Want to reduce your tax bill? Make sure you’re aware and taking advantage of tax write-offs…
As a business owner, you’re entitled to certain tax write-offs or tax deductions that reduce your taxable income and overall tax owed.
Unfortunately, the rules for tax deductions can be complicated and change often. So, knowing what expenses you can deduct can be tricky. For example, the Tax Cuts and Jobs Act of 2017 eliminated entertainment as a tax write-off entirely.
The good news? This post will help you learn about almost everything you need to know about tax write-offs to help you master your taxes and reduce your total tax bill, including:
- What tax write-offs are
- How to claim write-offs
- 17 common small business tax-deductibles
What Is a Tax Write-Off?
A tax write-off, also known as a tax-deductible, or deductible expense, is an expense that reduces your taxable income, so you pay less tax. These expenses include everything from rent, travel, and supplies to dues, interest, and marketing.
For an expense to be tax-deductible, it needs to meet certain requirements. You’ll learn more about these requirements later when we detail 17 everyday deductible expenses.
Tax Write-Offs vs. Tax Credits
A tax write-off is often confused with a tax credit, but it’s not the same thing. A tax write-off reduces your taxable income. You then pay tax on that income based on what tax bracket you fall into.
For example, if your annual gross income is $110,000 and your deductions are $10,000, your taxable income is $100,000. If you assume a tax bracket of 25%, you pay $25,000 ($100,000*25%) in taxes instead of $27,500 ($110,000*25%), which is a tax saving of $2,500.
Write-offs become increasingly more valuable as your income increases because when you fall into a higher tax bracket, you save more on taxes for every dollar spent.
A tax credit, however, directly reduces your tax bill, dollar for dollar. Using the same numbers as above would mean your taxable income is $110,000 and your taxes $27,500 ($110,000*25%).
When you apply the credit of $10,000, you apply it to your total tax bill (not taxable income), which reduces it to $17,500 ($27,500-$10,000). Tax credits benefit those who fall into lower tax brackets.
For more detail on tax credits and a comprehensive list of credits you need to know about, read Your Complete Guide to Small Business Tax Credits.
How to Claim Tax Write-Offs: Standardized vs. Itemized Deductions
There are two methods for claiming tax deductions.
- The first, a standard deduction, is a flat amount that reduces your taxable income and is determined by your filing characteristics.
- The second, an itemized deduction, is where you, as the name suggests, itemize all your deductions to reduce your taxable income. The more deductions you add, the lower your taxable income and the less tax you’ll pay.
So, which method for claiming tax deductions should you use?
There’s no right or wrong answer, but here is some information you can use to decide:
A standard deduction is more straightforward because there are no calculations; you know precisely how much to deduct.
An itemized deduction is more complicated as you need to complete more forms and justify all deductions. But itemizing everything means you can potentially get the most tax savings. There are, however, no guarantees.
In the end, choose the method which reduces your tax bill by the most—even if it’s the standard deduction. This means that if your standard deduction amount is less than your itemized deductions total, apply itemized deductions. Conversely, if it’s more, choose the standard deduction.
17 Common Small Business Tax Write-Offs
The tax write-offs in the upcoming section are either business expenses (e.g. home office expenses and business meals) or personal ones (e.g. health insurance and charitable contributions).
Business Tax Write-Offs
1. Home Office Expenses
If you have space at home that you use for work, you can claim the home office deduction. Just ensure you meet two essential criteria:
- You must use that space often and exclusively for running your business
- The area must be the core place from where you run your business
When calculating your deduction use the following two methods:
- Simplified method. Take the square footage of your home office (up to 300 square feet) and multiply it by $5 per square foot
- Regular method. Calculate the percentage of your home’s square footage dedicated to the home office. Then, multiply that percentage by the actual expenses of maintaining your home, such as mortgage interest, property taxes, maintenance and repairs, insurance and utilities
2. Rental Payments
If you do not work from home, but instead rent a location—perhaps you pay for a spot in a co-working office—then you can write off part of your rent as a business expense.
