When you’re running a small business, the Colorado small business tax deductions count. Claiming all that is available for your small business will help reduce your income tax bill for the year. So, if you are still not aware of all the Colorado small business tax deductions that you can take advantage of, we will provide you with a list. 

Read on to know more about the type of Colorado tax write-offs you can take advantage of. 

What Is a Tax Deduction and Why Do I Need Them for My Small Business? 

Tax deductions, also known as tax write-offs, are taxable income reduction schemes that help lower a business or a person’s tax liability. The deductions cover the taxpayer’s expenses incurred during a tax year or period. To get the sum of the tax owed, the tax deduction is subtracted from the gross income. 

Why do tax deductions matter? Do they significantly affect a business’s tax liability? Yes, especially if you have the opportunity to use most of them during a tax year. Colorado taxable deductions also reduce your taxable profit, and you can enjoy the money you earn from it by giving yourself a nice vacation, for example. 

Best Colorado Small Business Tax Deductions 

The Colorado tax deductions are another way for small businesses to enjoy an additional profit. You can also start benefiting from these by working on your company’s expenses and identifying which of them are tax-deductible. Even independent contractors or self-employed individuals can do the same. 

Below is the list of the best tax deductions for sole proprietors, partnerships, and limited liability companies: 

Advertising and Promotions 

Advertising and promotion expenses account for 100% tax deductions. It covers the following: 

• Income paid to graphic artists to design advertising materials 
• Printing cost (brochures, leaflets, business cards, etc.) 
• Website launch 
• Email and social media marketing 
• Event organizing or sponsoring (except political campaigns) 
• Ad space purchasing (both online and print media) 
• TV, radio, magazine, or newspaper advertising 

Usually, advertising and promotions are classified as miscellaneous expenses and you need to document accurately how much you spend on them. This way, it would be easier for you to claim your tax write-off. 

Remember that the advertising and promotional activities must be business-related to qualify for tax deductions. 

Colorado Tax Write-Offs for Business Meals 

Food and beverages are primary commodities, so it’s reasonable to include them in the tax deductions. Originally, all business meals were 50% tax-deductible, but with the passing of the COVID-19 Tax Relief Bill, you can enjoy 100% tax deductions until 2022 if the meal is provided by a restaurant. It’s the government’s initiative to revive the restaurant industry. 

• The business meals tax deduction covers the following: 
• Meals consumed by employer and employee during work or business hours, or business meetings (50% tax-deductible). Restaurant-provided meals are 100% tax-deductible. 
• Snacks, coffee, and water (50% tax-deductible) 
• Meals provided in charitable activities (100% tax-deductible) 
• Free food for the public (100% tax-deductible) 
• Meals for clients (50% deductible if not extravagant)  
• Meals served in team-building events, office parties, and functions (100% tax-deductible) 
• Meals for business travels (100% tax-deductible until 2022) 

And the list goes on. It would be best to check with a CPA or tax expert to get a complete list of tax-deductible business meals, including the current percentage. 

Business Use of Car is Tax-Deductible 

If you are using your car for business, then the operating cost of it is tax-deductible. However, the deductible amount depends on whether you use it solely for business or business and personal. Only business-related operating costs are tax-deductible. 

In order for you to benefit from the Colorado small business tax deductions, make sure to track your car’s business-related mileage and expenses. The tax-deductible amount per mile was $0.575 in 2020. This year, the amount has dropped to $0.56. 

With regard to expenses, the tax deduction covers lease payments, car registration, insurance, repairs, gas, oil change, and tire. A tax expert can explain to you the limitations of business use for car tax deductions and help you calculate the amount. 

Learn more about Business Travel Deductions here!

Business Insurance Tax Deductions 

Business insurance is a must for entrepreneurs especially if the state law requires having one. If you are operating a for-profit business, the premiums you pay are tax-deductible. This would often fall under business expenses.  Business insurances include:  

• Health insurance 
• Dental and visual insurance 
• Business interruption insurance 
• Workers’ compensation 
• Professional liability coverage 
• Liability coverage 
• Property coverage (equipment, furniture, etc) 
• Auto insurance 
• Employees’ life insurance provided the owner is not a beneficiary 

Talk to your CPA to know more about qualified business insurance so you can enjoy the benefits.  

Colorado Small Business Tax Deductions Also Cover Bank and Credit Card Fees 

Separate company credit cards and bank accounts ease the tax filing process as you don’t have to sort business from personal expenses. It’s also easier for you to calculate the tax deductions on bank fees.  

Banks collect annual fees for credit and some debit cards, service charges, and transfer fees, among others. If you add them all up, you will realize that card and account maintenance costs are also high.  

