Would you like to have your tax bill reduced?
A tax deduction, also known as a tax write-off, is an amount that you can deduct from your taxable income. Basically, tax write-offs give you the chance to lower your tax bill. However, the expense must meet the IRS criteria to qualify as a tax deduction.
Below is a list of tax deductions commonly available to self-employed businesses organized as partnerships or sole proprietorships. Some of these are directly connected to running a business, while others are more personal write-offs that a small business owner should know about.
To be honest, who wouldn’t want to have their tax bill reduced, right? That’s why we’ve decided to help you by creating this guide in which we rounded up the top 20 tax deductions for small business owners.
Without further ado, get ready to save some money!
1. Business Meals
As a small business, you are eligible to write off 50% of allowable food and drink purchases. This means that every time you meet with a potential client at a restaurant, you get to deduct half of the total cost. The tax deduction applies only to business-related meals, and you must keep the following documentation:
- The total cost of the meal
- Location and date of the meal
- The business relationship between you and the person or people you dined with
The easiest way to keep track of the business meal expenses is to have all your receipts organized with notes on the back with details of the meal.
2. Work-Related Travel Expenses
All business travel expenses, including airfare, rental car expenses, hotels, meals, dry cleaning, and so on, can be deducted at tax time. A complete list of deductible work-related travel expenses can be found on the IRS website. In order to deduct those expenses, your trip must meet the following criteria:
- The trip must be necessary in order to run your business.
- The place you go for work-related meetings must be away from your tax home, that is, the area or city in which your company performs its business.
- The trip must take more than a normal work day, and you also must rest on route or sleep.
3. Home Office Expenses
According to the IRS’ new simplified guidelines, both freelancers and home-based small businesses can write off 5 dollars per every square foot of their homes that are used for business purposes (up to a threshold of 300 square feet).
In order to qualify as a tax deduction, the area where you work must be used exclusively for business. This means that you cannot deduct the square footage of your living room if you perform your work duties at the dining table during the day. Also, you must use the home office on a regular basis as your main area for conducting business.
This tax deduction can also apply to freestanding structures. You can use a garage, studio, or even barn space as your home office, provided that the structure meets the “regular use and exclusive” requirements.
4. Business Insurance
You can also reduce your tax bill by writing off the cost of your business insurance. If you use a part of your house to run your business or have a home office, you can write off your renter’s insurance expenses as part of your home office deductions.
Most businesses are required to have some type of business insurance coverage because of industry regulations, state laws, or contracts. For instance, small businesses in New York City have to carry workers’ compensation insurance and provide disability benefits. As a result, the costs of the required insurance policies meet the ordinary, and necessary rules established by the IRS, and a business owner can deduct them.
5. Internet and Phone Expenses
The Internet, laptops, cell phones, and iPads have become more than ways for us to communicate or entertain ourselves: For many, these are now necessary business equipment. The IRS is well aware of the changes, so they came up with a tax deduction meant to help you write off the cost of some items used for business purposes.
This means the high-tech devices that help you do your work can pay for themselves come time for your income tax return. Usually, you can deduct only a part of the money spent on a cell phone because of personal use. Now, if you buy a separate mobile phone and also get a separate cell phone plan for business purposes only, you can deduct the entire cost.
Also, if half of your internet usage is work-related, you can deduct half of your internet expenses for the year.
Deducting depreciation is when you write off the cost of an item over the time you use it rather than deducting it all at once for a single tax year. If you need computers, mobile phones, tablets, or other electronic devices for your business, you can claim a tax deduction. Keep in mind that if the gadget costs more than $300, you won’t be able to deduct the full cost, but you can claim the decline in value.
Here is how to calculate depreciation:
Depreciation = Total cost of the item / Useful lifetime of the item
For instance, laptops, tablets, and mobile phones can lose 67% of their value after 3 years, while desktop computers get depreciated by 50% over 4 years.
Businesses usually write off long-term business investments that are more expensive, so they receive reimbursement for the expense over the entire time they used the item.
7. Business interest and bank fees
If you borrow money to support your business activities, you have to pay interest to the bank that gives you the loan. But as a business owner, you can write off the interest charged both on business credit cards and business loans. You can also deduct any additional fees and charges on your bank account and credit card used for work-related purposes, from monthly or annual service fees to overdraft and transfer fees.
This tax deduction also applies to transaction or merchant fees paid to third-party payment processors, such as Stripe or PayPal.
Keep reading to find out MORE tax deductions!
8. Advertising and promotion costs
A successful advertising campaign attracts customers by increasing awareness of your business and products. But having a good marketing strategy doesn’t come cheap, so as a business owner, you must spend some good cash on it.
The good news is that promotion and advertising expenses are fully deductible. This tax deduction applies for things like:
- Hiring a web designer to create a business logo
- The cost of printing brochures or business cards
- Buying ad space in online media or print
- Sending cards to clients
- Running a marketing campaign on social media
- Launching a new website
- Sponsoring an event
Note that you cannot write off the money spent on sponsoring political events or campaigns.
9. Work-related car use
If you use your car exclusively for business-related purposes, you can deduct all costs associated with maintaining and operating it. If you use your car for both work and personal reasons, you can only write off costs linked to the business usage of the vehicle.
This tax deduction allows you to claim the mileage you use for business purposes, either by writing off the actual miles traveled for work or by using the standard mileage deduction that offers $0.56 for every mile driven.
Keep in mind that this tax deduction doesn’t work for miles driven between your workplace and your home. These costs are classified as personal commuting expenses.
