly misunderstood write-offs. That’s because the IRS has quite a few stipulations that need to be met before they’ll pay for your dinner! In order to write off the cost of a meal, keep a few things in mind:
- The meal must be business-related. If you take your grandma out to eat on your lunch hour, it doesn’t count. Business-related means that business is being conducted, or that the meal will likely result in some sort of business transaction (i.e. someone is going to make money).
- You have to be physically dining with someone else. Solo meals can only be claimed when you’re traveling. As of right now, FaceTime-ing with a colleague or client during a solo lunch doesn’t count, even if you both get the Waldorf salad.
- Make sure not to double dip and claim a meal in two different categories—it’s either a meal write-off or a travel write-off, but not both! If you’re dining while away on business, you’ll most likely want to claim the meal as a travel expense.
- Most of the time, you can only claim 50% of the cost of the meal. Exceptions to this rule might include buying breakfast for your employees and serving it at the office. In this case, the IRS may let you claim up to 100%.
Internet access while traveling
Isn’t it annoying how some airports still don’t offer free WiFi? What is this, 2002? Lucky for you, the cost of that overpriced 24-hour pass or a subscription to Boingo Wireless is tax deductible, as long as you’re using your surf time for business purposes.
Just like at home, you can’t deduct 100% of the cost of Internet access if you’re also using it for personal use. If your time spent on Facebook is more about catching up with friends than promoting your page, just be sure to calculate percentages accurately and claim only business-related time.
Stamps and mailing costs
Snail mail is more than just kitschy-cool; it’s also tax deductible for your small business! As long as what you’re mailing or shipping is business-related, you can deduct the cost of postage, envelopes, P.O. Box rental fees and delivery services like FedEx and UPS.
The IRS will even let you deduct the cost of a messenger service, as long as something like that is regular and necessary for your business. (Read: sending a courier message to ask your best friend to lunch probably won’t count.)
Another commonly-missed deduction is the cost of shipping. If your business sells physical goods and you pay the cost of shipping, those fees are tax deductible. This is a great way to entice new business (free shipping!) without actually incurring additional costs.
Frequently asked questions
Are shipping costs tax deductible?
Certain shipping costs are tax deductible as either miscellaneous expenses, freight shipping, or as expenses that are regular and necessary for your business.
Freight shipping is the transportation of large amounts of goods by aircraft, ship, train or truck. It can be transported domestically and internationally by air, sea or land. Freight shipping of products are deductible under the Cost of products or raw materials category. (See “Publication 535, Cost of Goods Sold,” pg.3, Internal Revenue Service.)
Moving machinery and machine parts
For instance, If you move machinery or machine parts from one city to another, you can usually deduct the cost from your taxes under the Moving machinery category. This decreases the amount of money you owe in taxes by the cost of installing the machinery in the new area. (See “Publication 535, Business Expenses,” pg.48, Internal Revenue Service.)
Storage unit operating expenses
For instance, expenses spent on storing document and assets for future use to avoid loss and damages are deductible under the Storage category. (See “Publication 535, Cost of Goods Sold,” pg.3, Internal Revenue Service.)
Where do I put freight shipping on Schedule C?
The IRS Tax Guide for Small Businesses states that if you use Schedule C to file your taxes, you can deduct shipping expenses from your total. You need to fill in line 27a of your Schedule C. Other costs, such as containers or packaging, can be deducted as shipping costs or selling expenses if they are not an integral part of the manufacturing product.The cost of goods sold includes the cost of shipping and receiving the materials needed to make products to sell.
What’s the standard mileage rate for 2022? For the final 6 months of 2022, the IRS announced that the standard mileage rate has been increased to 62.5 cents for every business mile driven. (By the way, did you know the Shoeboxed app can help you track your miles?)
Are stamps and postage fees tax deductible?
The IRS will give you a tax deduction for the cost of postage stamps, as long as it is regular and necessary for your business. For example, if your business sells physical goods and you pay the cost of shipping, those fees are tax deductible. In this way, providing free shipping can serve to entice new business without incurring additional costs. (See “Publication 535, What Can I Deduct?,” pg.3, Internal Revenue Service.)
Are ATM fees tax deductible?
As a business owner, your ATM fees are tax deductible Because ATM fees are considered banking fees, and for small business owners, they are part of what the IRS considers regular operating expenses. But, regular people (non-business owners) cannot deduct ATM or bank fees. So only claim bank fees as tax deductible for bank charges associated with your business accounts.
Are bank fees tax deductible?
You can write off your bank fees as a business expense if your fees satisfy two of the following criteria. (1) They are classified as a “business expense,” which ought to be “ordinary and necessary.” Also, (2) your transactions must occur in a business bank account.
Are PO boxes tax deductible?
If you’re sending business-related mail or packages, you can deduct the cost of postage, envelopes, and P.O. box rentals from your taxes as such expenses are considered essential and standard. Similarly, renting storage space for business-related storage and using shipping services like FedEx and UPS to get them delivered are eligible for tax deductions. (See “Publication 535, What Can I Deduct?,” pg.3, Internal Revenue Service.)
Don’t miss out on the many possible tax write-offs available to you! Stay informed by visiting IRS.gov for up-to-date tax information. And visit the Shoeboxed blog for how to organize and manage your tax receipts for the upcoming tax season! Still unsure about how to tag your receipt? Contact our Help Desk with questions.