Whether you’re a small business owner, a solo entrepreneur, or a freelancer, understanding tax deductions is an essential skill. When used correctly, tax deductions can save you thousands in tax liability each year, ensuring you’re reducing your overall tax burden and saving money for your business.
This tax deduction cheat sheet will help you understand and correctly use tax deductions, helping you to make the most of tax time this year and simplify your tax filing process.
Key Takeaways
There are many available tax deductions to consider for business owners.
Tax credits can offer businesses additional help in lowering their taxes.
There are some best practices to maximize tax deductions when it’s time to file.
Accounting software can help you save time and money on business taxes.
Small business owners and self-employed individuals have plenty of expenses throughout the year, but do you know which ones can be deducted from your taxes? To be deductible, a business expense has to be both ordinary (common in your industry) and necessary. Here’s a tax deduction cheat sheet of the top tax-deductible and most common business expenses to claim:
1. Home Office
Do you work from home part-time or full-time? You can deduct the portion of your home that you use for business purposes from your taxes this year. If you choose the IRS simplified option method, you can deduct $5 per square foot of home office space, up to 300 square feet—provided you use the space year-round. If you only use it part-time, you would deduct a prorated amount based on the percentage of the year you work there. The maximum deduction amount is $1,500. The home office deduction is claimed on Schedule A (Form 1040).
2. Office Expenses
Smaller office expenses like paper, paperclips, pens, pencils, printers, laptops, and anything else that’s considered common to your industry and needed for your work can be deducted from your taxes as an expense.
3. Travel Expenses
If you have to travel for work, be sure to track your mileage, travel, transportation, and vehicle expenses as they can be deducted as tax write-offs. This includes fares for air, bus, or train, taxis/rideshares to get between your lodgings and your business appointments, transport of baggage and professional materials, vehicle expenses for your personal car used for business travel, lodging and meals, dry cleaning and laundry, tips, and other related travel expenses.
4. Phone and Internet
Your business almost certainly depends on a working phone line and internet connection. So why not write it off on this year’s taxes? Your phone and internet costs are completely deductible, provided they’re used entirely for your business and not for personal use.
5. Business Meals
Whether it’s a lunch meeting with clients or a breakfast brainstorm with the team, business meals are completely tax deductible. Be sure to save those restaurant receipts and deduct them from your taxes when it comes time to file your return. For the tax year 2023, the deduction for business meals is generally limited to 50% of the unreimbursed expenses.
6. Business Startup Costs
Startup costs like feasibility studies, market analysis, recruiting and training employees, advertising fees, and costs associated with setting up your business as a legal entity can all be deducted from your taxes. If your costs are $50,000 or less in the first year, your deduction is capped at $5,000. If your startup costs are more than $50,000 in year one, your deduction will be reduced by the amount above the limit that you paid. After the first year, you can amortize the remaining expenses over the next 15 years.
7. Bad Debt
If you made a credit sale or loaned money to customers that you can’t collect, it’s known as bad debt, since the debt is worthless and will not be recuperated. If you can prove this through evidence of making attempts to collect, you can deduct it from your taxes over time. You’ll first deduct it from your short-term capital gains, then you can deduct it from long-term gains. Finally, you can deduct up to $3,000 worth of bad debt from your other income. If the debt hasn’t been fully deducted, you can do the same for the following tax year.
8. Self-Employment Tax
Self-employed people are charged a tax of 15.3% of their net earnings. Self-employment tax consists of Social Security and Medicare taxes. Half of this amount (the employer equivalent) can be deducted from your taxes as a business expense. You will still have to pay the full amount at first, but you’ll be able to recoup 50% when it’s time to file your taxes.
9. Legal and Professional Fees
Fees associated with hiring lawyers and other professionals (e.g., accountants and bookkeepers) that are incurred as part of operating a business can be deducted from your taxes as well. According to the IRS, the professional fees you deduct must be considered “ordinary and necessary” expenses for your business.
10. Automobile Expenses
Freelancers and self-employed individuals can make tax deductions for costs associated with their vehicle, provided it’s used to carry out their work. You can make deductions for depreciation, gas, tires, repairs, insurance, and registration fees. You’ll need to keep detailed records of your mileage to get the most out of this deduction. You may elect to use the standard mileage rate instead ($0.655 per mile for the tax year 2023).
