Entrepreneurs have no shortage of responsibilities — or business expenses — that can often feel overwhelming, especially during tax season. Fortunately, small business owners are often eligible for several business tax deductions. Here are 15 tax deductions that could help your business save some money this tax season.
[Read more: 5 Types of Tax Forms Every Small Business Owner Should Know]
Home office
The IRS allows business owners, including self-employed freelancers and independent contractors, who utilize a home office for their business to deduct certain expenses that go into furnishing and maintaining it. The amount you can deduct depends on the size of the home office in square footage.
For example, if your home office is one-quarter of the square footage of your home, you can deduct one-quarter of your rent or electricity. This space must be used exclusively for business, even if it's only a section of a room that has another use.
Keep in mind that you cannot claim the home office deduction for employees working from home for your company; it's only for self-employed, independent workers.
Rent and phone/internet services
If you don't qualify for the home office deduction, you may qualify for deductions on your rent. If you rent an office (outside of the home) or equipment for your business, those costs can be deducted as a business expense.
Similarly, companies that need telephone and internet services can deduct these costs from their business taxes. If you use your phone and internet for personal and business purposes, you can only deduct a portion based on a percentage of your business-related use.
Startup expenses
If you're in the prelaunch stage or your first year of operation, you can claim up to $5,000 in startup expenses. The costs that are usually considered tax-deductible include:
- Training expenses.
- Travel costs for obtaining employees, suppliers, and customers.
- Market research.
- Advertising expenses.
- Wages for contractors or consultants.
You need to successfully open your business in order to claim these expenses, and you cannot deduct funds spent on a failed business.
Repairs and maintenance
If you have a brick-and-mortar store, you may find that repairs and maintenance are necessary as the building ages. You can deduct repair and maintenance costs that are necessary to keep the building in working order. Examples include painting the exterior or interior of the building and sealing leaks or cracks.
It's important to note that these repairs must be solely to maintain the building rather than improve it. Changes like adding a new room are not typically tax-deductible, though they may fall under capital improvements.
Business insurance
Depending on your state, the majority of businesses are required to carry a few forms of business insurance, such as workers' compensation insurance, general liability insurance, and professional liability insurance. These types of insurance are considered necessary for a business's operation and can be deducted from your taxable income. Note that certain insurance types — such as loan protection insurance and corporate-owned life insurance — may not qualify for deductions.
Advertising and marketing
The IRS considers any "ordinary and necessary" costs relating to advertising and marketing to be tax-deductible. These costs include billboard promotion, online advertising, and the cost of producing advertising materials such as business cards or logos. Deductible costs can even include money spent on food or entertainment you provide to the public to market or promote your business. Small businesses cannot deduct any money spent advertising at political conventions or in political publications.
If you rent an office (outside of the home) or equipment for your business, those costs can be deducted as a business expense.
Legal and professional service fees
Any fees paid to a professional — such as an accountant, lawyer, or consultant — are deductible, so long as they pertain solely to your business. This includes business accounting and tax preparation fees for sole proprietors.
If you use a professional's services to assist in purchasing a depreciable business asset, these service fees cannot be deducted; however, they will be added to the tax cost of the said asset.
Employee salaries
All of your employees' wages are fully deductible, including any bonuses and commissions, as long as the payments are deemed ordinary, reasonable, and for services rendered. You can also deduct any paid time off for your employees.
This deduction can also apply to independent contractors; however, the contractors must be classified correctly to avoid penalties. Anyone who qualifies as a partner or proprietor is not covered under this deduction.
Employee health insurance
In general, the cost of providing health coverage to employees is deductible at the state and federal levels. For deducting health coverage reimbursements, your business should have a clearly outlined and documented plan explaining your reimbursement policy.
Since 2010, the Affordable Care Act has offered tax credits to small businesses to mitigate the cost of coverage. The qualification for those tax credits can vary from year to year. You can also file paperwork to allow your employees to pay their health insurance pretax, which ultimately reduces your payroll taxes as the employer.