3. Business Meals
The deduction for business meals and drinks is generally limited to 50% of the cost of the meal. According to the IRS, to qualify for this tax write-off:
- The meal expense must be “necessary and ordinary.” Ordinary means the expense is normal in your line of work. Necessary means it can help your business
- You or your employee must be present at the meal with your client
- The meal or drinks cannot be “lavish or extravagant”
The IRS does not provide clear guidelines on what constitutes lavish or extravagant. But, expenses aren’t disallowed just because they’re more than a certain amount or because the meal takes place at fancy restaurants. It is based on facts and circumstances.
For example, a graphic designer who attends a conference in New York City may struggle to deduct a lobster and a bottle of Dom Pérignon at Jean-Georges. However, a luxury real estate broker may often take clients to dinner at Jean-Georges. Lavish or extravagant is relative.
Regardless of your circumstances, keep accurate records and documentation for tax filing purposes. Your documentation should clearly show:
- The total expense amount
- The date and place of the meal
- The general nature of the expense
Keeping records of your receipts is usually enough, but be careful of storing receipts on-site—in a shoebox or even filing cabinet. You can easily lose them, the ink fades over time (making them illegible) and having to go back and organize them for tax season can be a nightmare.
So, rather use cloud accounting software to snap a photo of the receipt, assign a tax-friendly expense category and safely store it in the cloud.
As an alternative to keeping records of your meal costs, you can use the “standard meal allowance” method. This is a set amount for your daily meals and incidental expenses. This amount varies based on where and when you travel. You can look up the per diem rate for each major city and locality at the US General Services Administration website.
4. Business Travel Expenses
The IRS classifies business travel expenses as “ordinary and necessary expenses of traveling away from [tax] home for your business, profession, or job.”
Your tax home is the area where you do business, which does not have to be your home city. “Necessary” means that if you choose to extend a business trip by a few days for a personal vacation, you cannot write those extra days’ expenses off as a deduction.
Two common business travel expense categories include:
- Meals and lodging
Meals and Lodging
The write-off for meals while traveling remains limited to 50% of the cost, and they still cannot be lavish or “lavish or extravagant.”
However, there is one other caveat for meals and lodging while traveling: To qualify for a deduction, your work duties must require you to be away from home for longer than a typical day’s work. In other words, stay-over is necessary.
For example, if you travel to a nearby town (an hour away) and work a nine-hour day, your meals aren’t deductible because your job didn’t require an overnight stay.
However, if you attend a three-day work conference in another state, your hotel room and all meals are considered deductible business expenses.
You can deduct the cost of travel by airplane, train, bus, taxi, or car between your home and your business destination. But, if you purchased your airline ticket using frequent flyer miles and didn’t pay out of pocket, your deduction is zero.
If you drive your own vehicle for the trip, you can deduct actual expenses or the standard mileage rate. Just make sure you keep meticulous records of your mileage as well as receipts for gas, oil changes, other repairs and maintenance and insurance.
You can also write-off any business-related tolls and parking and a portion of your car rental. Finally, don’t forget you can write-off “incidental expenses,” such as fees or tips for porters, baggage carriers and hotel staff, as well as the costs for laundry, dry cleaning, phone calls.
Many small business owners network with peers and potential clients by joining business associations, chambers of commerce and other organizations. But are the annual dues deductible? It depends on the purpose of the organization.
To be deductible, membership in the organization must actually help you conduct business. The association may not be organized primarily for pleasure or social purposes.
For example, a graphic designer who joins the local trade association for advertising professionals can deduct their dues, as the purpose of the group is to help members in that field advance their careers and build connections.
However, the same designer cannot deduct dues paid to a local country club, even if he or she met clients there. This is because the club is primarily used for recreational and social activities.
6. Salaries, Benefits, and Subcontractor Payments
If you have a team of employees, salaries, wages, and benefits such as workers’ compensation, are usually tax-deductible. Just ensure that:
- Your employees are not business owners (i.e. LLC, partner, or sole proprietor)
- Their services were indeed provided
- The salary or wages provided are necessary
Fees paid to independent contractors who offer a variety of services like email management and branding, are also tax-deductible.
