No business owner enjoys doing taxes. You could be punished for silly mistakes. The whole process is boring. On top of that, it’ll cost you money that could otherwise be reinvested in your business. As intimidating as it may seem, you’ll have to learn how to take care of it as early as possible. Thankfully, filing your taxes doesn’t have to leave a gaping hole in your wallet.
When you jot down your information, some of the details you provide can actually save you money. If you follow this Shift4Shop guide to small business tax deductions, you can transform some of your yearly or quarterly expenses into Tax Day savings.
What is a Tax Deduction?
There is gross income, and there is taxable income. The former is the money that your business generates. The latter is the money your business generated that the government can tax. Gross income and taxable income don’t have to be identical. Your state or federal tax codes may exempt certain expenses from your taxable income, which reduces how much you will ultimately have to pay.
That’s how tax deductions work. If you want to see a dent in your tax bill instead of your bottom line, you should take advantage of all available options. This practice can be especially helpful for owners of small businesses, who need to save every cent they can.
Top 20 Small Business Tax Deductions
A surprising variety of business expenses may be eligible for tax deductions, depending on where you live. Some of these deductions may only subtract a few dollars, but they can add up to a significant sum if you apply many of them. Here are just 20 of many to consider.
Advertising and Marketing
When you’re trying to spread the word about your business, advertising becomes a crucial expense. Fortunately, it can also be a deductible expense. According to the Business Expenses section of IRS Publication 535, “You generally can deduct reasonable advertising expenses that are directly related to your business activities.”
This provision acknowledges the importance of marketing efforts to running a business. It may cover a wide range of expenses, from running ads to hiring consultants to sponsoring events and more. With that said, and before you start buying sports cars and plastering billboards on them, please note that the IRS specifies “reasonable advertising expenses.”
Car and Truck Expenses
Speaking of automobiles, Section 179 of the US tax code allows people to deduct vehicles used more than 50% of the time for business. Heavy vehicles, or any auto weighing over 6000 pounds on its own, are even classified as transportation vehicles and may be eligible for further tax breaks.
Of course, there are catches. Among others, you only really get the most value for the vehicle’s first year. The tax breaks get smaller with each year as the vehicle’s value depreciates. The breaks also diminish depending on how often you use it for business. If you use it only 60% of the time for professional purposes, you only get 60% of the deduction.
Salaries, Wages and Benefits
We all know that employees get taxed on what they make from their employers. With that said, did you know that employers can get tax breaks on what they pay their employees? Salaries, wages, benefits, bonuses, awards, and other types of compensation may all qualify as deductible expenses for a business.
There are conditions. You must be able to prove that the employee provided the service for which you paid, and they need to have been paid within the past year. Moreover, the wages themselves must be “ordinary and necessary,” as well as “reasonable” by industry standards. And before you think about it, sorry: business owners do not count under this provision.
Many businesses are turning to independent contractors for a variety of services, using them as alternatives to employing a full-time staff. One common reason is that such labor is exempt from several employment laws. One example is that fewer provisions are required to claim payment of these contractors as a tax deduction.
The important number here is $600. That’s the minimum that a contractor must earn to warrant receiving a 1099-MISC form from the client. That’s also the minimum that a business can pay someone to fill out a 1099-NEC for the IRS. You’ll also need to report these payments with Form 1096 before you can qualify for deductions.
Education is always a great investment, and businesses can make that literal by supporting employees in their own quests for knowledge. If you create an Educational Assistance Program that helps your workers pay for education, you may be able to deduct those expenses from your taxable income.
This type of program should sponsor educational endeavors that actually relate to the business. An example would be a software company covering college-level coding courses for their development team. You can offer up to $5,250 to employees, independent contractors, and even yourself. It’s an acknowledgement that even when people find employment, they can keep learning and improving themselves.
Travel may be important for many businesses. Whether you’re meeting a potential client in another city or attending an out-of-state convention, you may rack up quite a few expenses along the way. Transportation, lodging, meals, tips, and various services could qualify as business expense deductions. You simply need to prove that they were important for business.
Of course, you can’t write off everything as a travel expense. The IRS may not accept luxurious hotel bills as deductible expenses when simpler options were available. Furthermore, location matters. You can’t stay at a fancy resort in your hometown and claim it was for work. Finally, make sure to keep every receipt from the trip — you may need all of them.
Important business decisions are often made while breaking bread, or steak, or pizza, or some other sort of meal. Therefore, it’s hardly a stretch to call business meals an essential expense. Congress and the IRS agree. In the past, 50% of all cash spent on food and beverages could be written off as business expense deductions. As of 2020, that’s changed to 100%.
Say it with us this time: there are limits. Trying to claim an extravagant meal as a business expense deduction may get a frown from the IRS. With that said, the meaning of “extravagant” may change as your business grows. The cost of food and beverages should also be separate from any entertainment costs.
Supplies and Equipment
You may need plenty of tools to keep a business humming. For tax purposes, these assets are generally divided into two categories. Your supplies would be short-term, intended to be used up within a year. An example would be staplers for employees’ desks. Your equipment would be long-term, meant to last for several years. Heavy machinery would count.