It’s a good thing that the Colorado small business tax deductions also cover bank fees. As long as they are used solely for business-related expenses, you can enjoy the yearly tax deductions and add them to your profit. 

Tax Write-Offs for Legal and Professional Fees  in Colorado

Oftentimes, it is necessary for a company to hire external manpower to help run the business. These may consist of lawyers, financial planners, bookkeepers, accountants, tax experts, etc. Payments for these professionals can cost you but the good thing is they are tax-deductible provided that they perform work related to your business. More importantly, legal and professional services should be necessary and ordinary.  

Legal and professional services used for personal reasons are excluded. 

Tax-Deductible Salaries and Benefits 

The principal rule for Colorado tax write-offs is the expenses have to be ordinary, reasonable, and necessary. The employees’ compensation, which includes salaries, benefits, wages, bonuses, and commissions ordinary and necessary, qualifies them for tax deductions. Even more, if the compensation amount is reasonable.  

The other criteria include: 

• Services paid for have been provided or delivered 
• The compensation was paid during the current year 
• The employee is not a member of an LLC, a sole proprietor, or a partner 

The Colorado tax deductions for small businesses also cover: 

• Sick leave and vacation leave 
• Education Expenses
  
• Employees’ loans 
• Reimbursements 
• Monetary awards 

You should ask a tax expert to know more about tax-deductible employee compensations as issues like taxable cash methods and accrual methods may come up. The IRS may also present a different view of reasonable compensation, which you should familiarize yourself with to fully benefit from the tax deductions. 

The Cost of Contract Labors: Also Tax-Deductible?

In any business, there are always jobs that need to be outsourced. Sometimes, you hire an independent contractor to design and maintain your website or repair office equipment.  

Make sure to track these expenses because you can later deduct the labor cost as a business expense. This applies if you pay the contractor $600 or more during a tax year. Have them accomplish Form 1099-NEC not later than January 31 of the following year. 

Tax Write-Offs on Business Taxes and Licenses 

Business owners always face a number of fees and taxes paid regularly, including licensing to continue operating. It’s a good thing that despite these recurring expenses, you can still enjoy tax deductions as long as they are spent on your business. These taxes and licenses include:  

• State income taxes 
• Payroll 
• Sales tax 
• Personal property and real estate taxes 
• Business licenses  
• Excise taxes 
• Fuel taxes
  

Tax Deductions for Your Business Loans

Occasionally, as a business owner, you have to take out a loan from a lender or pay a few business expenses with your credit card. As much as you would like your company to be debt-free, such expenditures are ordinary and necessary. This means they are also tax-deductible. However, there are a few requirements: 

• You should be legally liable for the debt, which means the loan should be directly taken by you from a lender or a bank. Loans coming from a friend or mortgage under your parents’ name are not tax-deductible. 
• You and the lender should agree that the debt is repaid. Otherwise, it should be interpreted as a gift. 
• You and the lender should have a genuine creditor/debtor relationship. This excludes loans from family members. 

Loans can be taken for both business and personal purposes, but the interest must be split to determine the tax deduction. 

Tax Write-Offs on Depreciation Expenses 

This is a complicated topic that I could go on about for days, and unless you are a tax pro, you might get cross-eyed trying to read it. For major purchases, business owners can benefit from a deduction for depreciating assets. Talk with your tax experts to find out if you can benefit more from this tax deduction. 

Instead of a one-time tax deduction, depreciation expenses are calculated by spreading the total cost of expensive equipment, furniture, and other business assets over a number of years.  

According to the IRS, business owners can write the depreciation expense off in several ways: 

• De minimis safe harbor election for assets costing $2,500 or less 
• Bonus depreciation which is applicable to business property or software 
• Section 179 deduction is applicable to the cost of equipment, machinery, furniture, appliances, and computers. 

Tax deductions on depreciation expenses involve a lot of details and you have to be a pro to understand how it works. It would be much better to consult a professional CPA or tax expert. 

Colorado Small Business Tax Deductions on Telephone and Internet Expenses 

Nowadays, it’s rare for a business to operate without a landline, cellphone, or internet service. They are valuable for communicating with clients, addressing customers’ concerns, and reaching out to vendors. Such an integral part of the business is also tax-deductible.  

On another note, if you have a landline at home, which you also use for business, the cost is not tax-deductible. If you want to take advantage of the tax deduction, you can have a second phone line installed and use it exclusively for business purposes. 

Cellphones and Internet connections used for both personal and business matters may be qualified for tax deductions as well, but only business-related usages are covered. 

