25 Tax Deductions for a Small Business
The top 25 tax deductions for a small business in the 2021 - 2022 tax year detailed in the guide below can help business owners lower their income tax bills by claiming all the deductions relevant to their work. These top tax write-offs will help speed up the income tax filing process and reduce the amount you owe to the government in taxes.
Here’s everything you need to know about maximizing tax deductions for your small business:
Top 25 Tax Deductions for Small Business
Small businesses can write off a number of expenses as tax deductions to help lower the amount they owe on their income tax. The top small business tax deductions include:
1. Business Meals
As a small business, you can deduct 50 percent of food and drink purchases that qualify. To qualify, the meal needs to be related to your business and you need to keep the following documentation related to the meal:
- Date and location of the meal
- Business relationship of the person or people you dined with
- The total cost of the meal
The easiest way to track business meal expenses is to keep your receipt and jot down notes on the back about the details of the meal.
2. Work-Related Travel Expenses
All expenses related to business travel can be written off at tax time, including airfare, hotels, rental car expenses, tips, dry cleaning, meals and more. You can reference the IRS website for a full list of deductible business travel expenses. To qualify as work-related travel, your trip must meet the following conditions:
- The trip must be necessary to your business.
- The trip must take you away from your tax home, i.e. the city or area in which your company conducts its business.
- You must be travelling away from your tax home for longer than a normal work day and it must require you to sleep or rest on route.
3. Work-Related Car Use
If you use your car strictly for work-related purposes, you can write off all costs associated with operating and maintaining it. If your car use is mixed between business and personal reasons, you can only deduct costs that are related to the business usage of the vehicle. You can claim the mileage you use for business driving, either by deducting the actual miles traveled for business, or by using the standard mileage deduction of $0.56 per mile driven.
4. Business Insurance
You can deduct the cost of your business insurance on your tax return. If you have a home office, or use a portion of your home to run your business, you can deduct your renter’s insurance costs as part of your home office write-offs.
5. Home Office Expenses
Under new simplified IRS guidelines for home office expenses, home-based small businesses and freelancers can deduct five dollars per square foot of your home that’s used for business purposes, up to a maximum of 300 square feet. To qualify as a tax deduction, your work area has to be used exclusively for business (i.e. you can’t write off the square footage of your dining room if you do your work at the table during the day) and you need to use the home office regularly as your principal place for conducting business.
6. Office Supplies
You can write off office supplies including printers, paper, pens, computers and work-related software, as long as you use them for business purposes within the year in which they were purchased. You can also deduct work-related postage and shipping costs. Be sure to file all receipts for office supply purchases, for documentation.
7. Phone and Internet Expenses
If using the phone and internet is vital to running your business, you can deduct these expenses. If, however, you use the phone and internet for a mix of work and personal reasons, you can only write off the percentage of their cost that goes toward your business use. For example, if roughly half of your internet usage is business related, you can write off 50% of your internet expenses for the year.
8. Business Interest and Bank Fees
If you borrow money to fund your business activities, the bank will charge you interest on the loan. Come tax season, you can deduct the interest charged both on business loans and business credit cards. You can also write off any fees and additional charges on your business bank account and credit card, such as monthly service fees and any annual credit card fees.
When you deduct depreciation, you’re writing off the cost of a big-ticket item like a car or machinery over the useful lifetime of that item, rather than deducting it all in one go for a single tax year. Businesses usually deduct depreciation for long-term business investments that are more costly, so they’re reimbursed for the expense over the entire useful lifetime of the item. Here’s how to calculate depreciation:
Depreciation = Total cost of the asset / Useful lifetime of the asset
10. Professional Service Fees
Any professional service fees that are necessary to the functioning of your business, such as legal, accounting and bookkeeping services, are deductible for tax purposes. If you use accounting or bookkeeping software for your business, that would also qualify as a tax deduction. If you are having trouble determining whether a particular professional service expense is for work or personal use, these guidelines for legal and professional fees from the IRS can help you judge the nature of the expense.
11. Salaries and Benefits
If you’re a small business owner with employees, you can write off their salaries, benefits and even vacation pay on your tax returns. There are a few requirements for writing off salary and benefit expenses:
- The employee is not a sole proprietor, partner or LLC member in the business
- The salary is reasonable and necessary
- The services delegated to the employee were provided
12. Charitable Contributions
You can deduct charitable donations that you make to qualifying organizations. If your business is set up as a sole proprietorship, LLC or partnership, you can claim these expenses on your personal tax forms. If your company is a corporation, you claim charitable donations on your corporate tax return.
