One of the easiest ways of lowering your income tax bill is to claim all of the possible tax deductions for your small business.
What is a tax deduction?
A tax deduction (also known as a tax write-off) is a business expense you can deduct from your taxable income. You take the amount of the expense and subtract it from your taxable income. Basically, tax write-offs can help you pay a smaller tax bill when tax season arrives. It is important to note that the expenses must fit the IRS criteria of a tax deduction.
Below are 17 tax write-offs commonly available for sole proprietors, partnerships, and LLC’s. We’ll explain how some are directly related to running a business, and some are geared more towards personal deductions every small business owner should be aware of.
17 of the Most Common Small Business Tax Deductions
Advertising and Promotion
The cost of advertising and promotion is 100% deductible. However, you cannot deduct amounts paid to influence legislation (ex. lobbying) or sponsor political campaigns or events. Advertising and promotion write-offs include:
- Hiring someone to design a business logo
- Cost of printing business cards or brochures
- Purchasing ad space in print or media
- Sending cards to clients
- Launching a new website
- Running a social media marketing campaign
- Sponsoring an event
Generally, you are able to deduct 50% of qualifying food and beverage costs. To be eligible:
- The expense must be an ordinary and necessary part of carrying on your business
- The meal cannot be lavish or extravagant under the circumstances
- The business owner or an employee must be present at the meal
You can also deduct 50% of the cost of providing meals to employees (such as buying pizza for dinner when your team is working late). Meals provided at office parties and picnics are 100% deductible. From Jan. 1, 2021, through Dec. 31, 2022, a business may claim 100% of food or beverage expenses paid to restaurants, assuming the business owner (or employee) is present when provided and the expense is not lavish or extravagant under the circumstances. For all other entertainment and business-meal expenses, the 50% meal deduction would still apply.
It is critical to keep documentation for the amount of each expense such as the date, the place of the meal, and the business relationship of the person you dined with. A great way to do this is to write down the purpose of the meal and what you discussed on the back of the receipt.
You may be able to deduct the premiums you pay for business insurance. This includes:
- Property coverage for your furniture, equipment, and buildings
- Liability coverage
- Group health, dental and vision insurance for employees
- Professional liability or malpractice insurance
- Workers compensation coverage
- Auto insurance for business vehicles
- Life insurance that covers employees, as long as the business or business owner is not a beneficiary on the policy
- Business interruption insurance that covers lost profits if your business is shut down due to fire or another cause
Business Interest & Bank Fees
Separating bank accounts and credit cards for your business is critical. If your bank or credit card company charges annual or monthly service charges, transfer fees, or overdraft fees, these are deductible. You can also deduct merchant or transaction fees paid to a third-party payment processor, such as Venmo, Cash App, PayPal, and more. You cannot deduct fees related to your personal bank accounts or credit cards.
Business Car Usage
If you use your vehicle solely for business purposes, then you can deduct the entire cost of operating the vehicle. If you use it for both business and personal trips, you can only deduct the costs associated with business-related usage. There are two methods for deducting vehicle expenses, and you can choose whichever one gives you a greater tax benefit.
Standard mileage rate: Multiply the miles driven for business during the year by the standard mileage rate.
Actual expense method: Track all of the costs of operating the vehicle for the year (including gas, oil, repairs, tires, insurance, registration fees, and lease payments), multiply these expenses by the percentage of miles driven for business.
Both methods require that you track your business miles for the year. You can keep a detailed log of your business miles, use an app to track your trips (such as the QuickBooks Mobile App), or reconstruct a mileage log using other documents, such as calendars or appointment books. If you keep a mileage log, clearly document the miles driven, time and place, and business purpose of your trip.
You cannot count the miles driven while commuting between your home and your regular place of business, these are considered personal commuting expenses.
When you hire freelancers or independent contractors for your business, you can deduct their fees as a business expense. If you pay a contractor $600 or more during the tax year, you’re required to send them a Form 1099-NEC by January 31st of the following year.
