25 Creative Tax Deductions for Small Business
Small business owners in the US can take advantage of tax-deductible expenses to reduce tax bills at the end of each year. These are legal ways to reduce the amount of taxes you have to pay, as per the IRS.
The following article will cover how to maximize your tax write-offs by using creative tax deductions for small business purposes.
- There are many legal tax write-offs small businesses can use to reduce the amount of tax owed each year.
- The IRS allows a variety of legitimate, creative business tax deductions, including advertising, loan interest, and even moving expenses.
- Even if you use your vehicle or home office for work only part-time, you can still claim a percentage of the home office expenses, travel expenses, and other costs incurred as a deduction on your taxes.
- All write-offs must be ordinary and necessary expenses for your business, like a camera for a photographer, or a gym membership for a professional bodybuilder.
- Using tax preparation software can ensure you’re organized and do not miss out on any legal tax deductions while remaining tax compliant.
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25 Creative Tax Deductions
The following are some of the creative tax deductions for small businesses, as per the IRS:
1. Advertising, Marketing, and Websites
You can usually deduct the costs of ads, marketing fees, website creation and administration, and more, as long as your expenses are reasonable and ordinary. You may not be able to write off sky plane ads or celebrity appearance fees, for example, but you may be able to use flyers, social media marketing, or branded pens as a tax write-off.
Your small business requires computer software to run smoothly. From project management software to tax preparation software to Microsoft Office or Adobe Photoshop, you likely cannot run your company without subscribing to or purchasing these important computer programs.
Fortunately, you can deduct some of the amount you spend on software. The amount will depend on how much of the time you are using the program for work vs. how much you are using it for recreational purposes or personal projects.
3. Cell Phone
If you use a dedicated cell phone exclusively for your business, you may be able to write off all of the costs incurred. Claims for cell phone use are often scrutinized by the IRS, as most people use their phones for much more than work-related functions.
That’s why if you have one phone for both work and personal use, you can claim a percentage of cell phone use as business-related. For example, if you use your phone for business 20% of the time, you can claim 20% of your phone bill on your taxes as legitimate expenses.
4. Home Office Utilities
If you work from home in a home office that is a room or space used exclusively for your trade, business, and work, you may be able to deduct some of your utilities bill from your end-of-year taxes. Qualifying taxpayers can use a prescribed rate of $5 per square foot of the home office or a dedicated portion of the home used for business, up to a maximum of 300 square feet. You may also deduct a percentage of the space used for business and deduct the same percentage of your home utilities.
These benefits are available to homeowners and renters, so everybody working from home can deduct home office expenses for tax savings in the upcoming tax season.
A small business owner, regardless of filing taxes as a sole proprietor or a corporation, can claim payments for their internet services as tax deductions if internet use is mandatory for the business to function. For example, if your clients can book online appointments or you have an online store, the internet can be claimed the same way as other utilities are.
If it is used for support services for the business but is not mandatory, the internet can be claimed as an office expense. For example, using Zoom for meetings, when you could communicate just as well in person or over the phone.
6. Commissions and Fees
Although you can no longer deduct fees paid to buy, sell, or hold an asset or to collect interest (brokerage fees, transaction fees, etc.), if you itemize deductions, it might still be possible to deduct the interest you paid on money borrowed to purchase taxable investments.
If you provide commissions for referrals or as part of a payment to employees, these may be deductible. Fees to pay an investment broker who invests as a business may also be deductible in certain circumstances.
Insurance premiums can be deducted from small business taxes because the IRS considers business insurance a necessary cost to running a company. Filling out the proper forms will allow you to reduce your overall taxable income. Some examples of deductible insurance are general liability, property insurance, and even errors and omissions insurance. If you have employees and provide health insurance, that cost is also tax deductible.
A sole proprietor also has the option to deduct their own insurance premiums from their individual tax return. In addition, you can also hire your spouse and pay them by covering their health insurance instead of paying them wages.
8. Loan Interest
If you have taken out a business loan that qualifies as such under tax law, you can use the business loan interest tax deduction to deduct the amount of interest paid from your tax liability, which will reduce the amount of money owed on your tax return.
The lender must be a legitimate business lender like a bank or professional lender, not a family member or personal acquaintance, you must be legally liable for the debt incurred, and both you and the lender intend on the loan being repaid.
Also, if you use a credit card for business purposes, you may deduct the credit card interest payments from your tax liability.
9. Retirement Contributions
If you set up simplified employee pension (SEP) plans or other qualified retirement plans like the solo 401(k) plan, you can deduct the contributions you make to the plan for yourself up to the amount specified by the individual retirement plans.