Both types of assets are deductible. However, as with cars and trucks, long-term assets depreciate over time. With each passing year, you can deduct less and less. Something that’s true for both types is that any supplies and equipment you try to expense must be exclusively for business use. Otherwise, it’s “listed property,” and you won’t get a full deduction.
Why worry about affording to keep the lights on when the government can help? Yes, utilities like power and water may be eligible for small business tax deductions. Just keep the bills handy and consult a tax expert, because not everyone can do this and the IRS may pay a visit.
This rule can benefit people running a business from home, though not as much as you may expect. You may be able to expense some of your household utilities by claiming that it’s for work. However, you’ll have to determine what percent of your home consists of your home office or workspace, then subtract that percent from each bill’s total. Only then can you get utilities as a home-based business tax deduction.
Repairs and Maintenance
Calling back to IRS Publication 535 again: small businesses can take off 100% of the cost of repairs and maintenance. Fixing up an old machine is an example. However, if something increases in value as a result, then it’s considered something else: an improvement. An example of that would be fixing the machine in ways that significantly increase its output.
With improvements, you’ll usually have to divide the overall cost by the number of years the improved asset’s expected to last, then deduct that amount each year. With that said, you may be able to deduct everything at once if the improvement meets the criteria of the “routine maintenance safe harbor” regulations. Consult an expert first.
Presentation can make a big difference, and you’ll want your office lobby to look spiffy and cozy. The stereotypical image is nice couches, flowers in vases, and stacks of magazines for those awaiting an appointment. You may be surprised to discover that even these expenses can be written off at tax time.
As you may expect by now, there are rules and limits. Paying for magazine subscriptions that last over a year will require prorated costs. Similarly, any furniture you purchase for the office will depreciate over time and need to be deducted accordingly. Decorations that don’t have an expected limited lifespan, like artworks, don’t qualify as business expense deductions.
Much of the advice in this small business tax deductions checklist can apply to business owners who work at home, rather than in a building. However, the unique situation requires some special considerations. Most are based on the ratio of using something for work and using that same thing for reasons other than work.
Utilities provide some good examples for home-based business tax deductions. You need power, wi-fi connection, and air conditioning for business. However, for business purposes, most people only need them in one part of the house — the home office. Figure out what percent of floor space is the home office, then subtract that percent from the utility bills as a deduction.
Running a business will require consulting with several kinds of experts. They may include lawyers, accountants, and tax advisors, among others. Everyone will charge a fee, and those fees can add up. Fortunately, you can deduct them.
Of course, this only applies if the services were related to your business. If personal and work-related matters are covered in the same session, the personal part can’t be deducted. Something else you should know is that legal expenses related to the acquisition of business assets don’t count for this practice.
Commissions and Fees
We noted earlier that all types of employee compensation may be eligible for tax deductions. If you wondered why, it is simply because paying your workers is part of running a business. You may then wonder, “Well, paying your workers to do their job is one thing, but what about commissions?”
Commissions and similar fees are, indeed, included under this practice. There are exceptions to this rule. Payments of this sort can’t be deducted if they were paid for stock and securities sales. The same goes for mortgage commissions.
Every business should have its own bank account, separate from the personal accounts of the business owners. In addition to preventing confusion and avoiding potential legal trouble, it provides an advantage at tax time. Business owners are able to deduct bank fees, as long as those fees are related solely to business.
This rule applies to a wide range of banking activities. Fees related to sustaining an account with the institution of your choice would qualify. So would overdraft fees, purchases of additional checks, ATM transactions, and similar transactions.
You never know what kinds of problems you may face when you run a business. Problems with the building foundation may result in serious damage. Customers may file lawsuits for issues beyond your control. Hackers could crash your website and steal information. They’re bad enough on their own. On top of that, they’re expensive.
Business insurance, just like home insurance and car insurance, exists to mitigate the financial toll of such problems. In exchange for monthly or annual fees, you can receive coverage just in case something happens. Those fees are deductible from your business taxes.
It’s not unusual for a prospective business owner to finance their dream by taking out a loan. The great hope is to build a stable operation off that money, pay off the loan quickly, and watch the profits roll in. Banks and similar institutions may be persuaded to lend some cash, but they’ll want something in return. That’s where interest comes in.
Paying for interest on top of a loan can feel like an extra burden during the already difficult process of starting a business. On the plus side, at least you can deduct the portion of the payments that goes towards the interest from your taxable income.
Taxes and Licenses
Deducting taxes from your taxes? You read that correctly. Businesses have to pay a myriad of taxes in their day-to-day operations. That includes real estate taxes, sales taxes, state income taxes, and more. As long as they’re connected to work, payments toward these types of taxes can help you pay less on your business taxes.
On that note, the costs of any licenses required in your line of work are also potentially deductible. Required licenses vary depending on local regulations and your chosen industry. With that said, you’re almost guaranteed to need one just to run any type of business.