Education costs are 100% deductible if they add value to your business and increase your expertise. In order to decide if your class or workshop qualifies, the IRS will look at whether the expense maintains or improves skills that are required in your current business.
Examples of valid business education expenses:
- Classes to improve skills in your field
- Seminars and webinars
- Subscriptions to trade or professional publications
- Books tailored to your industry
- Workshops to increase your expertise and skills
- Transportation expenses to and from classes
Any education costs that would qualify you for a new career, or costs related to education outside of the realm of your business, don’t qualify as business tax deductions.
If you use a home office for your business, you may be able to deduct a portion of your housing expenses against business income. There are two ways to deduct home office expenses.
Simplified method: You can deduct $5 per square foot of your home that is used for business, up to a maximum of 300 square feet.
Standard method: Track all actual expenses of maintaining your home, such as mortgage interest or rent, utilities, real estate taxes, housekeeping and landscaping service, homeowners association fees, and repairs. Multiply these expenses by the percentage of your home devoted to business use.
To qualify for the home office deduction, you need to measure up in two areas:
- Regular and exclusive use. You must regularly use your home office exclusively for conducting business activities. You don’t need to dedicate an entire room to your business, but your work area should have clearly identifiable boundaries. You may want to keep photos of your home office workspace with your tax documentation in case the IRS selects your return for audit.
- Principal place of business. Your home office must be your principal place of business. This means you spend the most time and conduct important business activities here. If you use the standard method for calculating your home office deduction, you’ll need to file Form 8829 along with your Schedule C.
When you purchase furniture, equipment, and other business assets, the accounting rules require you to spread the costs of those assets over the years you’ll use them (rather than deducting the full depreciation all at once).
Expensing these items upfront is more attractive because of the quicker tax benefit. Fortunately, the IRS gives business owners options to write off the full cost in one year.
De minimis safe harbor election: Small businesses can elect to expense assets that cost less than $2,500 per item in the year they are purchased. You can read more about the de minimis safe harbor election in this IRS FAQ.
Section 179 deduction: The Section 179 deduction allows business owners to deduct up to $1,040,000 of property placed in service during the tax year. This includes new and used business property and “off-the-shelf” software. The Section 179 deduction is limited to the business’s taxable income, so claiming it cannot create a net loss on your return. However, any unused Section 179 deduction can be carried forward and deducted on next year’s return.
Bonus depreciation: Businesses can take advantage of bonus depreciation to deduct 100% of the cost of machinery, equipment, computers, appliances, and furniture.
If you purchased a new vehicle during the tax year, the IRS limits write-offs for passenger vehicles. In the first year, if you don’t claim bonus depreciation, the maximum depreciation deduction is $10,000. If you do claim bonus depreciation, the maximum write off is $18,000.
When take out a loan or use a credit card to cover business expenses, you can deduct the interest paid to your lender or credit card company if you meet the requirements:
- You are legally liable for the debt.
- Both you and the lender intend for the debt to be repaid.
- You and the lender have a true debtor/creditor relationship.
The IRS tends to examine loans between related parties (such as family members). If you use the accrual method of accounting, you cannot deduct interest owed to a related person until the payment is made. If a loan is partly business and partly personal, you must divide the interest between the business and personal parts of the loan.
Legal (and professional) fees that are necessary and directly related to running your business are deductible. This includes fees charged by lawyers, accountants, bookkeepers, tax preparers, and online bookkeeping services. If the fees include payments for work of a personal nature (ex.making a will), you can only deduct the part of the fee that’s related to the business.
Businesses are able to deduct the cost of moving business equipment, supplies, and inventory from one business location to another. Be sure to keep detailed records so you can support all costs related to your business move.
If you rent a business location or equipment for your business, you can deduct the rental payments as a business expense. Rent paid on your home can not be deducted as a business expense, even if you have a home office. That rent can be deducted as a part of home office expenses.