Any education expenses you made to increase your expertise and add value to your business are 100% deductible. In order to qualify for this tax deduction, the workshop or course must help you maintain or increase the skills that are necessary for your current business
Here are some examples of allowable business education expenses:
- Webinars and seminars
- Classes to improve business skills
- Subscriptions to professional or trade publications
- Books tailored to your field
- Workshops to increase your skills and expertise
- Transportation costs to and from classes
Note that any education expenses that aren’t relevant to your business field or that help you qualify for a new career, don’t qualify as a tax deduction.
11. Professional service fees
Any professional service fees that are required for running your business, such as accounting, legal, and bookkeeping services, can be tax-deductible. For instance, if you use bookkeeping or accounting software for your business, you can deduct the amount spent on those services. Other fees also qualify as tax deductions, such as those charged by lawyers, accountants, consultants, and architects, to name a few.
If you’re having trouble identifying whether a particular professional service expense is for personal use or work, these guidelines for professional and legal fees from the IRS website can help you establish the nature of the expense.
12. Salaries and benefits
If you run a small business, you can claim a tax deduction for the salaries, wages, vacation pay, bonuses, and benefits paid to your employees. There are a few conditions for deducting salary and benefit expenses:
- The employee cannot be a sole proprietor, LLC member, or partner in the business.
- The salary is necessary and reasonable.
- The salary and benefits are paid during the tax year.
- The employee provided the services delegated to them.
Any employee pay you write off as a business expense must be declared as income on an employee’s W-2 form, including commissions, bonuses, cash tips, or other forms of compensation.
13. Charitable contributions
There are many businesses that make charitable contributions, especially during the holiday season. If you own a small business, there’s a tax deduction that allows you to write off charitable donations that you make to allowable organizations.
If your business is set up as a partnership, LLC, or sole proprietorship, you can claim these expenses when you file your individual tax return. However, if your business runs as a corporation, you have to claim charitable contributions on your corporate tax return.
As of 2020, taxpayers who are also running small businesses can claim up to $300 of cash donations as a tax deduction on Form 1040. To write off more, the business owners must itemize deductions using the Schedule A that goes attached to Form 1040.
The IRS provides several tax deductions for investment expenses if that amount is spent to produce taxable investment income. Deductible investment interest only applies to interest you’ve accrued on a loan meant to help you produce future investment income. This includes dividends, interest, royalties, and annuities that you expect to increase in value.
Plus, if you borrow money to make investments, you can deduct the interest paid to the bank. You can write off the interest up to the point that it matches the amount earned from investing. You may also claim money you spent on investment advice.
Note that you cannot write off investment income that exceeds your investment income.
15. Debt Interest
We believe that the ideal way to run your small business is to do it completely debt-free. In most cases, debt dramatically increases the risk preventing it from growing. Also, debt is a financial burden that slowly sucks the life out of your business. If you’re not careful enough, business debt can cause you years of endless payments, years of stress, and even bankruptcy.
While it’s best to avoid this kind of scenario, if you’ve already obtained a load for business purposes (whether it’s a line of credit or a mortgage), then you should know that the interest you’re paying may qualify for a tax deduction.
16. Medical expenses
Because of the expense, many small businesses don’t want to purchase comprehensive health insurance for their employees, but they are willing to provide some health benefits. Since 2017, a health care law known as the 21st Century Cures Act has been offering employers the chance to offer qualified health insurance to their employees while avoiding ACA penalties.
This being said, an allowable small business can reimburse health insurance and other qualifying medical costs up to $5,300 per year for employees, and up to $10,700 for a family (these limits were for 2021).
The entire cost of health insurance must be covered by the employer.
17. Child and dependent care expenses
If you are paying someone to care for your child or another dependent while you’re at work, you may be entitled to claim the Child and Dependent Care Credit. To be eligible, the person who receives the card must be a spouse, a child (under age 13), or another dependent who’s mentally or physically incapable of self-care.
Depending on your income, the credit is worth somewhere between 20% and 35% of your qualifying expenses. There’s obviously a threshold of $4,000 if you pay for the care of one dependent and of $8,000 for the care of two or more dependents.
18. Moving expenses
If you decide to move for work-related reasons, you may qualify for a tax deduction that will help you reduce the relocating costs. In order to deduct these costs, your move must pass the distance test. Basically, your new job location must be at least 50 miles farther from your previous home than your former job location was.
All costs related to transporting supplies, business equipment, and inventory typically qualify for this tax deduction.
Relocating expenses that aren’t directly associated with the move of the business don’t qualify. This means that personal moving costs are exempt, while some exceptions may apply to military members.
19. Retirement contributions
As a small-business owner or freelancer, you’re fully responsible for funding your retirement plan. Fortunately, if you make contributions to an Individual Retirement Account, you can lower your taxable income for the year. Whether you contribute to a Roth IRA, Simple IRA, Keogh plan, or Solo 401(k), you get the chance to qualify for a tax deduction.
Retirement accounts must follow IRS regulations in order to be deemed tax-qualified. Keep in mind that if you have employees, all of them must benefit from the retirement plan you choose, not just you.
Also, your total IRA contributions cannot surpass the total income you earned that year, or the annual maximum contributions, whichever is less.
20. Startup expenses
If you launched your own business in the latest tax year, you can qualify for a tax deduction to write off up to $5,000 in startup costs you incurred during the process of setting up a new business.
A startup cost is considered tax-qualified if it’s a cost you would typically write off when running an existing business, but it has to be a cost you incurred prior to the day your business began. That can include marketing, travel, or training costs.
Pro tip: If you’re purchasing tangible assets for your business that will be used for more than one year, the expenses of these assets must be depreciated over their useful lifetime.
That would be the end of this article, but we have more information about other ways to legally cut your tax bill. Here’s our recommendation: 7 Tax Breaks For Homeowners And Home Buyers!