A qualified expense that you can deduct from your business’s gross income is what a small business tax deduction is. Tax write-offs should be maximized to assist reduce your company’s annual tax burden.
Many small business owners fail to take advantage of all available deductions. Here are some common small and home business tax deductions to assist you boost your profits.
How Do Tax Deductions for a Small Business Work?
Business tax deductions reduce your taxable income, lowering the amount of tax you owe the government as part of your tax return. It’s a good idea to consult an expert, such as a CPA, to learn how to claim the maximum deductions feasible. An accountant’s role is to understand what tax deductions are available and how they apply to your small business.
23 Small-Business Tax Deductions
Certain costs are unique to the type of business you run. However, we compiled a list of common deductible business costs that most small-business owners can deduct:
- Qualified Business Income
- Home Office
- Rent
- Marketing and advertising
- Office Expenses and Supplies
- Software Subscriptions
- Office Furnishings
- Utilities
- Repairs
- Inventory (Cosmetic Cost of Goods Sold)
- Automobile Expenses
- Expenses for Energy Efficiency
- Travel
- Business Lunches
- Employee Benefits and Salaries
- Freelance or Contract Work
- Employee Benefits
- Education
- Taxes
- Insurance
- Fees for Legal and Professional Services
- Bad Commercial Debts
- Debt Interest
#1. Qualified Business Income
The 2018 tax reform law altered the way deductions work for the majority of taxpayers, including small-business owners. Most small firms (sole proprietorships, LLCs, S corporations, and partnerships) can deduct 20% of their income from their taxes under the tax legislation. Woo-hoo!
Do you have tax questions about your small business? RamseyTrusted tax professionals are an extension of your company.
This means that, say you operate a small firm that makes $100,000 per year. Before ordinary income tax rates are applied, you can deduct up to $20,000.
However, there are some restrictions that may prevent you from claiming this deduction. The most significant impediment is the income cap that applies to some high-earning business owners, such as lawyers, doctors, and consultants. This deduction begins to taper down after your income surpasses the maximum ($164,900 for single filers or $329,800 for pass-through business owners filing jointly).
That all sounds complicated, but it’s far simpler than it appears. A pass-through entity is a small firm that is exempt from corporate income taxes. In essence, the firm owner pays taxes at their personal rate. You should consult with a tax professional to discover if you qualify for the pass-through entity deduction.
#2. Home Office
Do you have a spare room in your house or apartment that you use as a home office? Excellent news! If you use your home for commercial purposes, you may be eligible to deduct some expenses.
Mortgage interest, insurance, utilities, repairs, and depreciation are all included. Small-business owners can additionally deduct $5 for every square foot of their home office, up to a maximum of 300 square feet, under the simplified version of this deduction.
Keep in mind that you can only claim this deduction if you utilize your home office entirely for business reasons on a regular basis. It’s not going to fly if your office doubles as a guest room for your mother when she comes to town.
#3. Rent
With rent always rising, it’s wonderful to receive a respite someplace. Whether it’s a downtown storefront for your cupcake shop or an office space in a business complex for your travel agency, the cost of renting a location for your business is totally deductible.
#4. Marketing and advertising
You’re in luck if you’ve been handing out business cards like candy on Halloween! On your tax return, you can deduct the expense of printing the cards. In general, you can deduct whatever you use to promote your business and attract new clients, including social media ads and billboards. So, subtract away!
#5. Expenses and Office Supplies
Okay, regardless of the type of business you run, you’ll probably need to stock up on basic office supplies like printer ink, pens, and Post-it notes. The good news is that those supplies are completely tax deductible.
In addition, if you purchased a new laptop, smartphone, or other device for your small business throughout the year, you can deduct the whole amount of such purchases.
#6. Software Subscriptions
Today’s businesses, especially tiny businesses, rely heavily on software. If you need tools to run your business, such as a Microsoft Office subscription or point-of-sale software (such as Square), you can deduct these from your taxes.
#7. Office Furnishings
Quality office furniture is essential for creating a comfortable working environment for your employees, clients, and consumers. Fortunately, the IRS classifies office furniture as office supplies. That is, you can. ..Deduct it, you guessed it!
#8. Utilities
Uncle Sam understands that you need to keep the lights on in order to keep your business running (and vice versa). Everything you spend on company utility expenses is 100% deductible, including power, phone, internet, water, heat, and sewage.
#9. Repairs
Roofs leak, toilets break, and walls need to be repainted on a regular basis. If you need to repair components of your commercial property or do routine maintenance to keep things running smoothly, you can deduct those expenditures from your taxes.
#10. Inventory (Cosmetic Cost of Goods Sold)
Is your small business producing or purchasing things for resale? Uncle Sam actually allows you to deduct the cost of producing or purchasing those goods. This covers expenses such as raw materials, employee compensation, and storage.3 However, this deduction can be complicated, so consult a tax professional.