Salaries & Benefits
Salaries, benefits, and even paid time off to employees are generally tax-deductible if you meet these requirements:
- The “employee” is not the sole proprietor, a partner, or an LLC member
- The salary is reasonable, ordinary, and necessary
- The services were actually provided
You can also deduct various taxes and licenses related to your business that include:
- State income taxes
- Payroll taxes
- Personal property taxes
- Real estate taxes paid on business property
- Sales tax
- Excise taxes
- Fuel taxes
- Business licenses
Telephone and Internet Expenses
If telephone and internet services are integral to your business, they can be deductible business expenses. If you use a landline at home, you cannot deduct the cost of your first line, even if you use it solely for work. However, if you have a second landline devoted to the business, the cost of that line is deductible.
If you use your cell phone and internet connection for both personal and business reasons, you can only deduct the percentage allocable to business use. Keep an itemized bill or other detailed records to prove the amount of business use in case your return is audited.
For a trip to qualify as business travel, it has to be ordinary, necessary, and away from your tax home. Your tax home is the entire city/area in which you conduct business, regardless of where you live. You need to travel away from your tax home for longer than a normal day’s work, requiring you to sleep or rest en route.
Deductible, IRS approved business travel expenses include:
- Travel to and from your destination by plane, train, bus, or car
- Using your car while at a business location
- Parking and toll fees
- The cost of taxis and other methods of transportation used on a business trip
- Meals and lodging
- Dry cleaning while on a business trip
- Business calls
- Shipping of baggage and sample or display materials to your destination
- Other similar ordinary and necessary expenses related to your business travel
Keep detailed records of the amount of each expense, as well as dates of return/departure, details of the trip, a mileage log if you drove your own vehicle, and the business reason for the trip.
Personal Expense Deductions Explained
All deductions mentioned above can be claimed on Schedule C or Form 1065, but there are a few other tax breaks small business owners commonly claim on their individual returns.
Sole proprietorships, LLCs, and partnerships cannot deduct charitable contributions as a business expense, but the business owner may be able to claim the deduction on their personal tax return.
To qualify, the donation must be made to a qualified organization.
Child and Dependent Care Expenses
If you pay someone to care for a child or another dependent while at work, you may be able to claim the Child and Dependent Care Credit. To qualify, the person receiving must be a child (under age 13) or a spouse or other dependent who is physically or mentally incapable of self-care.
The credit is worth between 20% and 35% of your allowable expenses, depending on your income. Allowable expenses are limited to $3,000 for the care of one dependent and $6,000 if you paid for the care of two or more dependents. IRS Publication 503 provides more information on the Child and Dependent Care Credit. You’ll need to attach Form 2441 to your Form 1040 to claim the credit.
You can deduct contributions to employee retirement accounts as a business expense, but business owners who contribute only to their own retirement funds claim the deduction on Schedule 1 attached to their Form 1040. The amount you can deduct depends on the type of plan you have.
Health Care Expenses
You can deduct out-of-pocket medical costs, such as office co-pays and the cost of prescriptions. These costs are included on itemized deductions on Schedule A.
Self-employed business owners can also deduct health insurance premiums for themselves, their spouse, and dependents on Schedule 1 attached to their Form 1040. However, if you are eligible to participate in a plan through your spouse’s employer, then you can’t deduct those premiums.
Tax deductions are an incredible way to help minimize the amount of tax you have to pay. Great record keeping will also help ensure you get to keep the deductions if the IRS ever conducts an audit. Always remember to separate your personal expenses from your business expenses, and keep in mind there are certain areas where personal expenses can qualify as a business expense.
If you ever need assistance with your bookkeeping or taxes, the team at Southern Payroll & Benefits is always here to help.
This information should not be taken as tax advice. Since tax rules change over time and can vary by location and industry, consult a CPA or tax advisor for specific guidance.