For many franchisees and small business owners, saving money is an important part of keeping things running. One of the ways to make sure you’re saving as much as you can is by taking advantage of the small business tax deductions you’re allowed to lower your tax burden.
In general, franchisees and business owners cannot deduct personal expenses, including the cost of living and family-related expenses. However, if you use something for both personal and business use, you can deduct the costs associated with their business use. Although many of these deductions may seem small and trivial at first, they can surely add up to significant savings. So be sure not to overlook these top 4 franchise and small business tax deductions when you file your business taxes this year.
1. Franchise Fees
Franchisees can deduct the fees they pay to license their franchise. This includes both the initial franchise fee and the annual residuals and fees, if any. The IRS categorizes initial franchise fees as Section 197 Intangibles . Although the initial fees are tax deductible, they must be amortized over 15 years.
In contrast, continuing fees for running a franchise can be deducted as regular business expenses, as long as they’re paid on a regular basis. Payments must be made at least once a year and must be either a fixed amount or based on a percentage of sales or profit.
2. Business Travel
If you’re a business owner or franchisee, whenever you’re traveling for work, those costs are tax-deductible. This includes not just long-distance travel via trains or flights, but also local travel. Anytime you leave your office and travel to meet a business contact, run business errands, or meet with a customer, you can deduct those travel expenses. However, this deduction only applies to employers, not employees, for 2018 due to changes brought on by the Tax Cuts and Jobs Act.
There are two ways to deduct business travel in your car. One is to keep track of the mileage you travel, then use the standard mileage deduction for those miles. For 2018, the standard deduction is 54.5 cents per mile. If you choose this method, it’s important that you keep detailed records of the date you traveled, where you went, whom you were going to meet, and the starting and ending mileage. A free mileage calculator can be of great help with tracking your business-related mileage.
The second way to deduct business travel expenses in your car is to determine the percentage of the time you use your vehicle for business use. This also requires you to keep track of the beginning and ending mileage after each of your business-related trips. Once you determine how much money you have spent in gas, maintenance, and other vehicle-related costs, you can deduct the percentage of the costs related to the business travel. For example, if you drive 10,000 miles in your car in 2018, and 2,500 of those miles are work-related, you have used your car for business 25 percent of the time. If you spend a total of $1,000 on your car during 2018, you can deduct 25 percent of those costs, which equals $250.
3. Meals, But Not Entertainment
As a franchisee or small business owner, you can deduct 50 percent of business-related meals with clients and/or employees, as long as business is discussed during the meal. Entertainment expenses for clients like tickets to sporting events or greens fees for rounds of golf are no longer deductible under the new tax law. But celebratory meals and activities for employees such as holiday parties and anniversary celebrations are 100 percent tax deductible. As with all deductions, be sure to keep receipts for the event, including with whom you met and what you discussed.
4. Home Office
If you have a home office, you may be able to deduct some of the expenses that apply directly to maintaining that office, including mortgage interest, utilities, repairs, and depreciation. To claim a home-office deduction:
- Your home office must be your primary place of business
- The office must be a separate room used exclusively for work
- You must be a business owner, not self-employed or an employee
So be careful that you meet these specific restrictions because claiming a home-office deduction is usually a red flag for the IRS to look more closely at a tax return.
In addition to these top 4 franchise and small business tax deductions, franchisees and small business owners have other deductions they’re entitled to . By taking the time to do some research or hiring a tax professional to help, you can lower your tax burden and help ensure your continued success.