Small business owners may also sponsor an employee retirement plan and deduct the amounts they pay to match their employee’s retirement contributions.
You may be able to deduct the cost of clothing that is necessary for work but cannot be used for other reasons. For example, work boots with steel toes could be deducted from your tax return if you are a contractor, but not if you are a hairstylist.
Make sure to save all receipts, including dry cleaning or repair costs, so you can prove that the expenses were reasonable and necessary for your business.
11. Contract Labor
If you need to hire independent contractors to help in your business, you may be able to deduct their fees as a business expense. Their work must be necessary for your business to qualify. Some examples include hiring a freelance writer to write the copy for your company’s website or hiring an independent delivery company to get a rush order to a client quickly. Make sure to send them Form 1099 at the end of the year if you pay them more than $600.
12. Education and Conference Expenses
If you attend conferences or educational programs to improve or upgrade your work skills, you may be able to deduct the registration fees, workshop costs, and more. Some qualifying expenses include books or internet courses related to your industry, trade publications, seminars, and classes or courses related to your field of work.
13. Home Office Equipment and Supplies
Necessary business equipment like printers, office furniture (desks and chairs), computers, storage solutions, and other work-specific equipment can be deducted if they were purchased and used for work. Make sure to keep all receipts and track your business expenses closely in case of an audit.
14. Legal Accounting and Services
The IRS allows ordinary and necessary legal and professional expenses, including the cost of hiring a tax professional, that are directly related to running your business to be deductible as business expenses. This does not include any fees of a personal nature, like personal accounting or the drafting of one’s will.
15. Meals and Entertainment
In general, a business owner can deduct up to 50% of all reimbursements given to employees for expenses incurred for meals purchased during business travel and business meetings. The 50% limit also applies to meals eaten during business meetings and meals provided to employees during meetings. This percentage also includes tips and taxes.
Meals provided to the benefit of all employees, for example, during an office party, are fully deductible. Entertainment expenses, such as taking your client to a sporting event, are no longer deductible.
16. Repairs and Maintenance
Regular repairs and routine maintenance, like changing oil in business vehicles, or repairing broken windows, can be written off, as these must be done to keep things running normally and safely.
If a business pays to improve an asset, like adding parts to extend the life of a machine or installing energy-efficient windows, these are considered capital improvements and cannot be deducted as repairs and maintenance.
Do you need help with your tax preparation? FreshBooks can help. Please check out the following video to learn more about how FreshBooks can make it easier for you to prepare for the upcoming tax season with confidence.
17. Car or Truck Expenses
If you are using a car or truck for your business, you can deduct car expenses, and if using your personal vehicle for business reasons, simply divide the actual expenses based on actual mileage or use the standard mileage rate. Commuting to and from work is not deductible, but if you have a home office, you may deduct the cost of travel to business meetings and other business-related events.
According to the IRS, the most commonly deducted car expenses include depreciation, lease payments, gas, oil, tune-ups, insurance, and registration fees.
Business travel deductions can be used when employees have to travel away from home or work for business reasons for longer than a regular workday. These expenses must be ordinary and necessary, and may not be lavish or extravagant. Business travel expenses for temporary work assignments up to 1 year in length can also be deducted. Make sure to log business miles, accommodation, and other travel expenses accurately and keep the receipts as proof.
Normal travel deductions include travel by plane, train, bus, or car from home to the business destination, some taxi fares, shipping of baggage and business items, lodging, meals, dry cleaning/laundry expenses, business communication, tips on necessary services, and other ordinary expenses.
19. Moving Expenses
Moving expense tax deduction rules changed in the 2017 tax year due to the Tax Cuts and Jobs Act, and until at least 2025, moving expense tax deductions are no longer allowed on a federal return for most individual taxpayers.
If you moved before 2018 but did not claim your moving expenses, you may be able to file an amended return. Military personnel who meet certain qualifications may still be able to claim this deduction.
If you are moving machinery for your business from one city to another, shipping costs are deductible, as is the installation of the machinery. Also, if you are moving your main office from one location to another, those expenses are deductible as well.
20. Charitable Causes
Some charitable donations may be considered deductible if you itemize your tax return. The donation must be made to a tax-exempt and qualified charitable organization. You may be able to deduct 20% to 60%.
If you are a real estate professional, and your donation is related to your business and expect to receive a financial return, your charitable donation can be 100% deducted, as any regular business expense.