When outsourcing these activities, ensure you have a formal agreement in place, which establishes that it’s an independent contractor relationship and not employment. Otherwise, you could wind up responsible for payroll taxes.
7. Phone and Internet Expenses
You likely use your internet and mobile for both personal and business use. You can deduct some of your annual cell phone and internet bill based on the percentage used for business.
Of course, it can be challenging to determine just how much of your cell and internet you use for work and business. After all, you’re probably not keeping a time log every time you play Candy Crush or watch Instagram stories. The key? It must be reasonable.
Get an itemized statement from your cell phone company or track your usage on an average day to figure out a reasonable percentage you can claim back. You can always simply speak to your bookkeeper, accountant, or tax consultant for financial advice here.
Just don’t try to get away with deducting 100% of your cell phone and internet costs unless you have a dedicated phone and internet line for business.
Take note: The first landline you have at home that’s dedicated solely to work is not a deductible expense. Only the second is.
8. Educational Expense
If you invest in educational resources, you can write these off as deductible expenses as long as they directly improve the skills you use to run your business. Examples include:
- Copywriter taking an online or in-person course to improve their writing skills
- Landscaper subscribing to trade publications related to their field
- Designer buying a book that shows them how to improve their marketing
So, unless you have an Etsy shop selling handmade scarves, taking a knitting class isn’t deductible. You also cannot deduct any expenses to train or qualify you for a new profession.
9. Advertising and Marketing
To promote your business and get new clients, you might order business cards, maintain a website, send postcards, or pay for SEO services.
This is advertising and marketing—and these costs are deductible as long as they promote what you’re selling or have a business purpose.
Just steer clear of trying to write off personal expenses that may have some promotional value. For example, putting an ad on your personal vehicle won’t make all of your driving around town for personal errands deductible.
10. Bank Interest and Fees
Do you use a credit card for business expenses? What about interest on that loan?
If you carry a balance from month to month, you can write off the interest paid to the credit card company or lender.
Again, you’ll need to separate business expenses from the personal ones—interest on that loan you took out to buy a TV is probably not deductible. You can, for example, have one credit card that is used exclusively for business to avoid any complications.
Bank fees are also tax-deductible, as long as these fees are linked to your business bank accounts. Finally, don’t forget about the fees you pay to third-party payment processors like Stripe.
11. Depreciation on Business Equipment
Depreciation simply reflects the decline in the value of an asset. Many small business owners forget that depreciation is, in fact, a deductible expense. Or, in many cases, they understand it is, but struggle to wrap their heads around what can be a hugely complicated topic.
To simplify things for you, here’s what you need to know:
- Previously, companies would write off a little bit of the value of the asset over time
- The IRS Section 179, now lets you deduct the full purchase price of a qualifying asset like equipment and software instead of depreciating it over time. Deducting the full cost immediately reduces the total tax owed
- Qualification for the deduction under Section 179 is, however, subject to requirements:
- Anyone who buys, leases, or finances equipment in the 2019 tax year will generally qualify, provided they don’t spend more than $3,500,000
- You must start using the asset. The tax deduction only applies in the year you start using the asset and not when you purchase it. So, if you buy it in 2020 and only start using it in 2021, the tax deduction only applies to 2021
- Assets* must be:
- Tangible (e.g. equipment and accounting software)
- Primarily used for running your business (i.e. 50% of the time)
- Purchased by you
- To file for a tax deduction on depreciation, complete Form 4562, or get your tax consultant or accountant to do it for you
*For a full list of qualifying equipment, visit Section 179 Org.
12. Moving Business Equipment
If you decide to move any of your business equipment to a new location—perhaps you want to store something—then you can deduct this expense.
But remember, as always, to keep an accurate record of the move costs so you can justify this deduction. This record should include the amount, date, moving company, and what was moved.
13. Business Insurance
The premiums on insurance policies are deductible. Here are a few types of business insurance that qualify for deductions include:
- Professional liability coverage, which covers you against clients suing for damages. E.g. if you’re a copywriter and a client requires you to write copy for an upcoming event, but you’re suddenly unable to help, your client can sue you for damages if your absence costs them money.
