20 Small Business Tax Deductions You Need to Know

Key Points

  • There are dozens of small business tax deductions you might be eligible for.
  • In the event of an IRS audit, keep invoices and receipts to substantiate your expenses.
  • In order to deduct business expenses, they must be “ordinary and necessary.”

Table of Contents

  1. Startup Costs
  2. Utilities
  3. Inventory
  4. Storage
  5. Auto and Travel
  6. Rent
  7. Office Supplies
  8. Advertising and Marketing
  9. Office Furniture
  10. Software Subscriptions
  11. Business Meals
  12. Insurance
  13. Bad Debt
  14. Interest
  15. Depreciation
  16. Taxes
  17. Employee Benefit Program
  18. Contract Labor
  19. Charitable Contributions
  20. Legal and Professional Fees

While running a small business means you get to be your own boss, choose your schedule, and do something you love, it also means you get to wear lots of hats and be responsible for things that you might not enjoy as much. There’s a good chance that anything associated with taxes might be stressing you out.

In this article, we’ll cover 20 small business tax deductions, ensuring you are putting your best foot forward this upcoming filing season. Note that we are just scratching the surface here, and you might qualify for other deductions outside of this list.

Small business owners, entrepreneurs, and gig economy workers who operate as sole proprietors and single-member LLCs report most of these deductions in Part II. Expenses section of Schedule C. If the expense does not have a separate line on the form, they can be detailed in Part V. Other Expenses section.

1: Startup Costs

The startup cost is a cost a business incurs before the day the active trade or business begins. Unlike outgoing business expenses, the IRS views startup costs as a capital expense or an investment in your business. If your total startup expenses are under $5,000, you can immediately deduct them. Any amounts over this threshold might need to be capitalized and then amortized over the period of 180 months.  

Examples:
  • Market research
  • Legal and accounting
  • Licenses and permits
  • Communications
  • Website
  • Office space
  • Insurance
  • Advertising and marketing
  • Equipment and supplies
  • Utilities
  • Inventory
  • Employee salaries

2: Utilities

If your small business has grown and is now using a warehouse or office location, utilities are a fully deductible expense. Even if you don’t have a separate office location, you might be able to deduct a portion of these expenses using the Home Office Deduction for Schedule C filers or Accountable Plan for corporate filers. This deduction is available to business owners who use space in their dwellings to run their businesses.

Examples:
  • Telephone
  • Internet
  • Gas
  • Electricity
  • Recycling
  • Water
  • Waste disposal

3: Inventory

Inventory is an asset owned by a business that is either ready to be resold in the current shape or form or needs to be further converted into goods to be sold for revenue. When you purchase inventory, it’s not an immediate write-off unless you operate on the cash basis of accounting. Small businesses that use accrual accounting are only allowed to move inventory to the cost of goods sold (an expense account) once the good is sold and the revenue is recognized.

Examples:
  • Raw materials
  • Overhead
  • Work in progress
  • Finished goods
  • Packing materials
  • Freight

4: Storage

Storage costs for your inventory or machinery are a business deduction as long as it is “reasonable, necessary, and ordinary” for the operation of your business, even if your warehouse is located in a different state.

5: Auto and Travel

You don’t always need to purchase a separate business vehicle to be able to deduct auto expenses. In fact, if you use a personal vehicle for business purposes, you can deduct expenses for the miles you drive or for the actual automobile costs. Moreover, travel for conferences, seminars, and client locations are all deductible.

Auto Examples:
  • Gas
  • Repairs
  • Maintenance
  • Tolls
  • Cleaning
  • Depreciation
  • Tires
  • Insurance
  • Registration fees
  • EV charging cost
Travel Examples:
  • Lodging
  • Airfare
  • Car rental
  • Tolls
  • Cleaning
  • Some meals

6: Rent

Rent can take on many different forms. If you own your office building, warehouse, or workshop, consider renting it out to your business to claim a deduction. Remember, if you are the landlord, you will be required to report any rental income on your individual return.

Examples:
  • Building lease
  • Office rent
  • Equipment lease
  • Vehicle rental
  • Tool rentals
  • Parking space rent
  • Event space rent
  • Home office rent via Home Office Deduction or Accountable Plan

7: Office Supplies

Any type of office supply is a qualifying business expense. There are too many to list them all. This could be a new pack of pens or computer paper. Even if the cost is small, such as $2 for a box of staples, you should still be including the amount as a business deduction to lower your taxable income. Get in the habit of deducting all qualifying expenses, regardless of the amount.

8: Advertising and Marketing

With the rise of social media, advertising and marketing are becoming more common for small businesses. Paying Google to promote your product or an affiliate to shoot a video are eligible business deductions.

