Top 10 Tax Deductions for Salon Owners
Knowing what you can write off can be hard for beauty pros. Allow us to help you out with the top ten tax deductions for beauty professionals.
- For a Limited Time – Special Deduction For Small Business Owners
For only a few more years, there is a special tax deduction called the Qualified Business Income Deduction (Yes, it’s a mouthful and yes, I have to say it nearly everyday). This is a 20% deduction of business net income. This deduction applies to nearly every entity type except C Corporations, which would be very rare for a salon. The exact criteria for this deduction is complex. Let’s be honest, your tax accountant is going to be doing the hard stuff anyways. Just know that it exists so you can make sure your CPA is claiming it for you. You’ll get extra brownie points with your accountant if you use the acronym QBID (pronounced “cue bid”). Proper phraseology would be, “Did you make sure to get my QBID?” or “How much was my QBID this year?”
Influencer Alert
One interesting item related to the beauty industry is a limitation on the QBID deduction for “Specified Service Trades or Businesses.” Beauty practitioners and salons do not fall under this limitation. However, anyone who is endorsing products or getting money from appearing at events does. In a world where hair stylists are turning into brand ambassadors or influencers, you should know that you need to set up a separate entity (such as an LLC) to do these endorsements so the money you earn from performing beauty services is kept separate on the tax return.
- Cell phone
Can you claim a deduction if you use the same phone for personal and business? Yes, but you have to split the bill based on how much is used for business and can only deduct that portion. 50% is pretty common. Anything over 75% is probably too greedy for the IRS’ tastes.
- Vehicles
You can’t deduct the miles to and from the salon because that is considered a commute. You CAN deduct miles driven for anything else business related. Getting products, travel for education or trade shows, running salon errands, etc. QuickBooks Online has mileage tracking on all its plans: super nice. If you don’t use QuickBooks Online, then MileIQ is a popular app and free up to 40 trips each month. #notsponsored
- Entertainment
Entertainment expenses were disallowed in most circumstances a few years ago. So, if you have a holiday party, the food is deductible, but any performances would not be.
- Food
Food can either be 0%, 50% or 100% deductible. Your everyday lunch is not deductible. If you’re taking anyone out to eat to discuss business, that’s 50% deductible. Food and beverage for an occasional work party for your employees is 100% deductible. Food and beverages available to the public, for example water bottles or snacks for clients, are also 100% deductible. Make sure you have two meal accounts in your bookkeeping software so you can separate which ones are 50% versus 100% deductible.
Special note for 2022: Meals were mostly 100% deductible in 2022 due to a tax break congress gave to encourage businesses to eat at restaurants. As we slide into 2023, be aware we’re back to the same old rules.
- Retirement plans
This could be a whole post by itself and you should definitely talk to your accountant in-depth about which retirement plans would be best for your exact circumstance. The quick summary is there are two types of IRAs: Traditional and Roth. Traditional gives you a tax deduction on what you contribute, but then you pay taxes on the principal and interest you withdraw when you retire. Roth does not give you a tax deduction when you contribute. BUT, when you retire and withdraw money, you do not pay taxes on the principal or interest. Given the historically low tax rates currently, Roth IRAs are a great investment choice.
- Rent
Of course your rent is deductible. You knew that. But did you know that if you’re renting a booth, you should be issuing your salon owner a 1099 if you paid more than $600 in rent if you paid that rent by cash or check? 1099s are due on 1/31. You can file them online using 1099online.com.
- Large Assets
Physical assets that cost more than $2,500 and will last multiple years sometimes have to be deducted over time. This includes items like furniture, computers, printers, plumbing, or other equipment. Check with your accountant about this one. Sometimes you can use the laws to deduct everything the first year. Sometimes it’s better to take the expense over time.
- Clothing
Any clothing that could be worn outside of work is not deductible. Uniforms with company logos are deductible. As much as we wish we could deduct it, clothes purchased for photoshoots and public speaking events are also not deductible.
- Travel
When traveling for business, there are lots of things you can deduct. Flights, rental car, hotel, meals, ride shares and other public transportation, and tips to service providers. - Other Deductions
These last few deductions don’t have special rules, but they’re good to remember:
- Booking Software
- Website hosting
- Insurance
- Education
- Supplies
- Cleaning services
- Licenses
- Salaries and benefits
- Advertising
- Utilities
The most important part about deductions is documentation. You have to be able to prove to the IRS that your deduction was a business expense. That’s why receipts are so important. Bank statements may show that cash was spent, but they don’t show what exactly was purchased so they are not sufficient for an audit. Make sure to keep your receipts saved to the cloud.
Do you need a CPA who understands the beauty industry and can explain things in plain English? I know where you can find one.