Key takeaways

  • Small business tax deductions help you lower your taxable income, which may lower what your business owes
  • You can claim business deductions for utilities, rent, insurance, interest on a business loan, equipment and more
  • You can’t claim deductions for every business expense, including entertainment, charitable contributions or personal living expenses

Small business tax deductions can help you pay less in taxes for the year, putting much-needed capital back into your business bank account. In some cases, these tax deductions can save you thousands of dollars.

When claiming these deductions, you’ll want to consult a tax professional or use accounting software to ensure you’re filing your taxes properly. Follow this guide to learn more about which tax deductions you might be eligible for based on the IRS Tax Guide for Small Business.

A small business tax deduction is a category of expenses that you can deduct from your taxable income when you’re filing your business taxes. In short, tax deductions can help your business save money because you’ll be paying taxes on less income.

Bankrate insight

Let’s say a sole proprietor business makes $50,000 per year. That business owner deducts expenses for their insurance, marketing, rent and utilities, which total $10,000 per year. By claiming these deductions, the business owner will now only need to pay taxes on $40,000 of income.

Why should you use business tax deductions?

It might be easier to file taxes without thinking through which business expenses you can deduct. But if you claim business deductions, you could stand to save thousands of dollars on your tax bill. It can also help you keep your business finances organized since you’ll have to keep records of expenses.

Bankrate insight

You may want to consider building a business emergency fund or contingency fund that you can tap if you owe money for business taxes. This will help to bolster your business budget and keep operations flowing smoothly, even during tax season.

If your business spends money on the following spending categories, you could be eligible to claim it as a business deduction. Just be sure to check with a tax professional to ensure your business qualifies for it.

1. Utilities

Utility costs of your small business are tax-deductible, including water, electricity and phone. While your primary home landline is not deductible, any other phones your business might be using can get you tax deductions.

However, if you use the utilities for your home and business, you’ll need to estimate the percentage of utilities used for your business. This applies only if you are taking the home office deduction and using the regular method to claim actual expenses.

2. Marketing costs

All costs related to the marketing and promotion of your business are deductible. The marketing expenses that you can claim include:

  • Business cards
  • Online, print or TV advertising
  • Website and logo design
  • Website domain name
  • Website hosting
  • Business signs and flyers
  • Email marketing hosting service

3. Insurance expenses

Insurance policies held by the small-business owner are tax-deductible. This includes health insurance, property insurance, business continuation insurance, liability coverage insurance, auto insurance, employee life insurance, malpractice insurance, business interruption insurance and compensation costs.

4. Business property rent or home office

If you rent or lease your business property, the expenses could be eligible for deductions from your taxes as long as you don’t have equity in the property. You can also deduct expenses related to operating your business out of your home as long as the space in your home is:

  • The primary place where you conduct your business
  • A place where you conduct business on a regular basis
  • A place that you use exclusively for your business

You can calculate the amount of your tax deduction either by calculating the actual expenses such as mortgage, insurance and utilities that you use for your business or by using the IRS simplified method.

Regular method: You will need to calculate the percentage of expenses that are used for your business, such as 25 percent of utilities.

Simplified method: You simply take the square footage of your home and multiply it by a dollar amount set by the IRS. For 2023 tax purposes, you can deduct $5 per square foot up to 300 square feet total.

5. Loan interest

Small business loans are common, but did you know that the interest could be a business deduction? As long as the loan is from a legal, traditional lender and the money is used for covering business expenses, you could deduct the interest from your income tax. That said, you cannot deduct the interest on a personal loan, even if you use the personal loan for business expenses.

6. Transportation costs

When you have a vehicle for business use, the costs can be deducted from your income tax, either by deducting actual expenses or using the standard mileage rate.

Actual expenses: If you deduct the actual expenses, you can include these costs in your deduction:

  • Depreciation
  • Lease
  • Gas and oil
  • Insurance
  • License and registration
  • Parking fees
  • Car repairs

Standard mileage rate: If you deduct using the standard mileage rate, you’ll need to keep track of the mileage you travel for business. For 2023 taxes, you can deduct 65.5 cents per mile. For 2024 taxes, you can deduct 67 cents per mile.

If you have only one vehicle and use it for both personal and business needs, you need to separate the business use for mileage or actual expenses to be able to make a tax deduction.

Bankrate insight

A marketing business owner travels across the U.S. to meet clients. In 2023, they traveled 5,000 miles in total. They can deduct $3,275 ($0.655 for 2023 standard mileage rate x 5,000 miles) from their taxable business income on their 2023 tax return.

7. Inventory expenses

If yours is a kind of business that manufactures goods or buys them for resale, you could make certain income tax deductions. The eligible deductions include the cost of raw materials, manufacturing and storage, and labor.

8. Equipment and machinery lease or purchase

The cost of leased or purchased equipment and machinery is deductible, whether it is a printer, a truck or a toolbox. However, since these are not one-time costs, they are usually depreciated over many years rather than only in a single tax year.

That said, if you take the equipment purchase or lease as a section 179 deduction, you may be able to deduct the entire amount during the first year that you place the equipment in service. For tax year 2023, the section 179 deduction is limited to $1,160,000.

Bankrate insight

If you use an equipment loan to buy the equipment, you won’t be able to deduct the business loan payments. But you can write off the business loan interest.

9. Office equipment and supplies

These costs may be small, but they are still related to your business and, therefore, tax-deductible. Items including pens, paper, notebooks, desks, chairs and the expenses of office supplies and furniture can be deducted from your taxes as long as you keep track of them.

10. Travel costs

If your business requires you to travel frequently to seminars, trade shows, meetings or conventions, you can deduct these expenses from your taxes. Travel for business must keep you away from your regular place of business for more than a day’s work in order to qualify.