Any educational expenses you incur to bring value to your business are fully deductible for tax purposes. The requirements for education-related expenses are that the course or workshop must improve your skills or help maintain your professional expertise. Educational expenses that qualify for deductions include:
- Courses and classes related to your field of work
- Seminars and webinars
- Trade publication subscriptions
- Books related to your industry
14. Child and Dependent Care
Costs you incur for caring for children or adult dependents is tax deductible. If your own children are twelve years old or younger, you can write off costs associated with their care. Adult dependents also qualify for deductions, including spouses and some other related adults who are unable to care for themselves because of physical or mental disability.
15. Energy Efficiency Expenses
Upgrades that you make to your home to ensure it’s more energy efficient can qualify for tax credits. You can claim 30 percent of the cost of alternative energy equipment for your home, including solar panels, solar water heaters and wind turbines. The IRS site offers further details on the home energy tax credits.
If you borrow money in order to make investments, you can write off the interest paid on the loan. You can deduct the interest up to the point that it matches what you earned in investment income.
17. Foreign-Earned Income Exclusion
American citizens with businesses based abroad can, under certain circumstances, leave the foreign income they’ve earned off their tax return. To qualify for the exclusion, your tax home must be based abroad. This article can help you better understand the requirements for foreign-earned income exclusion.
18. Medical Expenses
You can claim both insurance premiums and medical care expenses, including doctor’s fees, prescription drugs and home care. If you’re self-employed and pay for your own health insurance then you can deduct your health and dental care insurance premiums.
19. Real Estate Taxes
Real estate taxes paid at the state and local levels can be deducted on your income taxes. Property taxes are included in these deductions and you can claim up to a total of $10,000.
20. Mortgage Interest
You can deduct interest payments made toward mortgage loans to buy, construct or improve your home if you use your home for business purposes. If you take out loans against your home equity, you can also deduct the interest on those loans.
21. Moving Expenses
If you move and the main reason for doing so is work related, you might be able to fully deduct the costs associated with the move. To qualify, your move has to pass the distance test. To pass the distance test your new job location has to be at least 50 miles farther from your former home than your old job location was from your previous home.
22. Retirement Contributions
If you contribute to an Individual Retirement Account, doing so helps reduce your taxable income for the year. Your total IRA contributions can’t exceed the total income you earned that year or it can’t exceed the annual maximum contribution, whichever one is less.
23. Advertising and Promotion
You can fully deduct expenses related to promoting your business, including digital and print advertising, website design and maintenance and the cost of printing business cards.
24. Client and Employee Entertainment
If you take business clients out, you can deduct the expense as long as you discuss business during the meeting and the entertainment takes place in a business setting for business purposes. You can deduct 50 percent of the cost of these entertainment expenses. You can also deduct as much as 100 percent of the cost of social events held for your employees.
25. Startup Expenses
If you launched a new business venture in the latest tax year, you can deduct as much as $5,000 in startup expenses you incurred in the lead up to your business launch. That can include costs associated with marketing your new business, travel and training costs.
How Do Business Tax Deductions Work?
Business tax deductions work by lowering your taxable income, thereby lowering the amount of tax you owe to the government as part of your tax return. To find out how to claim the most deductions possible, it’s a good idea to consult a professional, like a CPA. It’s the job of an accountant to know what tax deductions are available and how they can apply to your small business.
What Can Be Written off as Business Expenses?
Small businesses, freelancers and entrepreneurs can write off a range of business expenses when filing their income tax, including:
- Car expenses and mileage
- Office expenses, including rent, utilities, etc.
- Office supplies, including computers, software, etc.
- Health insurance premiums
- Business phone bills
- Continuing education courses
- Parking for business-related trips
- Business-related travel expenses, including flights, rental cars, hotels, etc.
What Is a 100 Percent Tax Deduction?
A 100 percent tax deduction is a business expense of which you can claim 100 percent on your income taxes. For small businesses, some of the expenses that are 100 percent deductible include the following:
- Furniture purchased entirely for office use is 100 percent deductible in the year of purchase.
- Office equipment, such as computers, printers and scanners are 100 percent deductible.
- Business travel and its associated costs, like car rentals, hotels, etc. is 100 percent deductible.
- Gifts to clients and employees are 100 percent deductible, up to $25 per person per year.
- If you’re self-employed and pay your own health premiums, you can deduct those at 100 percent.
- Your annual business phone bills are 100% deductible.
What Is a 1099?
A 1099 is an IRS tax form that’s used to report any income earned through sources other than employment, so independent contractors, freelancers and self-employed workers use the 1099 form. You can find out more about the 1099 tax form on the IRS site.
Can You Write off Previous Years’ Taxes?
As a small business, you may be able to write off the state and local taxes in the year you paid them, even if the taxes are from a previous year. However, you can’t deduct any federal taxes that you paid for a prior year.