Ever had a really slow day at the shop?
Your taxes are that slow day at the shop. And your tax deductions are that person snapping up all your stellar goods.
Why? Because tax deductions make taxes WAY more interesting and affordable. And the more you understand them, the more you can write off—and the less you’ll have to pay.
But before you can reap the benefits, you have to know what’s what. Start by checking out this giant list of tax deductions specifically designed for business owners with physical (as in, real-life) stores.
- Advertising and promotion
Everything you spend on promoting your business is deductible, such as:
- Marketing: Ad placements in digital and print publications, newspaper ads, billboards, signage, Facebook Ads, Google Adwords, and email marketing software.
- Promotional materials: Flyers, business cards, calendars, leaflets, newsletters, posters, and swag with your logo on it, such as pens or stickers.
- Website: Domain names, hosting, subscription website services (Wix, Squarespace) themes, plugins, stock photos, and other things you buy for your website.
- Auto expenses
Owning a shop, cafe, or restaurant means you run a lot of errands. The good news? You can write off what you spend on business travel. Example of business travel are:
- Errands to the office supply store, post office, grocery store, and suppliers (like a restaurant supply store or maker workshop).
- Travel to business meetings with partners, employees, suppliers, vendors, and consultants.
- Scouting trips for new suppliers, vendors, and merchandise.
What doesn’t count as business travel? Travel from your home to your shop. This is considered commuting and is not deductible.
There are two methods to write off your auto expenses:
The easiest way to write off your auto expenses is by tracking your business mileage and taking the mileage deduction at tax time. Every year the IRS sets a standard mileage rate. At the end of the year, you just multiply your annual business mileage by the rate and- voila– you’ve got your mileage deduction.
- Here’s an example: You drive 2,000 miles to take care of business errands. The IRS mileage rate for 2020 is 57.5 cents per mile. The formula is: 2,000 x 57.5 cents = $1,150. Your deduction is $1,150!
The second way to write off your car is by writing off a percentage of your total vehicle expenses. Vehicle expenses include insurance, gas, repairs, oil changes, and car washes. The percentage you write off depends on how much you use your car for business travel vs. personal travel.
- Here’s an example: You drive a total of 10,000 miles and 3,000 miles are for business. You can deduct 30% of your expenses. Let’s say you spend $6,000 on your car. The formula is: $6,000 x 0.30 = $1,800. So your deduction is $1,800!
Regardless of which method you choose for calculating your auto deduction, parking and tolls for business travel are 100% deductible. So keep feeding that hungry meter.
- Bank fees
Fees associated with your business bank accounts and loans are deductible.
- Bank fees: You can deduct monthly service fees, ATM fees, overdraft fees, deposit fees, wire transfer fees
- Credit card fees: This includes annual fees, late payment fees, and interest.
- Loan and leasing fees: This includes things like set-up costs for loans and leasing fees for equipment
- Business licenses and permits
Keeping things legit ain’t free. Shop owners need to ensure that they have current licenses and permits to run their shops. Fortunately, the fees and costs associated with acquiring those licenses and permits are deductible. Here’s what that can involve:
- Licenses: Business licenses, alcohol resale licenses, and professional licenses required to perform your services or sell your merchandise fall into this bucket.
- Permits: Resale permits and permits required by government agencies can be deducted.
- Charitable contributions
This means cash and in-kind donations you made to charity. For a donation to be tax deductible, the organization must be categorized as a 501(c)(3) non-profit. That means donations to your favorite political organizations are NOT tax deductible. Remember, always request a donation receipt for your taxes, since you’ll have to include that when you claim the deduction.
- Cost of goods sold
Cost of Goods Sold (COGS) is a special type of expense that pertains to the cost that you, the seller, incurs to manufacture or sell an item. You may also see this written as Cost of Sales.
These are the raw materials needed to manufacture and sell your goods or merchandise.
- Example: You own a restaurant. Food, drinks, spices, condiments, and oil are part of your COGS.
Direct labor related to manufacturing a product does not include a person you hire to help you sell a product, but does include a person directly involved in the production of the product.
- Example: You own a shop where you sell your handmade jewelry. You pay someone to solder clasps for your necklaces. What you pay this person is your COGS.
This is defined as merchandise you purchase to resell. You can only write off the cost of inventory that is sold. If you have unsold inventory, that is considered an asset.