Remember to consider any sales tax on vehicle-related expenses as part of your comprehensive sales tax deduction.
11. Medical Expenses
Unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI) can be deducted from your taxes. This goes for almost any kind of medical or healthcare service, so be sure to keep track of receipts from dentists, acupuncturists, massage therapists, doctors, and any other health professionals you see.
12. Bank Fees and Interest
Some of the fees and interest you pay for your business bank account may be deducted from your tax liability as well. This includes service, overdraft, and transfer fees for those who are self-employed, provided the IRS considers them ‘ordinary and necessary’ for your specific business.
13. Advertising and Promotions
Advertising costs and promotions are considered miscellaneous business expenses and can be deducted from your taxes as long as they’re considered a reasonable need for your business. This goes for everything from billboards and TV ads to sponsoring an event, so keep taxes in mind when budgeting for promotion.
14. Retirement Plan Deductions
Generally speaking, you can deduct your contributions to a regular Individual Retirement Arrangement (not a Roth IRA) or a 401(k) plan. The maximum contribution amount you can deduct changes from year to year, so take a look at it early on in order to strategize your contributions and lower your tax liability. For 2023, you can deduct up to $6,500 of contributions to a traditional IRA.
15. Business Entertainment
Meals, team-building events, staff parties, and other entertainment expenses can be tax write-offs, though many of these deductions are only available for 50% of the actual cost you incurred. You can also deduct costs related to hosting business meetings and conferences, as these fall under ‘entertainment’ in the eyes of the IRS.
16. Charitable Deductions
Charitable contributions are a great way to give back to your community while lessening your tax burden at the same time. You’ll need to donate to a qualifying, tax-exempt organization and collect qualifying documentation after contributing in order to be eligible for a tax deduction, which can range from 20% to 60% depending on the specifics of the donation and the organization.
17. Business Insurance
Business insurance can be a big expense for entrepreneurs. Thankfully, the IRS allows you to write it off from your taxable income completely, provided it’s considered ‘ordinary and necessary’ for trade, business, or professional reasons.
18. Education Expenses
There are a few methods in place to help you reduce taxable income if you paid tuition for a qualifying college or other post-secondary institution. The American Opportunity Credit allows you to deduct up to $2,500 for the cost of tuition, books, and supplies, while the Lifetime Learning Credit lets you deduct up to 20% of your first $10,000 spent on tuition (up to $2,000). Additionally, for educators, there’s the educator expense tax deduction, which can be claimed by eligible teachers. Be sure to get the appropriate forms for your institution in advance of tax season to use this as a qualified business income deduction. Self-employed individuals can deduct their work-related education expenses on Schedule C (Form 1040).
That’s a lot of deductions for business owners and self-employed individuals to consider! If you’re looking for a way to make tax prep suck a little less, FreshBooks has you covered with our tax preparation guide below.
6 Additional Tax Credits to Consider
Beyond the standard deductions for business owners and self-employed people, there are a number of tax credits that can help you lessen your tax bill when it’s time to file your tax return. Here are 6 to consider:
1. Family and Medical Leave Act (FMLA) Credits
This is a tax credit provided to employers who provide paid medical and/or family leave for their employees. The credit is equal to a percentage of the wages you paid your employees during their period of absence. The minimum percentage credited is 12.5%, and the maximum is 25% depending on the amount of wages you pay to employees on leave.
2. Disabled Access Credit
Small businesses (30 or fewer employees and less than $1M of total revenues) can claim up to $5,000 in non-refundable tax credits for eligible expenses up to $10,250 related to accessibility improvements to your business. This could mean installing a ramp, widening a doorway, or even hiring sign language interpreters.
3. General Business Tax Credit
The General Business Tax Credit is actually an amalgamation of several credits that business owners can claim on their taxes. It includes many of the credits listed here, and cannot exceed the excess of a taxpayer’s net income tax liability, or whichever is greater: the minimum tax for that year, or 25% of a taxpayer’s net regular tax liability above $25,000.