Ordinarily, depreciation regulations force people to take off part of the cost for an asset each year for several years. However, there are ways to get the full 100% deduction on such assets within the same tax year. De minimis safe harbor elections allow small businesses to write off any asset with a price under $2500.
There are other options for costlier assets. Section 179 would let you take off up to $1,000,000 and change for new tangible assets used in the previous year. Some may qualify for bonus depreciation, a recent addition to the tax code that lets you write off the full cost. Take advantage of that while you can, because the maximum deduction will drop from 100% starting in 2023.
Rent on Business Property
Rent can be a major monthly expense, but it’s also a deductible one if you pay it to use a space for business. Please note that this only applies, as the IRS helpfully explains, to payments “for the use of property you do not own.”
If you work from a home office, then you can’t deduct all the rent you pay for your living space. What you can do is take the dimensions of your home office and figure out what percent of your home is devoted to it. Then, you can submit that percent of your rent payments as a home-based business tax deduction.
Personal Tax Deductions for Small Businesses
We spent plenty of time telling you what deductions you can and can’t make for your small business. Now, we’ll show you a few that small business owners frequently as personal tax deductions. It’s only fair.
Large corporations can deduct charity donations, and individuals can deduct charity donations. However, most types of small businesses aren’t allowed to do the same. Instead of trying to take them as business expense deductions, owners and stakeholders usually include them when filing their 1040s.
Typically, only a certain percentage of your adjusted gross income can be deducted when it comes to charitable contributions made in cash. For the 2020 tax year, that percentage jumped to 100%. We should also note that not every charity qualifies. Check if it falls under Section 170 and keep your receipts handy.
Many people enjoy a life of self-employment because they get to be their own boss. However, they still have to pay for their own health insurance. It’s not always easy, especially when one wants coverage for their spouse and dependents. Fortunately, they are allowed to deduct health insurance premiums on their 1040.
Such a deduction can only apply to a health insurance plan or package from a single entity. You can’t do this if you receive healthcare from another job. You also can’t do this if your partner has healthcare through their own job and you’re on their plan.
Business owners dream of creating a thriving enterprise that keeps their pockets lined for years to come. Many also dream of the day they can stop working and enjoy the fruits of their labor. To make sure they have enough cash to last, they often submit financial contributions to personal retirement plans throughout their career.
These contributions can help not just during post-work life, but also during tax time. They are eligible for deductions. Despite their business connection, they must be submitted in your individual filing due to their personal nature.
Child and Dependent Care Credit
The IRS offers something called the Child and Dependent Care Credit. It’s designed to alleviate the costs of caring for anyone who is either under the age of 13 or otherwise can’t “take care of himself or herself.” If your situation meets certain criteria, you may get relief for as much as 35% of your care-related expenses.
We mention it here not just because it may prove useful to know, but also because it’s connected to your work. According to the IRS, you can consider such expenses “work-related” if they “allow you to work or look for work.” Business owners are included.
Tax Deductions for Online Businesses
Online businesses operate differently from other types of businesses in many ways. As a result, they require their own special tax considerations. Below, we’ll describe a few tax deductions for online businesses only.
Software and Online Services
Every aspect of the online store requires some sort of software, from building the website to creating shopping carts to processing payments. There are plenty of others, including sales tax software, but we highlight these examples because they are essential to any online store. Without them, and without plenty of others, it just wouldn’t exist — at least, not as an eCommerce site.
Given that fact, you could consider this software to be necessary for your operation. You may be able to claim such programs and platforms as deductible expenses. No list of tax deductions for online businesses would be complete without mentioning it.
Internet Hosting and Related Services
The importance of web hosting to running an eCommerce venture is similarly inarguable. It’s the online equivalent of real estate. With it, you have your own dedicated website where customers can browse and buy your products. Without it, you’re restricted to hawking your wares on marketplaces.
That’s not necessarily a bad approach, but having a website gives you much more control — not to mention, more legitimacy to prospective customers. When you sign up for hosting and register a domain name, you should keep those receipts and mark the costs as business-related deductions.
Much thought and care should always go into your website’s design. The visual presentation should appeal to your target customers and fit with your branding. More importantly, the page layouts and sitemap should be easy to navigate. Getting all these aspects right is crucial to success.
We recommend leaving room in the budget for purchasing the services of a tech-savvy graphic designer. If you hire them as an independent contractor and pay more than $600, you may deduct their earnings. Just make sure to file a 1099-NEC and send that contractor a 1099-MISC.
Our small business tax deductions checklist contains 20 options, plus several more that may come in handy. There are many others scattered throughout the US tax code. If you try even just a few of these when taxes are due, you may find yourself with more money than expected.
With that said, you need to be careful when you start filing for business expense deductions. The IRS will carefully scrutinize your claims, and they may request receipts or other forms of proof. That’s why you must take care not to overstep with inappropriate and untruthful filings. Otherwise, you may find yourself in deep trouble with potentially harsh punishments.
Other than that, we can only repeat the same advice we’ve already offered multiple times. Keep all your receipts organized. Separate the business expense deductions from the personal ones. Lastly, consult experts, even when you feel sure. After all, you may be able to deduct their fees.