Examples:
  • Marketing professionals’ fees
  • Social media
  • Photography
  • Business cards
  • Print ads in magazines and flyers
  • Direct mail
  • Billboard rent
  • Referrals
  • Video
  • Television Commercial
  • Influencer marketing
  • Content marketing
  • Email campaigns

9: Office Furniture

Whether you are purchasing a new desk or upgrading your old chair to an ergonomic one, office furniture is a common business deduction. If your business is just starting out, review startup cost rules. If the individual cost is under $2,500, you can deduct it right away. If more, the amount would need to be depreciated over 7 years unless you qualify for accelerated depreciation in the form of section 179 deduction or bonus depreciation, and then you can deduct all or a portion of your furniture in the year you purchase it.

10: Software Subscriptions

These days, you’re bound to have at least one software subscription for your small business. Online tools and apps often become fundamental parts of your business. Although many of them come with considerable prices, expensing these costs provides a significant benefit.

Examples
  • Accounting software
  • Time-tracking app
  • Project management portal
  • Inventory system
  • Productivity tools
  • Security
  • Office app
  • Communication and collaboration platform

11: Business Meals

Any type of meal that has an underlying business purpose, like taking a client or employee out to lunch, is 50% deductible. Unlike many of the other deductions, business meals are limited to 50% deductibility. There are exclusions to the 50% rule. Company-wide meals are 100% deductible. Think of a holiday party or bringing in pizza to celebrate hitting a certain milestone. It’s also important to note that entertainment, such as tickets to a sporting event, are nondeductible.

12: Insurance

Most small businesses will have an insurance policy. Insurance related to your business is fully deductible. In addition, you might be able to deduct a portion of your personal health insurance policies and receive a tax credit.

Examples
  • General liability
  • Workers’ compensation
  • Umbrella policies
  • Commercial auto
  • Commercial property
  • Business interruption
  • Cyber liability
  • Professional liability
  • Product liability
  • Errors and omissions
  • Property damage

13: Bad Debt

Bad debt occurs when you ship a product or complete a service, and the customer never pays. Generally, receivables over 90 days old should be evaluated for collectability. If you don’t believe your business will get paid back, you can write the amount off through bad debt if your business uses accrual accounting. The debt written off must be business-related.

14: Interest

Business interest expense refers to the cost of borrowing money to finance business activities, and it is deductible for tax purposes. Interest paid on loans and lines of credit are deductible if they relate to your business. Taking out a home equity line of credit to start your business wouldn’t qualify. Generally, the loan needs to be in your business’s name and the funds used for operations.

Examples
  • Mortgage
  • Business loans
  • Vehicle loans
  • Credit card
  • Line of credit

15: Depreciation

Depreciation is the process of writing down a capitalized asset over its useful life. For example, computers and vehicles have a useful life of 5 years, while office furniture and most equipment are depreciated over 7 years. As a good rule of thumb, assets over $2,500 should be capitalized. This doesn’t always mean you need to wait years to take the full expense. Instead, there are special depreciation options, like Section 179, that allow you to write off the entire cost of an asset in the year it’s placed in service.

16: Taxes

Taxes applicable to businesses are deductible. Paying your personal taxes out of the business would not be a qualifying deduction. On the contrary, making a pass-through entity election to pay state taxes at the corporate level would give way to a federal deduction.

Examples
  • Payroll
  • Real estate
  • Personal property  
  • State
  • Local

17: Employee Benefit Program

Employees are an integral part of the business. Payments made toward benefits such as health plans, gym membership, dependent care assistance, disability insurance, and life insurance are tax-deductible, but it also shows that you care about the people who help you build a successful business.

18: Contract Labor

Contract labor expenses are amounts paid to individuals who aren’t employees. Make sure you are deducting these expenses, even if you paid the contractor in cash, and always as for an invoice. Some contractors that you pay over $600 during the year need to be issued a 1099. Make sure you request a Form W-9 before the contractor begins work.

Example
  • Freelancer
  • Consultant
  • Seasonal worker
  • Temporary worker
  • Virtual administrative assistant
  • Construction workers building or remodeling a property
  • Electrician
  • Plumber
  • Carpenter
  • Painter
  • Florist

19: Charitable Contributions

Sometimes, businesses donate inventory, supplies, and cash to charities. Any donation to a qualified charitable organization can be deducted. This might include sponsoring a hole in a golf tournament or donating inventory to be auctioned off. There can be limitations to this type of deduction, so consult with an expert. This one deduction is reported on Schedule A.

20: Legal and Professional Fees

While some legal and professional fees might be included as startup costs, the IRS allows businesses to deduct legal and professional fees for “ordinary and necessary” expenses.

Example
  • Accountant
  • Lawyer
  • Bookkeeper
  • Wealth advisors
  • Fractional CFO
  • Engineer
  • Architect

Conclusion

Overpaying taxes eats into your profit. As a small business owner, you can empower yourself with the knowledge to navigate tax season efficiently and reduce your taxable income during the upcoming filing season.


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