Tax deductions for small businesses are an essential part of any business owner’s income tax planning. As a small business owner, you’re eligible for some deductions that you would not be able to take if you were an employee.
You may also qualify for other deductions that aren’t available to self-employed people or independent contractors. Knowing which deductions you are eligible for and how to claim them on your taxes.
There are steps you can take to reduce your tax burden, and by taking advantage of these deductions and credits, you’ll be able to keep more money in your pocket. If you are a small business owner, you can benefit from using these 16 significant tax deductions for small businesses.
What Exactly Is a Tax Deduction?
Tax deductions are reductions in your taxable income. Deductions reduce the amount of money that you owe in taxes, so they can help you save money on your tax bill.
The IRS defines a tax deduction as an expense that reduces your taxable income. The keywords are “reduces” and “taxable income.” Tax deductions don’t reduce your total costs; instead, they allow you to deduct part of those expenses from your gross (total) income.
For example, if your business earns $100,000 in revenue and has $50,000 in expenses, it will be taxed on $50,000 of income. If you have $5,000 worth of business-related expenses, you can deduct those expenses from your $50,000 taxable income to arrive at your final figure — $45,000. What you make and what you owe is your “taxable income.”
Deductions come in many forms: business expenses, charitable donations, mortgage interest payments, and more. Tax deductions are an essential consideration for small businesses because they can lower your tax bill significantly.
How Does Tax Deduction Save You Money?
A tax deduction is an adjustment made to your taxable income. If you have an expense that doesn’t fall under one of the other allowable deductions (medical expenses, alimony, etc.), it may fall under a business tax deduction.
Deductions reduce your taxable income by specific amounts based on certain criteria set by the IRS. For example, if you’re self-employed or have a lot of medical expenses, then those expenses can count as deductions for your taxes. All deductions reduce your taxable income, meaning less money will be taken out from your paycheck for taxes each year.
For example, if you make $50,000 per year and have some business expenses that add up to $3,000, those expenses will be subtracted from your total income (or deductible). Instead of paying taxes on $50,000 in earnings, you would only pay taxes on $47,000 in payments! That’s why it’s important to claim every possible deduction when filing taxes as a small business owner: they could save you thousands of dollars every time you file your taxes.
The tax deductions available to small businesses can be a valuable tool for lowering your tax bill. These deductions can also help you use less of your profits to pay taxes, leaving more money in your pocket.
Staying On Top of Your Deductions
If you own a small business, you likely have many expenses to deduct from your income. However, with all the deductions available, it can be challenging to know what is legitimate and what isn’t.
That’s where bookkeeping comes in.
To stay on top of deductions, you need to keep good records. If you’re a small business owner, keep copies of your receipts and invoices. As a small business owner, you’ll also save paperwork related to your business vehicle and assets. Be sure to also keep letters from vendors.
One way to stay on top of your deductions is by using accounting software like QuickBooks. These programs allow you to keep all of your financial information in one place and automatically calculate the deductions you’re eligible for based on data from previous years. If you want everything done for you, you can hire an online bookkeeping service or accounting firm to keep all the records.
You may already know the many tax deductions if you own a small business. But it’s essential to be mindful of these deductions — and to make sure you’re keeping track of them — because they can help save you money when it comes time to file your taxes.
When you’re starting a small business, it can be easy to overlook the tax implications of your new venture. But understanding the basics of bookkeeping is one of the most important things you can do for your business.
There’s a lot to keep track of: invoices, receipts, bills and payments, salaries and expenses — not to mention the daily details of running a business. If you don’t keep good records, it’s easy to overlook critical deductions that could save you thousands in taxes each year.
If you want to claim tax deductions on your small business income, you’ll need to keep good records throughout the year. It’s also important to know what tax deductions are available to small businesses and which ones benefit entrepreneurs running their ventures.
If you’re ready to learn more about accounting, here are 16 tax deductions specifically for small businesses.
Advertising and Promotion
Advertising and promotion costs are 100% deductible. This includes the cost of advertising your business, designing a website, and more. This also includes things like:
- Hiring someone to design your company logo
- Shipping cards to clients
- Sponsoring a networking event
- Creating and launching a new website
- Costs associated with printing business cards
- Running a social media marketing campaign
However, you can’t deduct the cost of entertaining customers or employees at sporting events or concerts.
You can deduct 50% of your food and entertainment costs, but only if it’s directly related to your business and as long as they’re with clients or employees and aren’t excessive. If you buy a meal for a client or customer, the IRS requires that you have “more than a general expectation of getting income or some specific benefit at some future time.” In addition to this:
- The meal expense must be necessary to carry out your business goals
- The meal cannot be extravagant in any way
- The business owner must also be present during the dinner.
It’s also good to know that you can deduct up to 100% of the cost of providing meals to employees, such as burgers and drinks, if your team is working late.
Meals that you provide at office parties are also 100% deductible.
This is among the most popular small business tax deductions because it’s easy to claim. Keep track of all the costs and what you spend on meals, and you can keep some extra cash later down the line.