- Example: You own a clothing store. You bought 50 denim jackets, but you only sold 12 so far. You can write off the costs of those 12 jackets that you sold.
Yes, decor is actually deductible. Decor is defined as small expenses related to decorating your shop (inside and outside).
- Curtains, rugs, and throw pillows.
- Art (plus framing) and wall hangings.
- Plants, pots, hangers, and planter stands.
- Candles, lamps, and small lighting elements.
- Small decorative items.
- Dues and subscriptions
Professional organizations that you’re a member of, like your local chamber of commerce or neighborhood merchant’s association, most likely charge fees. If it’s related to your shop, it’s likely to be covered. Time to start deducting!
Owning a business has a learning curve, which is why it’s pretty awesome that you can write off your related educational expenses. Sending employees to specialized trainings and workshops? These expenses are also deductible.
- Books and reference materials: Printed books, ebooks, magazine subscriptions, newspaper subscriptions, and audio books.
- Workshops and trainings: In-person workshops and trainings, online courses, conferences, and lecture series.
- Equipment purchases
Equipment you purchase for your shop can be written off. Depending on the cost of the equipment, it will either be taken as an expense, and written off in one tax year, or as an asset and depreciated over several years.
Hold up. What does that mean?
Depreciation is a method of allocating the cost of an asset over the lifespan of the asset. For example, if you purchase a $5,000 computer and plan to use it for five years, each year, the computer would depreciate $1,000. While you couldn’t deduct the initial $5,000 purchase, you can claim that $1,000 annual depreciation expense on your taxes.
If you make large equipment purchases for your shop, speak with an accountant about how best to deduct them. There are guidelines for depreciating expenses, as well as exceptions, and an accountant can help you determine the best tax strategy.
- Equipment rental
You can deduct any equipment that you rent to perform your services or sell your products. For example, let’s say you just hosted a pop-up shop and rented an RV and generator to make it happen. Save your receipts and write that equipment off.
- Event costs
Expenses related to events that you host, both for the general public and for your employees, can be written off, including:
- Food, drinks, and catering fees (100% deductible for public events and employee events).
- Paper goods, flatware, linens, table and chair rentals.
- Entertainment costs like a DJ, band, emcee, ambient performers, and speakers.
- Staffing fees like an event planner and coordinator, parking attendants, cleaners, and setup/breakdown staff.
- Venue rental.
- Furniture and fixtures
Just like equipment purchases, furniture and fixtures will either be taken as an expense and written off in one tax year, or taken as an asset and depreciated over time.
- Furniture like tables, chairs, stools, desks, sofas, and benches.
- Display cases and shelving.
- Window displays.
Gifts to customers, business associates, and employees can be deducted, up to $25 per recipient per year. Yes, that means if you gift each of your employees $50 gift cards to the local pinball arcade, you can only write off $25. Sorry.
Owning a shop means you’ve got A LOT of liability hazards! If an employee accidentally leaves the Keurig on, you have to clean up that mess. And if a customer steals, you have to make up the difference. Luckily enough, all of your insurance is deductible. This includes stuff like
- General liability coverage.
- Property and building insurance.
- Theft insurance.
- Loss-of-income insurance.
- Interest expenses
Finance charges got you down? Hey, at least they’re deductible. You can write off both credit card interest and business loan interest.
- Leasehold improvements
Did your shop need some major work to get it in tip-top shape? Did your renovation require building permits? How about smaller renovations to make the space functional? These expenses are called leasehold improvements.
Leasehold improvements can be expensed in one tax year or taken as an asset and depreciated over time. How you deduct leasehold improvements on your taxes depends on the total cost of the improvements and your tax strategy.
Another thing to keep in mind: Leasehold improvements are attached to your business property. For example, a portable bookshelf is not a leasehold improvement, but built-in shelving is. If you can’t take it with you when you leave, it’s probably a leasehold improvement.
A few more examples:
- Built-in shelving and cabinets.
- Electrical work.
- Plumbing work.
- Carpeting and flooring.
- Permits needed for work.
- Architecture and design fees.
- Meals—but not entertainment
Oh dear… the tangled web that is business meals. Since the new 2018 tax law, the meal write-off has been hotly debated among tax professionals. The new tax law has some grey areas when to comes to writing off meals, but here’s what we know:
- Meals while traveling (as an owner or for an employee): 50% deductible
- Meals with employees for meetings: 50% deductible
- Meals for employees during work shifts for the convenience of the employer: 50% deductible (think doughnuts, bagels, granola bars, water, tea, and coffee)
- Meals with customers, suppliers, vendors, and associates: Perhaps 50% deductible. The new tax law is unclear about the deductibility of these meals. Always check with your tax preparer to get their take before claiming a new deduction.