Tax Deductions on Rent and Moving Expenses 

Are you renting equipment for your business, office, or commercial space? Then you are qualified to collect tax deductions on rental payments, too.  The same goes for co-working spaces. Rent prices for commercial areas in Colorado can be high, and the rent you pay for your business (whether it’s a storefront or a spot in an office building) is tax-deductible. Make sure you keep track of these expenses every month or quarter, however, you pay them.

A home office is not qualified as a business expense, though. Rather, it will be considered a tax-deductible home office expense. You can also enjoy tax deductions in case you want to move your business equipment and supplies to a different location. 

Shipping and Postage Expenses for Businesses 

The year 2020 has seen growth in online businesses and remote office work due to the pandemic. It is likely that these will be carried through the coming years. Along the way, shipping and postage also experience a rise in number. It’s a good thing that shipping and postage fees are also tax-deductible.  

Make sure to keep all shipping records and track your expenses so you can apply for the appropriate tax deductions. 

Tax Deductible Travel Expenses  

For a time, travel became limited to minimize, if not stop the spread of COVID-19. In spite of this, the travel expense tax deductions remained.  

After the world took a pause, the cities are getting back to normal, and more and more people, especially business owners, employees, and professionals, are beginning to travel freely again. As you enjoy moving again, you should also take advantage of the Colorado small business tax deductions. 

Business travels that are necessary, ordinary, and reasonable are covered by tax deductions. This includes parking fees, taxi or Uber fares, toll fees, lodging, meals, and even dry-cleaning fees.  

That said, keep a record of all the expenses incurred while on a business trip so you can later submit them as attachments when you file your tax. 

Charity Deductions 

There are cases where money donated to charity is not tax-deductible, especially those that come from sole proprietorship companies, partnerships, and LLCs. Business owners, however, claim the charitable tax deduction through their personal tax returns.    

To enjoy tax deductions out of your charity contributions, you must identify which charitable organizations are qualified.  Donations can be in the form of cash, goods, items, or property. Any donations you make should come with the right paperwork to avoid problems when claiming your tax deductions.  

Additionally, the tax-deductible amount depends on what you donated. You can claim up to 30% of your adjusted gross income (AGI) for property donations, and up to 50% for cash donations.  

Meanwhile, employee benefits and bonuses, contributions to your employee’s health insurance and retirement plan, do not qualify for the tax deduction. The same goes for non-profit organizations. If you want to claim the tax deductions for these, you can do so under the business expense category. 

It is important to talk to an accountant who is also an expert in taxes to guarantee that you are donating to the right organization with proper documentation. Learn more about charitable contributions as a tax deduction here!

Home Office Deductions 

The pandemic forced millions, including small business owners and self-employed individuals, to work from home. If you are among those that have been affected, you may be wondering if there is a tax break for you.  

Fortunately, you may be qualified for the home office tax write-off. If you have a space at home that you use exclusively for business transactions, you can claim $5 per square foot of your home office space, according to Safe Harbor Law. Remember that this is applicable to only one home office space. 

The government sets criteria for you to qualify for this tax deduction. A professional CPA will be able to help you understand the requirements and give you tips to ensure approval. Learn more about home office tax deductions here.

Education Tax Credits  

Education or continuous learning plays a valuable role in growing your business and strengthening your workforce. Do you know that you can also get tax deductions on educational expenses? Examples of these are publication subscriptions, trade-related books, classes, workshops, business seminars, training, and transportation expenses. 

These activities should be related to the industry to which your business belongs and must be proven essential to business development. 

The IRS will look into these activities to determine if they pass the criteria and qualify you for tax deductions. If the classes or seminars you are attending will lead to a new career, outside of the nature of your business, it will not be qualified for tax deductions. Learn more about education tax credits here.

Finding Niche Specific Tax Deductions Is a Real Thing: A Look at Some Actual, Outrageous Write-Offs

There are many Colorado small business tax deductions that you may be qualified for, that you weren’t aware were available to your specific business. And with tax law changes, new potential deductions could arise. Some of them may come in small amounts but they can save you a huge amount of money when you add them up. Take a look at some “outrageous” (but yes, they were legal at the time) tax deductions below.

It may be outrageous but…

Pet Food

Do you have feral cats? If you need them to rid your business property or rental of rats, mice, snakes, or other creatures, that feral feline food is tax deductible. This deduction actually went to court. A junkyard owner deducted his feral cat food supply, stating that he needed those fluffy feral felines to maintain pest control at his place of business. The case made it to an IRS court, where the verdict came in for the cats. IRS law now recognizes pet food for feral cats as a legitimate business deduction. Be sure and save your kitty kibble receipts for the inclusion of your business deductions when you come in to meet with your Fort Collins accountants.