Business insurance is a considerable expense for small businesses. Fortunately, it’s also one of the most tax-deductible items on your list.
Business insurance can include general liability, property, casualty, workers’ compensation, etc. If you own your business, you’re responsible for paying premiums and deducting them from your taxes. But if you’re self-employed and work as an independent contractor, you’re not allowed to deduct the cost of insuring yourself.
The amount that can be deducted varies depending on your insurance policy and how much coverage it provides. The IRS allows you to remove a percentage of your premium payments for most business insurance policies — including fire, theft, burglary, and liability coverage — up to certain limits per year.
Business insurance deductibles may also include:
- Liability coverage
- Property coverage for your buildings, furniture, and equipment
- Vision and dental insurance for employees
- Workers compensation coverage
- Life insurance for employees
- Auto insurance for business vehicles
Having separate bank accounts and credit cards specifically for your business is always a good idea if you are a business owner. If you use your bank account to conduct business, you can deduct your payment fees.
These include monthly maintenance fees, ATM fees, wire fees, and overdraft fees. You can also deduct any expenses your bank charges for closing an account.
It’s important to know that you cannot deduct fees related to your banking accounts or credit cards as these are regarded as personal expenses.
Business Use of Your Car
Business use of your car can be a tricky deduction, but it can also save you money. If you need a business vehicle, the IRS allows you to deduct the cost of mileage, gas, maintenance, repairs, and depreciation of your car. The IRS also allows you to remove any tolls and parking fees.
The IRS allows the following deductions:
The standard mileage allowance allows small business owners to deduct 58.5 cents per mile for business miles driven in 2022, up from 56 cents in 2021. The IRS has specific rules about when to claim this deduction. To calculate your deductible expenses, multiply the miles driven for your business during the year by the rate set by the IRS.
Gasoline and oil costs. You can deduct what you paid for gas and oil during the year, but only if they’re used to generate revenue for your business.
Insurance premiums. You can deduct the cost of liability insurance, collision coverage, and comprehensive coverage (if your vehicle is used for business).
Repairs and maintenance costs. You can deduct expenses related to maintaining or repairing your vehicle (such as tires or oil changes) as long as they don’t improve its appearance or performance beyond other cars in its class. This includes any labor charges related to those repairs or maintenance work.
To deduct actual expenses related to your car’s business use, it’s essential to keep track of all vehicle operating costs, including mileage, gas, oil changes, and repairs. You can save a detailed log of your business miles by using an app that tracks your mileage, or you can construct a mileage log using appointment bookings and the like.
Note that the cost of driving between home and work is not deductible and is considered personal commuting expenses.
If you hire contract labor to perform services for your business, you may be able to deduct these costs as a business expense. Contractors include independent contractors who provide plumbing, landscaping, and accounting; they also include temporary employees who work full-time for a specific period.
It’s important to note that the IRS has strict rules about what constitutes an employee versus an independent contractor, so speak with a tax professional if you have questions about this category.
The contract must be in writing and signed by both parties, and the labor must be performed at the direction of the person who signs the contract. A written agreement between you and your employee describes their services and duties as required to substantiate employee status.
Also, remember that if you pay a contractor more than $600 for work completed, you’re required by the IRS to send them a Form 1099-NEC the following year.
Education costs are fully deductible when they add some value to your business. If you’re taking classes to improve your skills in your current business, then those education expenses may be tax-deductible. If they relate directly to your job, you can deduct the cost of tuition, books, and other required materials, such as travel expenses.
Education and job training programs can be deducted if they meet the following criteria:
- The education is designed to make you more valuable in the marketplace.
- Books tailored to your industry
- Workshops to increase your expertise and skills
- Transportation expenses to and from classes
You can deduct the cost of books and supplies required to take the course, but not any other expenses, such as travel expenses.
Home Office Expenses
You can take a home office deduction if you use part of your home exclusively for business purposes. If that’s the case, you can deduct the amount of your rent or mortgage interest and property taxes and utilities and maintenance costs related to that area.
Some employers provide their employees with a workplace, but if yours doesn’t, then you can’t claim this deduction.
You have to meet specific criteria to qualify for this deduction, however. For example, you must use the space regularly and exclusively for business purposes, and it must be your principal place of business or an entire office used by employees.
If you use your own money to finance a business, like through a loan or credit card charges, this interest can be deducted from your taxes. The IRS allows interest paid on loans used for any business purpose, including supplies, equipment, or other operating expenses, to be deducted as an expense.
If you use money from a loan or credit card to cover your business expenses, you can deduct the interest paid as long as you meet the following requirements:
- You are legally liable for the debt
- You and the lender have a genuine relationship
Legal and Professional Fees
If you have an attorney or accountant helping you with your taxes or other matters, these expenses are deductible against your gross income. Legal and professional fees are deductible when they’re related to your business.
For example, you can deduct the cost of professional advice like tax planning, estate planning, and other legal services. If you’re a limited liability company (LLC) or corporation, you can also deduct the cost of accounting services required for your business.
You can’t deduct the cost of personal legal bills or expenses that aren’t related to your business. For example, if you get sued for negligence by a client in your profession as a carpenter, that lawsuit is personal and not deductible.
