20 (+1!) Small business tax deductions

Panna Kemenes

Small business tax deductions are expenses you make as a business owner that you can claim in tax rewards. Many common business expenses are regarded as necessary to the operations of the business. As such, these expenses can qualify you for tax discounts.

In this post you’ll discover exactly what you can save money on with deductions for small businesses.

Small business tax deductions you can save money with

As a small business owner, it’s highly likely that you can claim business expenses for taxes.

But what can I write off for a small business?

Expenses you can write off range from travel costs to office furniture. Use the following small business tax deductions checklist to clear up any doubts you may have as to what qualifies as deductible business expenses.

Quick small business tax deductions checklist:
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Utility bills

Utility bills for your business space are fully deductible. This means that you can pay less on your electricity, water, and even phone bills.

Personal use is excluded. If you make personal phone calls only from your place of work then you wouldn’t qualify for phone bill tax deductions.

Here’s the full list of qualifying utility bills according to the IRS:¹

  • Heat
  • Lights
  • Power
  • Telephone service
  • Water
  • Sewerage

Office stationery and supplies

A common business expense, but one that you might not consider tax deductible, is office stationery and related supplies. This can include everything from paper to pencils.

The IRS states that you can ‘deduct the cost of materials and supplies actually consumed and used during the tax year’. As such, if you work your way through office stationery quickly, you might be surprised at how much you could save with this minor but standard deduction.

Here’s an example of what’s included for this deduction:

  • Books (that you read during the tax year)
  • Professional instruments
  • Equipment
  • General stationery (pens, pencils, paper)

Office / business property rent

If you rent a space for your business, you can qualify for a tax deduction that will come from your rental payments. However, those who work from home can also qualify for home office deductions, provided that they pass the IRS eligibility test.

If your home is a place of work, consult the IRS Publication 587 for more information on relevant tax deductions for small businesses.²

This deduction is only available for the year you paid for the rent. There are various ways to qualify for this deduction, such as for the entire year’s worth of rent or for monthly payments you make.

Business insurance

If you work at home, you can deduct business insurance you have that covers the business part of your home. However, you can only deduct the business part of insurance that covers the tax year.

Travel expenses

IRS Publication 463 outlines travel expenses you can receive business deductions for. There are various conditions to meet to qualify, such as needing to sleep away from your ordinary place of work or needing to be away from your general area of your tax home to conduct business.

Marketing costs

IRS Publication 535 states that you can deduct most marketing costs, provided they are directly related to your business activity.

You can’t claim deductions if you put advertising on your car, as this doesn’t change the status from personal use to business use in the eyes of the IRS.

Interest

Self-employed workers can deduct tax from their car loans if they use the car for business. The amount is proportional to how much you use the car for business. The IRS uses the following example:

If you use your car 60% for business then you can deduct 60% as interest.

Bad debt

The IRS states that you can claim bad debt as a business expense on your Schedule C (1040) form or applicable business income tax return. The IRS provides the following as examples of bad debt:

  • Loans to clients, suppliers, distributors, and employees
  • Credit sales to customers, or
  • Business loan guarantees

Office furniture

Office furniture falls into the same bracket as office supplies, so also qualifies for tax deductions.

Software package subscriptions

You can deduct taxes from software subscriptions you pay for business use. To do so, you'll have to file it under ‘other common business expenses’ and ‘other miscellaneous expenses’ on the Schedule C tax document.

Machinery and equipment purchased for use in a trade or business

If you purchase, finance, or lease new or used business equipment, you can qualify for a Section 179 deduction.³ This allows you to deduct the cost of equipment when placed in service.

IRS Publication 463 outlines in detail how much you can deduce with leased equipment or machinery.

Car usage expenses for business

If you use your car for business, you can deduct taxes both according to your mileage and actual expenses to maintain the car. This extends to car parking and toll fees.

For tax year 2022, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 58.5 cents per mile.

Client entertainment

General entertainment expenses are nondeductible, yet there are exceptions. For example, you can deduct 50% of the cost of business meals if the food or drinks aren’t considered to be ‘lavish’ or ‘extravagant’.

You can deduct 100% of meal expenses if the food and drink are provided by a restaurant and are paid between December 31 2020 and January 1 2023. This extends to business clients you meet under a business pretext.

Inventory

Inventory isn’t a straightforward tax deduction. While you can receive a deduction for the cost of materials to produce inventory, there isn’t a deduction directly for storing inventory.

Taxes

Though it may seem odd, you can indeed deduct tax costs from the taxes you pay. This can include taxes at the federal or state level, as well as for personal local income.

It also extends to any real estate tax you may pay and sales taxes. If you’re an employer, you also qualify for deductions on certain employer taxes.

Legal or accounting professional fees

Legal or accounting professional fees are always fully deductible expenses.

Employee salaries

Employee wages are fully deductible, and this extends to bonuses and commissions. However, this isn’t the case for any sole proprietors, partners, or LLC members you work with.

Employee gifts

Employee gifts are deductible for either the full price or a portion of the price you paid. There’s a catch, though. The IRS states that there’s a $25 limit for each individual you give a gift to in the tax year.

Employee benefits

You can deduct taxes from some employee benefit programs. For example, this includes education programs, qualified retirement plan accounts, and dependent care assistance.

For those who are self-employed, it’s possible to claim personal deductions on their retirement plan contributions.

Independent contractor or freelancer costs

When you hire independent contractors or freelancers, you can fully deduct taxes. It’s necessary to provide contracted workers with a MISC-1099 form if they receive more than $600 for the tax year in question.

Bonus: Capital expenses

Capital expenses, such as startup costs, can be deducted but not in the conventional way.

To deduct these expenses that have benefits lasting longer than a year, you would need to claim periodic deductions for amortization, depletion, or depreciation.

For more information, consult IRS Publication 535 chapters 7 and 8.

Small business owners

How to claim small business tax deductions

To claim your small business tax deductions, here’s what you need to do:

  1. Fill out a Schedule C tax form (form 1040) to determine the taxable profit from your business
  2. Report your taxable profit on your personal 1040 form
  3. Calculate the taxes that you owe

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As small business owner, you’ll know that every cent saved counts. Small business tax deductions are one way to save money.

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Sources:

  1. Publication 535 (2021), Business Expenses | Internal Revenue Service
  2. Publication 587 (2021), Business Use of Your Home | Internal Revenue Service
  3. IRS issues guidance on Section 179

All sources checked June 10, 2022.


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