What about entertaining your customers, vendors, or suppliers? Sadly, as of 2018, you can no longer write off the cost of that entertainment.
- Merchant processing fees
Chances are you accept credit cards in your shop. Many fees associated with processing credit cards are deductible, including fees from:
- Square, Clover, ShopKeep, and many other payment gateways and processors.
- Payroll expenses
These are expenses related to running payroll for your employees.
- Local, state, and federal payroll taxes.
- Payroll service fees, or in other words, the fees that you pay your payroll provider.
- Workers’ comp insurance.
- Professional fees
Legal and professional consultations for your business are deductible, including:
- Legal fees for an attorney or online legal service.
- Accountants and bookkeepers.
- Office expenses
You can write off general office expenses for the back- and front-end of your shop.
This is equipment you purchase for office use such as computers, tablets, printers, and copiers. (Keep in mind that equipment that costs over $2,500 may be considered an asset and depreciated over time rather than deductible at the time of purchase.)
Software and online services
One time and ongoing software subscriptions for things like cloud storage, POS systems, scheduling software, accounting software, music subscription services, and apps.
Consumable goods, or products that get used up, like office supplies. Specifically, this can include paper, pens, ink, and file folders.
Rent that you pay for your shop, storage space, and booth fees (if you also sell your merchandise or goods outside of your brick-and-mortar location) are all deductible.
- Repairs and maintenance
This includes ongoing repairs and general maintenance for your shop.
- Cleaning and janitorial services.
- Small repairs. (Remember, anything major is a leasehold improvement).
- Salaries and benefits
Wages and benefits that you provide to your employees are deductible, including:
- Wages, salaries, and employee commissions.
- Employee benefits like health insurance, 401(k) matches, HSA and flexible spending accounts, life and disability insurance.
- Shipping and packaging
Got people all over the world clamoring for your merchandise? Then write off those shipping expenses stat.
- Postage and subscription postage services.
- Delivery charges.
- Packaging materials like boxes, envelopes, packing peanuts, bubble wrap, packing tape, and labels.
Employees can’t do it all! A contractor is anyone you hire to perform a service for your business that is not an employee. If you pay this person more than $600 in a tax year you will need to file a 1099 return. You may hire a contractor that works as a:
- Graphic or web designer.
- Photographer or videographer.
- Offers some kind of specialty service.
- Shop supplies
General supplies needed to maintain your shop and sell your goods and merchandise falls into this arena. Depending on the type of shop you own and your industry, these expenses will vary.
- If you own a restaurant it could include small wares (items under $500), linens, order pads, kitchen towels and rags, paper goods (toilet paper, paper towels), hand soap, and cleaning supplies.
- If you own a boutique it could include bags, tissue paper, ribbon, register tape, pricing, and stickers.
- If you own a salon it could include towels, brushes, combs, products used for styling, and blow dryers.
- Telephone and communications
This is the cost of your landline or VoIP service for your shop.
Going to a trade show or conference? To meet potential vendors? A sales event? You can write off the costs as long as your trip has a business purpose and you’re away from the area where you typically work overnight. Specifically, you can write off:
- Airfare: The cost of your plane ride.
- Ground transportation: Like Lyft, Uber, taxis, public transportation, and rental cars.
- Lodging: This is the cost of a hotel, Airbnb, VRBO, or other short-term rentals.
- Local transportation: Not leaving town? You can still write off the cost of traveling within your local area for business purposes. Just like ground transportation, you can write off taxis, public transportation, Lyfts, and Ubers.
Deduct any utility bills you get for your shop, including:
- Heat and electric.
- Water and garbage.
- Security systems.
Are you partying it up in your shop yet? You should be. Knowing what you can deduct makes the tax-filing process way less stressful—and way more fierce.
Article Courtesy of Andi Smiles, Small business financial consultant, via our trusted payroll partner Gusto
Disclaimer: This is not to be taken as tax, legal, benefits, financial, or HR advice. Since rules and regulations change over time and can vary by location, consult a lawyer or HR expert for specific guidance.