Moving expenses are a standard tax deduction for small businesses. If you moved to a new location for business reasons, the IRS might reimburse you for your moving expenses. Moving expenses include:
- The cost of packing and shipping your belongings.
- The cost of travel and lodging to your new location.
- The cost of connecting or disconnecting utilities at your old residence.
- The cost of renting a truck or other large vehicle needed to transport your belongings.
Keep track of all receipts and travel documentation for this deduction.
If you rent a business location or equipment for your business, you can deduct the rental payments as a business expense. This includes rent, mortgage interest, and property taxes.
You’ll need to show proof of the cost and how it relates to your business — for example, by keeping a log of time spent in the space each day and showing how much time was spent working.
Salaries and Benefits
Salaries are likely the most significant expense for your business, so it’s no surprise that they’re tax-deductible. The amount you pay your employees is deductible as long as you have a reasonable salary for the work performed.
The IRS allows businesses to deduct reasonable salaries for themselves and other employees. The company can also remove any benefits it provides its employees, such as health insurance and retirement contributions.
These types of deductions are often overlooked by small business owners who focus on other aspects of their business, but they can add up fast and make a big difference when doing your taxes.
Telephone and Internet Expenses
If you use your phone or internet connection to conduct business, these expenses are tax-deductible. For example, if you have an office and use an internet connection to send emails to clients, this expense is deductible. You can also deduct costs associated with your smartphone if used for business purposes such as making or receiving calls or sending emails.
However, if you use your cell phone primarily for business calls, then in most cases, you can also claim a deduction for that portion of the bill — be sure to track how much time is spent on business calls versus personal ones.
The same goes for a landline at home or elsewhere: You can deduct the cost as an ordinary and necessary expense for that part of the bill related to work-related calls.
Internet access is another area where it gets complicated quickly because there’s no blanket rule about what percentage of usage is considered work-related. If you have a cable or DSL line and use it mainly for personal browsing but also do business online from time to time, then you may qualify for this deduction if most of your usage is related to work activities.
A trip to qualify as business travel has to be necessary and away from your tax home. This means that you or your employees travel away from the entire city or area where you conduct business, regardless of where you live.
It would help if you traveled away from your tax home for more than a day to qualify for this tax-deductible.
If you qualify, you can deduct all travel costs — airfare, taxis, train tickets, and car rentals — if they’re related to your business. You can even remove your meals while traveling and lodging expenses (including Airbnb) if you have to stay overnight on business.
Deductible, IRS approved business travel expenses also include:
- Travel costs to your destination and back
- Using your car while at a business location
- Any parking or toll fees
- Any other methods of transportation like taxis and Uber
- Any meals and lodging costs
- Other necessary expenses related to your business travel
You must keep records of all your expenses, details of your trips, and the business reasons for the journey.
Personal Tax Deductions for Business Owners
You’re not just paying taxes on your income as a business owner. You may also be able to deduct expenses related to your business from your tax return, as long as they are considered ordinary and necessary for your business to run.
The 16 tax deductions mentioned above can be claimed on Schedule C, but there are also other tax breaks that small business owners may qualify for and claim on their returns.
Child and dependent care expenses
If you have dependents who require child care services, you may be able to deduct those costs as business expenses. The IRS allows this deduction if you pay for the care of children under the age of 13 or disabled dependents who can’t take care of themselves outside the home because they’re physically or mentally unable to do so.
You can also deduct these expenses if you have a spouse or other qualifying person who is physically or mentally unable to take care of themselves outside the home.
Depending on your income, the amount you can deduct is worth between 20% and 35% of your allowable expenses. Allowable expenses are limited to $4,000 for one dependent and $8,000 if you paid for the care of two or more dependents.
If you’re a business owner, you may have the option to make contributions to a retirement plan. These contributions are tax-deductible, but they may not be deductible if your business is organized as a sole proprietorship or single-member LLC taxed as a sole proprietorship.
If your business is organized as an S corporation or partnership, these plans are usually deductible from your income taxes. If you’re self-employed, you may be able to deduct some of your retirement plan contributions. The money must be deposited into an IRA or a qualified retirement plan to qualify for this deduction.
Health Care Expenses
If you’re a small business owner, you may be able to deduct some of the expenses related to your health care. You can remove the following healthcare expenses:
Health Insurance Premiums. You can deduct the health insurance premiums you pay for yourself, your spouse, and your dependents on your income tax return. It would help if you delivered the dividends yourself and not through an employer or other employee benefit plan to qualify as a deduction.
Out-of-Pocket Medical Expenses. Eligible expenses include prescription drugs, co-pays, and co-insurance fees for doctor’s visits, ambulance services, hospital stays, nursing home care, etc.
The Bottom Line – Saving Money
As a small business owner, you may be eligible for various tax deductions. Not all small business owners are familiar with miscellaneous tax deductions. If you’re starting or running a small business, it’s essential to understand the basics of these deductions and how they can benefit your business. You can keep some extra money in your pocket come tax season.