Moving Animals

When you change jobs, and it requires a move, most of those expenses are tax-deductible. But did you know the IRS will allow you to deduct any charges incurred with relocating your pet, in addition to yourself or your family? And, you don’t have to use the said pet as part of your business to claim this one. The crate for your cat, the cage for your domesticated tiger, or the hauling charge for your elephant, it’s all good in the eyes of the IRS.

Exotic Trips

Be sure to hold your next business meeting in a Canadian ski resort, at a Mexican Resort, or even on a private yacht outside of Bermuda. As long as your trip is for business, most locations count. Be sure and check with your Fort Collins tax service before booking your tickets and hotel, as not every location qualifies. For some strange reason, the IRS will allow you to hold a business event in Bermuda, Barbados, Costa Rica, Dominica, the Dominican Republic, Grenada, Guyana, Honduras, Jamaica, and Trinidad and Tobago. Meetings held in Canada, Mexico, and all U.S. possessions also qualify. Planning a business meeting in Germany or South Africa might be a lot of fun, but the IRS won’t allow you to deduct the trip as a business expense.

Private Airplanes

A couple had to buy a private airplane to check on their real estate holdings, as the commercial flight was severely limited as a travel option for its location. The IRS court said it was all good. Not only the private plane, but the fuel and other operating costs were deductible as a legitimate business expenses. This is relevant in Colorado, as many of our areas are quite remote. If you own rental property on top of a mountain to which there is limited commercial transportation available, ask your Fort Collins tax service about which types of transportation, including a plane, are tax deductible in order for you to care for your property.

Body Oil

Are you a professional bodybuilder? Your oil is tax deductible. A pro actually wrote off everything from his body oil to his vitamin supplements in his taxes. The court nixed most of the items but ruled that body oil is a legitimate expense for bodybuilders.

Cosmetic Surgery

A professional stripper was able to deduct the cost of her size 56 AA breast implants as part of her business expenses.

A Girlfriend

As your Fort Collins accountants, we don’t need you to bring your girlfriend in to prove she’s a business expense, but if you can verify that you hired her to take care of rental properties, redecorate business holdings, or oversee home repairs, she is indeed deductible. Well, in part, the fine dinners and spa trips don’t count. For the particulars, talk to your certified public accountant about using your partner as a tax deduction.

Free Beer

A very astute owner of a gas station decided to give his customers free beer in place of trading stamps. The IRS said it was all good.

A Swimming Pool

If you have a severe health condition, and your doctor prescribes exercise as part of your treatment, a swimming pool can be tax deductible. Exercise equipment, including a swimming pool, can be a tax write-off if it is prescribed for health care treatment. This can include a health club membership, exercise equipment, and fitness classes, and if kicking the cigarette and cigar habit is part of your health care treatment, those costs are tax-deductible as well.

Getting Serious: You May Be Missing Out on Deductions for Your Small Business Niche!

One of the biggest benefits of working with a CPA on your small business taxes is finding deductions specific to the type of work you perform. Laws, court cases, and business practices open up possibilities for legal, and rightful, tax deductions your business may be eligible for. However, finding and understanding all of these on your own is near impossible while effectively running your business. Allowing a CPA (who already has more foundational knowledge about tax deductions) to do the research for your niche or provide suggestions, opens up your time and possibilities for more write-offs and returns. Meanwhile, you get to focus on maximizing how efficiently you run your business. Trying to squeeze tax deduction work and knowledge into your already busy schedule, means you WILL miss out on tax deduction opportunities.

Enjoy A Wide Array of Colorado Small Business Tax Deductions but Ask A CPA Professional First  

It’s important to know the requirements and how you can make the most out of the Colorado small business tax deductions available to you. Some of them are straightforward, while others need more explanation to get the hang of. When something seems complicated for you, giving it up right away and turning to other tax deductions that you can understand is not a smart move.  

For one thing, you cannot guarantee that you will qualify for the others on your first go, especially if you are a new business owner. Business-minded individuals do not waste an opportunity to make money. If you need more explanation regarding a tax deduction that you want to profit from, consult a tax expert or CPA professional first.  

Professional CPAs are proficient in tax-related issues and other accounting functions – payroll, business analysis, bookkeeping, financial management, etc. These are the people that can guide you through a wide range of Colorado tax write-offs that you can take advantage of.  

Steven J. Wick & Associates P.C. is a company of accounting and tax experts who have long years of experience in the field. Our team has competently handled a variety of accounting tasks including tax deductions. We also offer payroll outsourcing services, tax preparation services, business consultancy, CFO services, and bookkeeping.  

We can help you with your business. Just call us right away for more information!