#11. Automobile Expenses
Many small-business entrepreneurs rely on vehicles to get things done, whether it’s traveling to and from client meetings or utilizing a pickup truck to transport heavy equipment between job sites. You can deduct car expenses from your income if you can prove you use it for business reasons.
There are two ways to claim this deduction now:
1. Make use of the normal mileage rate.
Add up all of the miles you drove for business and multiply by the IRS’ standard deduction rate to see how much you can deduct. As of 2022, the regular mileage rate is 58.5 cents per mile.4 This means that if you drive 5,000 miles for work in 2022, you can deduct $2,925 from your taxes.
2. Add up all of your actual car-related costs.
This alternative will necessitate a little more effort. You can calculate how much your car depreciated and how much you spent on gas, maintenance, tires, tune-ups, car insurance, and registration costs if you keep accurate records throughout the year. Then that will be your deduction rather than the distance.
Which choice you select is mostly determined by how fuel-efficient your vehicle is, how much it costs you to drive it during the year, and how thoroughly you have documented your car-related expenses. You should keep those receipts!
#12. Energy Efficiency Expenses
Do you own any business property or structures? If you’ve recently made energy-efficient improvements, such as changes to heating, cooling, and interior lighting, you could be eligible for a deduction of up to $1.88 per square foot.5 Not a terrible deal. To receive the entire deduction, you must demonstrate that you have reduced your energy consumption by 50%.
#13. Travel
Many small-company owners and workers spend a significant amount of time in airports and on business trips across the country. However, all of those plane tickets and hotel rooms might add up. The good news is that you can deduct most travel expenses for yourself and your employees—as long as the trip has a business purpose.6 Just save all of your receipts and keep meticulous records from your travels.
#14. Business Lunches
Wining and feeding business clients can be costly, but you’ll be able to split the bill with Uncle Sam. Business lunches are normally deductible at 50%, whereas entertainment expenses (such as athletic events or concerts) are not.
However, the expense of providing meals for your staff during a business picnic or holiday celebration is totally deductible.
#15. Employee Benefits and Salaries
If you have employees, everything you pay them, from salaries and wages to bonuses and commissions, is tax deductible. Contributions to their retirement plans, school assistance, and most other employee benefits are likewise tax deductible.
#16. Freelance or Contract Work
Freelancers and independent contractors can be a significant asset to your company. And, like regular employees, the expense of recruiting them is fully deductible. Nice! Simply ensure that you issue the appropriate IRS form (1099-NEC or 1099-K, depending on how you pay them) to any freelancer or contract worker who is paid $600 or more.
#17. Employee Benefits
You can also deduct up to $25 per person per year for employee gifts.8 So, if you’re feeling especially generous this Christmas season—or at other times of year—make sure to document and record your gift-giving.
#18. Education
You can deduct educational expenses in full as long as they contribute value to your firm. So, if you pay for classes, workshops, or seminars (or even books and subscriptions) to improve your business knowledge, you can deduct those expenses. However, keep in mind that any educational costs must bring value to your business. So, unfortunately, a couples cooking class on a date night does not qualify. Sorry!
#19. Taxes
Nothing beats deducting taxes from your taxes. While you cannot deduct federal income taxes, there are many different local taxes that you can deduct on your tax return. For example, state and local income taxes, sales taxes, real estate taxes, and personal property taxes can all be deducted up to $10,000.9
Other taxes that you can deduct include:
- Your self-employment taxes
- Franchise tax rates
- Excise Tax
- Workplace taxes
#20. Insurance
You should always defend your business, no matter what it is. And the best method to do so is to obtain the appropriate insurance. Many insurance premiums for your business, such as liability insurance, fire, and flood insurance, or theft insurance, are deductible.10 Medical insurance for your staff is also deductible under certain conditions.
#21. Legal and Professional Services Fees
You have the right to an attorney, as well as the ability to deduct any legal and accounting fees incurred as a result of your business operations.
#22. Bad Commercial Debts
We get what you’re thinking: Isn’t all debt bad? Yes, indeed. But that isn’t what we’re talking about here. When you lend money to an employee or a vendor and do not receive it back, you have a bad debt. The IRS considers credit sales to customers and corporate loan guarantees to be bad debt (if previously included in income).
You can claim bad debt as a tax deduction if you can prove it is a corporate debt rather than a personal problem.
#23. Interest on Debt
Listen, we believe that the ideal way to manage your business is debt-free. Debt is not a tool for corporate growth; it adds additional risk. Debt will steadily drain the life out of your company. And, if you’re not careful, business debt can cause years of stress, never-ending payments, and even bankruptcy.
If you’re considering getting a business loan, don’t. That’s plain stupid!
However, if you’ve already taken out a loan for business purposes, whether it’s a mortgage or a line of credit, the interest you’re paying on the loan can definitely be deducted from your taxes. Even though it appears to be a good deal, it is difficult to come out on top when debt is involved. This is one deduction we do not want you to make.