You can deduct the cost of travel to and from your destination, such as flights, taxis or renting a car. You can also deduct 50 percent of the cost of meals and lodging if your travel keeps you away from home and requires you to rest before you can continue traveling and working.

11. Labor costs

You can deduct payroll for employees and pay for independent contractors from your taxable income. If you are paying an independent contractor more than $600 in a tax year, you must also issue a form 1099-NEC, according to the IRS.

Labor deductions you can take include various forms of pay and employee benefits, including:

  • Employee payroll
  • Contractor payments
  • Bonuses
  • Sick or vacation pay
  • Property given to the employee as payment for their work
  • Travel expenses, including flights, meals and lodging
  • Health insurance plans
  • Dependent care benefits
  • Use of a business vehicle
  • Continuing education expenses

12. Bad business debt

Bad business debt is any amount of money that you have lent to a customer, employee or supplier that you cannot regain from them. Have you made credit sales to customers but were never paid? You can claim these expenses as bad debt and deduct them from your income tax. But you do need to have proof that it was indeed a business debt and not a personal loan.

13. Retirement plan

As a self-employed small-business owner, you can open your own retirement account or an account for your employees and make regular contributions to it. The money that your business puts into your or your employees’ retirement fund is completely tax-deductible and can be claimed on your income tax form. You can claim tax deductions if the retirement plan is one of these types:

  • Simplified Employee Pension (SEP) plans
  • Savings Incentive Match Plan for Employees (SIMPLE) plans

14. Books and education expenses

Newspapers, magazines or books related to or necessary for the operation of your business can be deductible. As long as you can prove that these publications are a requirement for your business, you may be able to deduct the expenses of everything from a newspaper to cable television.

If you require higher education or professional training for your business, you can deduct these as education expenses. However, you cannot deduct the cost of education intended for a different career or a purpose unrelated to your business.

15. Business taxes

The taxes your business incurs are deductible from your income tax. These include sales tax, real estate tax, or other local, state or federal business taxes. Federal income tax is never deductible on your business tax return.

16. Business gifts

If you give holiday gifts or other presents to employees or clients, you can deduct up to $25 per person in a given tax year, according to the IRS. You don’t need to include branded gifts that cost less than $4 in the $25 limit. You do need to prove the business purpose for the gift, such as giving a small gift to clients as a thank you for doing business with you.

If you reward your employees with a bonus, the full amount of the bonus can be deducted since the bonus is considered a form of employee pay.

17. Repairs

You can deduct repairs to your equipment or office space as long as they were meant to fix something broken or damaged and not merely a restoration or betterment. This includes repairs made to a rental property if that is your business.

If you make repairs to equipment or property that improve the property’s value and condition, you can depreciate the cost of repairs over time. Consult a tax professional to make sure that you’re depreciating the cost of assets correctly.

18. Software

If your business uses software subscriptions to get work done, you can claim it as a business deduction. The catch is that the software has to be ordinary and necessary for conducting your business. This means that you must need the software subscription to operate your business and that the expense is common among similar businesses in your industry.

19. Business entertainment

You generally can’t take business deductions for activities considered entertainment for your employees or customers, according to the IRS travel and gift rules. You can deduct up to 50 percent of meal costs for employees even at entertainment events if the meals are charged separately from the entertainment costs. Even though most entertainment doesn’t qualify, you can take deductions for:

  • Holiday office parties or picnics
  • Entertainment used as a form of employee pay
  • Business meetings, seminars or conventions
  • Entertainment that you sell to customers, such as shows

20. Legal and professional services and fees

Sole proprietors can deduct fees related to legal or professional services as long as they are an ordinary and necessary expense for the business. You must need these services to conduct business in your industry. This includes fees related to preparing your business taxes for the year.

You can’t deduct every business expense. The business expenses that you won’t be able to claim on your business taxes, according to the IRS Tax Guide for Small Business, include:

  • Personal living expenses and purchases
  • Charitable contributions
  • Dues to clubs
  • Activities considered purely entertainment
  • Lobbying, bribes or political contributions
  • Fines paid for breaking the law
  • Payments and legal fees for sexual harassment cases if the case requires a nondisclosure agreement
  • Federal income taxes

Bottom line

Businesses can take many tax deductions when filing their business taxes for the year, including deductions for travel, meal expenses, home office, rent, utilities, insurance and more. These deductions can help the business pay significantly less in taxes as it reduces its taxable income.

But be sure to consult a tax professional. Not all businesses can take deductions for every type of business expense. You’ll also want to consult IRS tax rules yearly, as the rules can change over time.

  • A business write-off is another term for a business tax deduction, meaning that the business can use an expense to reduce the taxable income that it has to pay. Business write-offs are often expenses that are deemed ordinary and necessary to the business. The business must need that equipment, service or expense in order to operate. Business write-offs can include deductions for home office, lease, utilities, business travel, car expenses, insurance and more.

  • How much an LLC can write off will depend on the amount of the business expense and whether the LLC can take the expenses as a tax deduction. To find the amount that an LLC can write off, the LLC owner can tally the list of tax deductions. The final amount is the total that the LLC can write off. LLCs can also write off up to 20 percent of their net income in addition to other deductions. This tax deduction is made available through the Tax Cuts and Jobs Act.
  • No, you do not need an LLC to write off business expenses. Sole proprietors are able to take business tax deductions provided that they operate a business during that tax year.

Read the full article here

Subscribe to our newsletter to get the latest updates directly to your inbox

Please enable JavaScript in your browser to complete this form.
Multiple Choice
Share.
2024 © Budget Busters Hub. All Rights Reserved.