4. Employee Retention Credit
The Employee Retention Tax Credit (ERTC) is a refundable credit that is available to employers who paid wages to some or all employees between March 12, 2020 and January 1, 2022. The ERTC is primarily for businesses that were partly or fully suspended by a government order related to COVID-19. The credit is not available to individuals.
5. Work Opportunity Credit
The Work Opportunity Credit is a federal credit for employers who hire employees from certain recognized ‘targeted groups’, such as veterans, ex-felons, SNAP benefits recipients, summer youth employees, and more. The aim of this credit is to encourage investment in employees who have faced barriers to employment. Generally, the maximum credit is $2,400. The unused portion can be carried back one year and then forward 20 years. There is no limit on the number of employees eligible for the credit.
6. Research and Development Credit
If your company performs research and development (R&D), you may qualify for this federal tax credit. This is especially prevalent for tech companies, engineering firms, and industrial designers, but other industries can qualify as well. Your business must be engaged in legitimate research activities as defined by the IRS to qualify for the R&D tax credit and lower your tax bill. The credit rate is 6% for small businesses and 14% for large businesses.
Tips for Maximizing Tax Deductions
Deductions are essential for reducing your taxable income, but they can also be quite complex. When it comes to filing taxes, here are a few tips to maximize deductions for your business tax return this year:
Keep accurate records of all eligible expenses
Stay up-to-date on announcements and changes to tax laws and regulations
Collect receipts for travel expenses and vendor payments
Prioritize contributions to your 401(k) and/or IRA plans
Consider charitable investments as a way to make deductions
Track and deduct small expenses like office supplies
Pay business expenses promptly and keep track of your receipts
Consult a tax professional for more advanced support
Simplify Your Tax Preparation with FreshBooks
Looking for support with filing taxes this year, ensuring you maximize deductions and minimize your tax burden? FreshBooks has you covered with our cloud-based, state-of-the-art accounting software.
FreshBooks accounting software is like your own personal tax advisor that helps you track and categorize expenses, which makes it much easier to keep track of every single deduction when it comes time to file your taxes this tax season. This is especially helpful for smaller businesses without dedicated accountants on the payroll, as it frees up busy business owners to spend more time doing what they do best and less time on taxes.
If you still have questions about small business tax deductions, be sure to read the other free tax resource articles by FreshBooks.
FAQs about Tax Deductions Cheat Sheet
Have questions about the details of optimizing taxable income? Here are answers to the most frequently asked questions on tax credits and tax deductions.
How much in deductions can I claim without receipts?
If you’re filing without receipts for your expenses, you’ll only be able to take the standard deduction amount off of your tax bill. For the tax year 2023, for individuals, this is $13,850, or $27,700 for people who file their taxes jointly.
What expenses cannot be deducted?
There are many expenses that can’t be deducted from your tax bill. These include certain taxes (e.g., most federal income tax), fines and penalties on late taxes, capital expenditure (e.g., vehicles, office furniture, real estate), commuting costs, personal/family expenses, political contributions, and gifts over $25, to name a few.
Do I need receipts for all deductions?
Generally speaking, yes, you need receipts and records if you want to use them for a tax deduction. Some expenses, such as home office supplies, don’t need receipts to be eligible for deduction, though it’s still a good practice to keep these receipts for your own records.
What is the rule of thumb for tax deductions?
Generally speaking, any expense that is considered ‘usual and necessary’ to run your business is deductible from your taxable income. While there are some exceptions, this is a good rule of thumb to follow.
Does itemizing your taxes reduce taxes?
If your total itemized deductions exceed the standard deduction amount of $13,850, it can reduce your taxes to itemize each tax deduction instead. However, if you haven’t spent more than the standard amount, it’s probably best to not spend time itemizing all deductions and to claim the standard deduction instead.
Is it better to itemize or take the standard deduction?
This depends on whether or not your expenses exceed the standard tax deduction amount of $13,850 on eligible deductible business expenses in the 2023 tax year. It’s a good idea to keep and organize all receipts so you can say for certain whether it’s better to itemize or take the standard tax deduction.
More Useful Resources
Explore our diverse tax deduction guides catering to various niches. From small businesses to real estate agents, find valuable insights to optimize your tax savings.
Sandra Habiger is a Chartered Professional 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. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.
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