- Income protection insurance, which gives you an income if you’re unable to work for an extended period—perhaps due to an unfortunate car accident
- Commercial property insurance, which covers physical assets such as equipment (laptop and camera)
- Business interruption insurance, which covers lost profits due to unforeseen business interruptions
Any gifts you send clients and employees are deductible, subject to these limits and rules:
- You cannot deduct more than $25 per gift. For example, if you buy an employee a $125 meal voucher to eat at a fine-dining restaurant, only $25 of that amount is deductible
- The following aren’t considered gifts and are excluded from the $25 upper limit:
- Incidental expenses like postage, gift wrapping, or mailing
- Branded marketing collateral
- Items that cost $4 or less and have your name and logo on it
Personal Tax Deductions
In addition to business tax write-offs, there are deductions you can claim on your personal tax forms to reduce your total taxable income.
15. Health Insurance
If you purchase health, vision, dental insurance, or long-term care for you and your family, you may be able to deduct a portion of the premiums you pay.
But, you can only take a deduction if neither you nor your spouse (if married) are eligible to participate in an employer-sponsored plan. So, if you’re a freelancer and your spouse has access to health insurance through their full-time job, you cannot claim the deduction.
If you do qualify, keep in mind that this deduction isn’t claimed on the same form as your other business expenses. It goes on Line 16 of Schedule 1 attached to your Form 1040.
Still having trouble determining if your medical and dental expenses are deductible? Take the quiz on the IRS website. It will only take 15 minutes of your time.
16. Contributions to Charity
You can write off donations you make to specific charities under section 170 of the Internal Revenue Code. But there are rules for claiming donations as a deductible expense:
- Your contributions must be to qualifying organizations. To check if an organization qualifies, visit the Tax Exempt Organization Search page
- You must deduct the fair market value of the asset for all donations besides cash
- If you give gifts to political parties, labor unions, international governments, and individuals, you cannot claim them as a deductible
- You need to keep accurate records, which includes the name of the charity, the date, and the amount donated
You also have a limit on how much you can claim. For cash donations you make to qualifying charities, the limit is 60% of adjusted gross income. For assets, you hold for longer than a year, the limit is 30%, subject to a fair market value deduction.
17. Retirement Contributions
If you contribute toward your employees’ retirement accounts, then you can deduct those contributions as a business expense.
But, if you contribute to your own retirement account, then you’ll have to claim the deduction in your personal capacity. This means having to include your IRA contribution when completing Schedule 1, attached to your Form 1040.
How much you can deduct depends on your retirement plan. For more detail on how to calculate your deduction, visit the IRS page on the topic of retirement contributions and calculations.
Use FreshBooks to Track Your Tax Write-Offs
Knowing what’s deductible and what rules apply to each deductible gives you information you can use to reduce your taxable income and, in turn, tax bill. This post gave you details on 17 of the most common tax write-offs to help you achieve precisely that.
From home office expenses, business meals, and business trips, to dues, business insurance, and retirement contributions, you should now have a pretty good understanding of what you can and cannot deduct.
Understanding tax write-offs, though, is one thing; keeping track of them is another.
Now, you can track your business expenses and write-offs using Excel. The problem is these methods take time, remove you from more important work and lead to errors. Just think back to that time when you incorrectly classified an expense and ended up having to pay more tax.
The better approach is to use accounting software like FreshBooks that helps simplify expense tracking and other more complex accounting tasks. With FreshBooks you can:
- Track your expenses without lifting a finger, so you know where your money’s going. Simply connect your bank account and say goodbye to manual entry
- Effortlessly assign tax-friendly expense categories, so you’re prepared come tax time
- Track your expenses on the move via a mobile app (available for iOS and Android)
- Store your receipts in the cloud, so you don’t lose them if disaster strikes
- Easily pull billable expenses into an invoice, so you’re not losing out on income from clients
Use FreshBooks today to improve how you track tax write-offs and reduce your total tax bill.
This post was updated in December 2019.