Pay off that loan as soon as possible, and never borrow another dime again!
How to Claim Small-Business Tax Deductions
Most small-enterprise deductions can be claimed on Schedule C and Schedule E forms (just make sure you fill out the correct form for your business type). You can use these forms to total all of your deductions and calculate your taxable income.
Remember that the more deductions you take, the lower your taxable income will be. And the less taxable income you have, the less you owe Uncle Sam. Got it? Great!
But, hey, this stuff becomes tricky—especially if you have employees in a tiny business. The last thing you want to do is miss out on tax deductions that might save you hundreds or thousands of dollars, or make mistakes that get you in hot water with the IRS. You should consult with a tax professional to ensure that everything is in order.
What Can Be Deducted as Business Expenses?
When paying their income taxes, small firms, freelancers, and entrepreneurs can deduct a variety of business expenses, including:
- Mileage and car expenses
- Office expenses, such as rent and utilities.
- Office supplies, such as computers and software.
- Premiums for health insurance
- Phone bills for business
- Courses in continuing education
- Business travels require parking.
- Business travel expenses such as flights, rental cars, hotels, and so on.
- Postage
What Is a 100% Tax Deduction?
A 100% tax deduction is a company expense that you can claim 100% of on your income taxes. Some of the expenses that are completely deductible for small enterprises are as follows:
In the year of purchase, furniture purchased completely for office use is fully deductible.
Computers, printers, and scanners are all fully deductible office equipment.
Business travel and its accompanying costs, such as car rentals, hotels, and so on, are fully deductible.
Gifts to clients and employees are fully deductible, up to a maximum of $25 per person per year.
If you are self-employed and pay your own health insurance premiums, you can deduct them entirely.
Your annual business phone bills are completely tax deductible.
What Is 1099?
A 1099 is an IRS tax form used to report income earned from sources other than employment, hence it is used by independent contractors, freelancers, and self-employed workers. The IRS website has more information on the 1099 tax form.
Can You Deduct Taxes From Previous Years?
As a small business, you may be allowed to deduct state and local taxes in the year they were paid, even if the taxes were paid in a previous year. However, you cannot deduct any federal taxes paid in a previous year.
How to Deduct Business Expenses
How you record your earnings and company tax deductions is determined by your business entity.
- Use a Schedule C form if you are a sole proprietor.
- Form 1065 is used for LLC partnerships.
- Form 1120 is for corporations.
Having trouble staying on top of your costs throughout the year? Consider adopting small business tax software to keep your finances organized and prepared for tax season. When building a list of deductible business expenses, remember to consult the IRS – that’s where you’ll discover the most current and up-to-date information.
My House is Rented. Do I Have a Home Office Expense Deduction?
Yes, if you fulfill all of the business usage requirements, you can claim the home office expense deduction. Based on the percentage of the home allocated to business use, a tenant can apply the simplified or actual expense method.
Is the Qualified Business Income (QBI) Deduction Available to C Corporations?
No. The IRS states that “income earned through a C corporation or by providing services as an employee is not eligible for the deduction.”
A C company must submit Form 1120: U.S. Corporation Income Tax Return, and is therefore ineligible for the deduction.
You also cannot deduct any amount of your wages paid by an employer and reported on Form W-2: Wage and Tax Statement. The deduction is available to independent contractors and pass-through businesses. They declare their percentage of business revenue on Schedule C: Profit or Loss from Business, which is attached to Form 1040: U.S. Individual Revenue Tax Return. Individual Income Tax Return.
Which Is Better for My Commercial Vehicle: Standard Mileage or Actual Expense?
It is determined by the amount of vehicle-related expenses you incurred during the year. For example, if you’ve spent a lot of money on maintenance (oil changes, brake pad replacements, new tires, etc.), car inspections, and registration, the real expense technique may be more useful.
Conclusion
It is critical to manage and report your spending throughout the tax year in order to claim small business tax deductions. Keeping meticulous records makes tax time easier, and if you are ever audited, you will have documentation of those spending.
When you go through the small company tax deduction checklist and file your business taxes, take stock of your business insurance coverage. An annual assessment will ensure that you have the correct policies in place and the right level of coverage for your company’s needs in 2023.
Whether your last year was one of development, loss, or simply holding the course, you may be able to save money on insurance. If you relocate to a different state or reduce your firm, for example, acquire fresh insurance estimates to see if you can receive a lower price.
Related Articles
- HOW TO WRITE OFF BUSINESS EXPENSES: All You Need To Know
- MORTGAGE INTEREST DEDUCTION: Can You Deduct Mortgage Interest?
- HOW TO REDUCE TAXABLE INCOME: Best Simple Strategies!
- What Can I Write Off On My Taxes In 2023? (Detailed Guide)
- HOME OFFICE TAX DEDUCTION: All You Need to Know
References