Qualified benefits
Beyond health insurance, you can typically deduct several other employee benefits from your business taxes, including the following:
- Retirement plans, both for your employees and for yourself.
- Tuition reimbursement, up to $5,250 per employee per year.
- Continuing education costs, including any associated publications or materials.
- Paid leave for medical or personal reasons, typically between 12.5% and 25% of the leave amount you pay to the employee.
Charitable contributions
If your business donated to charity, you may be able to claim it on your tax return. The contribution must be a cash donation and benefit a qualified charitable organization, such as a religious organization or a nonprofit founded in the United States. You can deduct up to 25% of a donation to a church, synagogue, or veterans organization, for example.
If the business is a limited liability company, a sole proprietorship, or a partnership, these charitable contributions must be claimed on personal income tax forms — personal charitable donations can, in some cases, be 100% deductible.
Bad debt
A bad debt is defined by the IRS as a loss of a debt that occurred through the business or a liability that was closely related to your trade or business. This includes instances where you may have loaned money to an employee, vendor, or customer and did not see a return. Sales to customers on credit can also qualify as business bad debt.
To qualify for the deduction, you must prove that the debt was related to the business and not personal or nonbusiness debt. Nonbusiness bad debt could be personal credit card debt or unpaid loans.
[Read more: 9 Commonly Overlooked Small Business Tax Credits]
Business vehicle
Expenses from the use of a company or business vehicle, such as tolls, maintenance fees, licenses, and insurance, are usually 100% deductible; however, it's vital to keep detailed records of how the business is using the car, including tracking the mileage. Additionally, the costs must be divided based on mileage if you also rely on the vehicle for personal use.
Business entertainment
The events and meals you provide your employees and potential customers or vendors can also be tax-deductible. The amount you can claim depends on when and where you made the purchase.
Meals purchased from restaurants in tax years 2021 and 2022 are considered 100% deductible under the Consolidated Appropriations Act. However, effective tax year 2023, all meal and entertainment purchase deductions reverted back to the guidelines set forth in the Tax Cuts and Jobs Act, which state the following:
- Employee office parties are 100% deductible.
- Meals and snacks for employees at the office are 50% deductible.
- A business dinner with a client is 50% deductible.
Travel expenses
Work-related travel, regardless of its frequency, can often be a tax deduction for small businesses. To qualify, the person traveling must do so for longer than a normal day of work and must sleep away from home.
You can also deduct expenses for temporary work assignments of less than one year. If your team must travel to another state to complete a project for two weeks, you can deduct the reasonably related expenses. You can even deduct any travel expenses for conventions or conferences if they benefit the business.
How to save on taxes as a small business owner
Although taxes can feel overwhelming as a small business owner, there are a few ways to save yourself time and money. Follow these rules:
- Stay organized. Setting up a separate bank account or credit card for business expenses helps ensure all your information is in one place when tax season rolls around. You may also consider using bookkeeping software and switching to digital versions of receipts.
- Make estimated tax payments on time. If your business qualifies as an S corporation, you'll need to estimate your taxes for the year and pay portions of that estimated total quarterly. As a business owner, you need to do the same for your income tax and self-employment tax. These regular payments and estimations will keep tax season from being a surprise to you and your bank account.
- Max out your retirement plan contributions. Although retirement plan limitations vary, contributing the maximum amount to your retirement plan puts your money in a safe place to grow. It may be tempting to use your income for more immediate things, but be disciplined and only prioritize real emergencies and basic necessities over retirement contributions.
- Consider hiring a certified public accountant (CPA) or an enrolled agent. No online guide or quick tip round-up can give you the kind of specialized advice that a professional can. A CPA will get to know your business and understand how to best file your taxes every year.
[Read More: 10 Smart Small Business Tax Strategies That Will Save You Money]
For more information on small business taxes, check out our guide for tax season planning.
This article was originally written by Rachel Barton.
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