7 common tax deductions for US businesses

If you’re an accountant based in the US, chances are you regularly advise clients on tax write-offs that they should claim for their business. This is one of the hallmarks of being a reliable financial services provider — by helping your clients maximize their tax deductions, they can save money and be in a better financial position.

But even seasoned professionals can miss certain deductions. And as we approach tax season, it’s high time to brush up on the common tax write-offs that businesses should include when filing their taxes.

Here’s a roundup of some of those deductions. Check them out below and keep them in mind when you’re doing your clients’ taxes.

Note: The content below is for informational purposes only. Every business is different so if you need specific tax advice, please consult with a financial professional.

If you have clients who recently started their business, be sure to ask them about their startup costs. A lot of people assume that they have to officially be in business before taking advantage of tax write-offs; but the fact is they can deduct their startup (i.e., pre-business) expenses as well.

Here's the fine print, though: the Internal Revenue Service (IRS) lets you deduct only up to $5,000 in business startup costs and $5,000 in organizational costs if the total startup expenses are $50,000 or less. If the startup costs exceed $50,000, you'll need to subtract the excess amount before taking on the deduction.

For instance, if your client’s startup costs are $51,000, they’ll have to subtract $1,000 from $5,000 and only claim $4,000 worth of deductions. If the startup costs are above $55,000, then they wouldn’t qualify for this deduction.

Startup expenses are a good topic to bring up when you’re interfacing with new entrepreneurs. Be sure to ask about how much they spent getting their business started. If it’s under $50,000, they may qualify for this deduction.

Credit card fees and interest accrued from business expenses are tax deductible. As a reminder, the IRS defines business expenses as the “cost of carrying on a trade or business”. And in order to be deductible, the IRS stipulates that the expense "must be both ordinary and necessary." This means that the cost should be common in your client’s trade or business and they must be necessary for the company to operate.

Another caveat is that the expense needs to be on your client’s business credit card. This means if they used someone else’s credit card to purchase a business expense, they can’t write-off interest or fees on the non-company card.

Keep this in mind when discussing tax write-offs with your clients. Make sure they know they can only deduct interest and fees from credit cards under their business and advise them against using their personal credit cards for company-related purchases.

Certain types of taxes — including payroll tax, property tax, sales tax — can be considered as deductions.

The specific process for taking these deductions will vary depending on the type of taxes paid. The steps for deducting property taxes, for example, will be different from the process for deducting payroll, sales tax, etc.

As an accounting professional, it’s important that you ask clients about the different types of taxes that they’ve paid, and then determine the right deductions to take.

Health insurance can be considered as a tax write-off, but the way you report this deduction will depend on the type of business entity of the client.

Businesses that are considered a Sole Proprietorship or Single Member LLC can write-off health insurance by reporting it on Schedule 1, Line 16, per the IRS’ guidelines.

According to the IRS, you may be able to deduct your client’s health insurance expenses on their Sole Proprietorship or LLC tax return if they meet the following criteria:

• They were self-employed and had a net profit for the year reported on Schedule C or F.

• They were a partner with net earnings from self-employment.

• They received wages from an S corporation in which they were a more-than-2% shareholder. Health insurance premiums paid or reimbursed by the S corporation are shown as wages on Form W-2.

If your clients contribute to a 401(k) retirement plan for their business, they may be able to deduct those contributions on their taxes.

“Employer contributions are deductible on the employer’s federal income tax return to the extent that the contributions do not exceed the limitations described in section 404 of the Internal Revenue Code,” states the IRS on its website.

As with most tax deductions, the manner in which 401(k) contributions should be handled will vary, depending on the structure of the business. According to the IRS, "sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), partnerships deduct them on Form 1065, and corporations deduct them on Form 1120 or Form 1120-S."

Earned Income Tax Credit (EITC) is a tax break for low to moderate-income workers and families. Taxpayers would know if they qualify for EITC if they received a letter from the IRS.

While not technically a deduction, your clients may be able to claim this credit in order to offset their tax bill. According to the IRS, individuals who want to claim EITC must file Form 1040.

EITC can be beneficial, but there is a caveat: those who claim it may face more IRS scrutiny. Data from ProPublica found that EITC recipients, whose annual income is usually under $20,000, were audited at a rate of 1.41%. (For context, people within this tax bracket are usually audited at an average rate of just 0.69%.)

For this reason, claiming EITC may not be worth the money. Intentionally skipping tax deductions or credits may make sense depending on the situation. If it opens up questions from the IRS and the amount that the client stands to gain isn’t worth it, then claiming the tax credit may not be a good idea.

If your clients pay property taxes, it may behoove them to appeal the Assessed Value of their property.

According to The National Taxpayers Union, 30-60% of US property owners' real estate is overassessed, so there’s a good chance that your clients can lower their property tax bill simply by appealing their property value assessment.

Help your clients review the Assessed Value of their real estate to see whether or not the assessment is fair. If you determine that the property is over-assessed, you (or the client) can file an appeal, and potentially lower their tax bill.

The realm of taxation can be complicated to navigate, and this gives your clients all the more reason to rely on accounting professionals like yourself. The good news is that tax season isn’t for another few months, so you still have time to prepare and educate your clients.

Remember that when implemented correctly, providing expert advice and education can vastly improve your client interactions. By taking the time to recommend taxation practices, you can strengthen client relationships, ultimately improving retention and your bottom line.

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