21. Free Beer
One of the most creative tax deductions on this list is alcohol. In some cases, you can deduct beer as a business expense. Giving high-end gifts like craft beer, a bottle of wine, a box of chocolates, or a gift basket to a client is a deductible expense. The cost can be deducted as a Gift Expense of up to $25 per person per year.
22. Genetic Testing Kits
The IRS has included specific circumstances within which genetic testing can be deducted. They must be authorized by the FDA to be marketed as medical devices, and they must be used for health assessment purposes.
It is considered a medical expense in tax deductions when used for the prevention, diagnosis, or cure of disease but cannot be deducted when used to determine ancestry.
23. Gym Memberships
If you are diagnosed with certain medical conditions by a doctor and are using the gym to stay healthy as part of a plan created by your physician, you may be able to join a new gym (you cannot have already belonged to the gym to qualify) and then itemize the membership fees as a deductible medical expense. Gym memberships and other health-related reimbursements may also be deductible under an accountable plan sponsored by a corporation.
24. Interview Expenses
Transportation arrangements and other non-wage costs incurred that are related to interviews and are not wages can be deducted as a business expense on your tax return. The 50% limit applies to food and beverages, meaning if you hold your interview at a restaurant, for example, you can only claim half of the total bill.
While you cannot claim your pet as a dependent, if you use your animal friends in your business (in advertising, as security, etc.), expenses, like food, training, and grooming that are related to the animal’s ability to work may be allowed as legitimate business tax deductions. All costs and expenses must be thoroughly recorded and must pertain to the animal’s time at work.
These types of claims are not usual, though, and may bring some scrutiny to your business, so be sure you are making a legitimate claim before adding your pet to your tax paperwork.
FreshBooks Simplifies Tax Preparation
As you can see, there are likely many legitimate ways for a small business owner to reduce the amount of tax you have to pay each year simply by knowing the ins and outs of the tax system. By staying organized and recording all business costs, you will be able to take advantage of all of the benefits the IRS offers small business owners.
FreshBooks cloud-based accounting software can help you to track and catalog your expenses throughout the year so that you never lose a paper receipt or miss a deduction again.
Try FreshBooks for free, and find out just how easy it is to streamline your workflow, stay organized, and get to know your business better.
If you want to know more about creative tax deductions available to you, you can explore more in our Small Business Tax Deductions article.
FAQs About Creative Tax Deductions for Small Business
The following are some of the most frequently asked questions about all the tax deductions for small business owners and how to get creative to minimize your tax payments at the end of the year.
Do you need receipts for tax write-offs?
Yes, it is always a good idea for a business owner to keep all of your receipts and proof of purchase. There is always the chance that your small business will face an audit, and you will want all of your purchases to be able to stand up to close scrutiny.
FreshBooks receipt & expense tracking makes it simple to upload and organize receipts by date or category, making tax time easier. The IRS requires a business to keep all receipts for purchases over $75 (unless it’s for travel—then all receipts are required), however, it is smart to keep all receipts.
Can you write off haircuts as a business expense?
No, haircuts, along with other personal care, are not considered business expenses that can be used as deductions by the IRS. Your business tax return must only contain costs incurred from regular, necessary business expenses.
Can you write off vitamins on your taxes?
No, vitamins are a general health product and cannot be written off unless a doctor specifically prescribes them in relation to a specific health condition.
The only tax-deductible medical expenses are those related directly to the treatment or prevention of a specific health issue.
Can you write off auto insurance on your taxes?
It depends—if you are using your vehicle solely for business purposes, you may be able to write off the auto insurance premium, along with other important car expenses like fuel, oil changes, and depreciation. Keeping track of all of your vehicle expenses with FreshBooks will ensure that your receipts and proofs of purchase are recorded properly and easy to find when you need them.
Can you write off home gym equipment?
Not usually, but if you are a fitness trainer who is working from home, you may be able to claim expenses like fitness equipment, weights, mats, educational courses, and even the music subscription services that you use to motivate your clients as tax deductions for your small business.
Professional bodybuilders may also be able to write off fitness items or gym memberships. For everyday taxpayers, home gym equipment is not a tax-deductible expense.
Can you write off professional memberships?
Yes, there are times when business owners can write off the costs of professional memberships if they are essential for maintaining your professional standing, and there is a connection between the place where you pay your membership dues and your place of employment.
For example, an accountant may wish to join the American Accounting Association to reap the benefits of career services, networking and volunteer opportunities, and more, using the fees as a tax write-off.
About the author
Sandra Habiger is a Certified Public Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Learn more about her work at http://www.sixfiguresaccounting.com/ .