Every dollar counts when running a small business, including what you can save on your taxes. Knowing which expenses qualify as tax deductions can significantly reduce your taxable income and free up cash to reinvest in your business. Here, we’ll cover 15 small business tax deductions every business owner should know.
Understanding Tax Deductions
Tax deductions, or tax write-offs, are business expenses you can subtract from your total income before calculating how much tax you owe. This helps lower your taxable income, thus reducing the income tax you have to pay to the IRS.
For example, if your small business made $100,000 in income in a given tax year but had $20,000 in deductible expenses, you’d only be taxed on $80,000.
However, as a small business owner, knowing what qualifies as a write-off can be challenging. Tax deductibles need to be related to your business. Otherwise, the IRS might flag and audit your business. Keeping good records and receipts and tying different expenses to specific business purposes can help, along with working with a certified public accountant (CPA).
The Difference Between Tax Write-Offs and Tax Credits
A tax deduction reduces your taxable income, while a tax credit reduces your actual tax bill, dollar for dollar. So if you owe $3,000 in taxes and qualify for a $1,000 tax credit, you now owe just $2,000.
Tax credits are more valuable than deductions because they directly cut the amount you owe, regardless of your business income level or tax bracket. Some well-known examples include credits for hiring employees, investing in energy-efficient equipment, or offering healthcare coverage. You can find more information about credits and deductions for businesses here.
The Best Tax Deductions for Small Business Owners
There are several different types of deductible business expenses that you should be aware of as a small business owner. Most are necessary to run your business on a day-to-day basis, while some can help with long-term growth and scalability. Here are some essentials to include on your small business tax deductions checklist.
1. Home Office Deduction
While remote work isn’t as popular as during the pandemic, you can still gain some tax savings using a home office. However, this space must be used regularly and exclusively for business to qualify. The simplified method uses a rate of $5 per square foot, with a maximum size of 300 square feet. This equals a maximum deduction of $1,500. The regular method involves deducting the home office based on the percentage of the home that’s devoted to business use. You can read more about this here.
2. Business Use of Your Vehicle
If you have a business vehicle, there are additional deductions available. You can reduce your tax liability here in two ways: with the standard mileage rate or the actual expense method. You deduct the rate per mile with standard mileage, currently $0.70 per mile. So, if you took a business trip that was 1,000 miles, you could deduct $0.70 x 1,000 = $700. This covers all operating costs, including gas, depreciation, repairs, insurance, maintenance, etc. The actual expense method requires that you calculate each line item individually and include it on your tax forms.
3. Office Supplies and Equipment
Office supplies like pens, notebooks, printer ink, and postage are all tax-deductible. Larger purchases such as computers, printers, desks, or filing cabinets also qualify, as long as they’re used for business. However, depending on the cost and lifespan of the item, you may need to depreciate the expense over several years instead of deducting it all at once. Be sure to keep receipts and track purchases throughout the year for easy reference during tax season.
4. Business Meals
You can generally deduct 50% of qualifying business meal expenses, whether a lunch with a client or a dinner during a business trip. To qualify, the meal must be directly related to your business, and you should keep documentation of the expense. This includes the date, location, amount spent, and who you were dining with. Meals provided to employees or catered for in-office meetings may also be eligible. Just be cautious not to claim personal meals, as the IRS is strict about what counts as a legitimate business meal.
5. Travel Expenses
Transportation costs like flights, train tickets, and car rentals can be written off, as well as lodging, meals, baggage fees, and tips. The key requirement is that the travel must be primarily for business purposes. Vacations or side trips tacked onto business travel are not deductible. To help keep things separate, having a business credit card is recommended.
6. Salaries and Wages
If you have employees, the money you pay them in salaries, wages, bonuses, and commissions is tax-deductible. This also includes employer-paid benefits such as health insurance, retirement plan contributions, and certain fringe benefits.
7. Contract Labor / Freelancers
Payments to 1099 workers, such as freelance designers, virtual assistants, or consultants, are also deductible as business expenses. Just remember that if you pay a contractor $600 or more during the year, you’re required to issue a 1099-NEC form.
8. Utilities and Rent
The monthly rent is fully deductible if your business property is a rented office space or coworking space. Utilities associated with that space, including electricity, water, heat, internet, and business phone services, can also be written off. These costs are considered necessary for day-to-day operations and qualify as ordinary business expenses.
9. Depreciation
When your business makes a significant purchase, you may be unable to deduct the full cost in the year you bought it. Instead, you can recover the cost over time through depreciation. The IRS allows different methods, including the Section 179 deduction (which lets you deduct the full purchase price up to a certain limit in the same year) and bonus depreciation (which applies to new or used qualified assets).
10. Marketing and Advertising
Marketing and advertising costs are also 100% deductible and should be diligently recorded throughout the year. This way, when tax time comes around, you can maximize your write-offs. These include traditional advertising like newspaper ads, flyers, and business cards, as well as digital efforts such as social media campaigns, Google ads, and website development. Email marketing platforms, branding consultations, and even event sponsorships may also qualify. The IRS recognizes marketing as a legitimate business expense since it helps generate future business.
11. Insurance Premiums
Any business insurance premiums that you pay for can also be deducted. This includes general liability insurance, professional liability (malpractice), commercial property insurance, and cyber liability coverage.
12. Legal and Professional Services
Running a business often involves working with professionals like accountants, bookkeepers, and attorneys. Fees paid for these services are tax-deductible, provided they’re directly related to your business operations. This could include hiring tax professionals, a lawyer to draft contracts, or a consultant to help with HR compliance. As with other deductions, keeping itemized invoices and documentation for these services is important.
13. Education and Training
Investing in education to improve or maintain skills relevant to your business can pay off. Not just professionally, but at tax time, too. Deductible expenses include courses, workshops, webinars, certifications, and relevant business books or online training platforms.
However, the education must be directly related to your current business or profession; it can’t be used to qualify you for a new line of work. Therefore, it’s important to keep personal and business education separate. You may be able to file non-business-related education on your personal tax return, but it’s best to ask your CPA before putting it with your business tax write-offs.
14. Software and Subscriptions
Many small businesses rely on cloud-based tools to stay productive. Monthly or annual fees for software like QuickBooks, Adobe Creative Cloud, Slack, Microsoft 365, and project management tools are all deductible. The same goes for subscription services tied directly to your business, such as industry newsletters, domain hosting, or CRM platforms. As long as the software is used for work purposes, it counts and can be noted on your business’s tax return.
15. Self-Employment Tax
Finally, if you’re self-employed, you can also write off a portion of your self-employment tax. All individuals must pay 12.4% of their income for Social Security and 2.9% for Medicare, totaling 15.3%. Usually, an employer will cover 7.65%, and the employee will pay the other half. For self-employed individuals, the employer portion of the tax can be treated as a business expense.
Ready to Maximize Your Deductions?
Navigating small business tax deductions can feel overwhelming, especially when juggling day-to-day operations. However, understanding what you can write off and keeping good records throughout the year can significantly affect how much you owe come tax time.
If you’re unsure where to start or want expert guidance to ensure you’re getting every deduction you qualify for, Del Real Tax is here to help. Our experienced team specializes in small business taxes and can walk you through every step, from accounting to filing your business tax preparation and more. Contact us today to learn more.
