Plenty of small business owners want to reduce their tax liability. Tax deductions, many of which are ordinary business expenses, can be claimed on your business’s tax return, and are a way to minimize tax liability and keep more money in your pocket. Because the tax rules are complex, it’s easy to overlook eligible deductions, and it’s not always clear how to claim them. Here we will look at the most common tax deductions for small businesses and tips for claiming them.
What is a tax deduction?
A tax deduction is an expense that is subtracted from personal or business income, reducing taxable income and resulting in a lower tax obligation.
Specifically for small businesses, a tax deduction is a business expense recognized by the Internal Revenue Service (IRS) as an “ordinary and necessary” expense that reduces a business’s taxable income.
Ordinary expenses are deductible if they are common or routine expenses in your line of work. These expenses are deemed essential for your business to survive and prosper.
Businesses organized as sole proprietorships, partnerships, C corporations, S corporations, and limited liability companies (LLCs) can utilize deductions, also known as tax write-offs, on their federal income tax return.
6 types of tax deductions for small businesses
There are a number of business expenses that may qualify as tax-deductible expenses. The most common categories of expenses are:
- Business expenses
- Home office expenses
- Travel expenses
- Professional development expenses
- Health insurance premiums
- Retirement plan contributions
1. Business expenses
It’s normal to have expenses for your business, whether for supplies or renting office space. Below are expenses that typically are deductible.
- Supplies. Deductible supplies include paper, printer ink, printers, computers, pens, shipping supplies, labels, and postage. These expenses are deductible in the year they are purchased if they are for business purposes only.
- Equipment. The rental payments or purchase costs for equipment, such as copiers, printers, and vehicles, are deductible as long as the equipment is only for the business.
- Rent. Rental payments qualify as deductions if you rent office, manufacturing, or storage space for your business. Like the other expenses, these must be used strictly for business purposes.
- Furniture. Furniture purchased for your business, such as desks and chairs, qualify as deductible expenses. When starting a business, no more than $5,000 in furniture costs is deductible.
- Software and fees. The cost to purchase software for your business is a deductible expense. Fees are also deductible if you utilize any online platforms, such as Shopify, for your business.
2. Home office expenses
Just because you work from home doesn’t prevent you from deducting office expenses. Utilizing a dedicated home office for your business can provide some welcome tax deductions.
- Utilities. A percentage of the cost of utilities is a deductible expense based on the percentage of your home used for a home office. This means a portion of electricity and water expenses for your home are business tax deductions.
- Mortgage interest. The same rule applies to mortgage interest. This lets them write off a percentage of mortgage interest based on the percentage of the residence used as a home office.
- Telephone and internet. If phone and internet service is necessary for your business and used only for business, the cost is a deductible expense. However, suppose you use a service for both personal and business. In that case, only the percentage of use for the business is a tax deduction.
- Real estate taxes. The percentage of your home dedicated to a home office determines the business portion of real estate taxes. The business portion of real estate taxes is deductible.
3. Travel expenses
There are possible deductions available when you travel for business. The IRS has set out the criteria for a trip to count as a tax deduction. This includes:
- Your work duties require you to travel
- The travel must be outside your “tax home,” which is the area where you usually conduct business
- The travel is longer than a regular workday, requiring sleep
The types of travel expenses that are deductible include transportation, lodging, and meals. According to the IRS, costs should not be lavish and should not be for personal purposes.
- Transportation. The cost of airfare, bus, train, transportation to and from the airport, and transportation from your hotel to your business meeting or temporary office are deductible business expenses.
- Lodging. Hotel costs and other types of accommodations qualify as tax deductions.
- Meals. For meals after January 1, 2023, the deduction allows for as much as 50% of the unreimbursed cost.
4. Professional development expenses
Keeping up with the latest information in your industry is vital to continuing and expanding your business. Fortunately, expenses for professional development qualify as tax deductions.
- Training. A qualifying tax deduction is the expense of taking a course or attending a webinar or seminar that will benefit your business.
- Conference. As long as you can show that a conference benefits your business, the expense to attend can be deductible.
- Reading material. The cost of a trade publication subscription and books for your industry count as educational expenses that can qualify as tax deductions.
- Professional memberships. Fees or dues for membership in a professional organization may be tax deductible, provided the membership is related to professional or business development. Deducting the cost of membership in country clubs and gyms is generally not allowed.
5. Health insurance premiums
As a business owner, you are responsible for costs generally paid by an employer. Some of these expenses can help reduce your tax liability. If you report a net profit on your Schedule C (the form where a self-employed individual lists income and expenses), health and dental insurance premiums are completely deductible for you, your spouse, and your dependents. However, instead of taking it as an itemized deduction, it is taken as an adjustment to your income that reduces your taxable income, which can result in an even lower tax bill.
If a small business owner provides health insurance for their employees, the cost of the premiums paid is a deductible business expense.
6. Retirement plan contributions
Saving for retirement is helpful for your future and can help reduce taxes due. Contributions to an IRA, SEP IRA, SIMPLE IRA, and qualified retirement plans, such as a 401(k), reduce the income on a self-employed business owner’s personal tax return on Form 1040, Schedule 1. The deduction amount depends on whether you or your spouse have other retirement plans through an employer. The deduction cannot be more than you earned, and no more than the maximum savings amount within the plan.
Three tips for claiming tax deductions
The more tax deductions you can claim, the more you can reduce your tax liability. Here are some tips to follow to maximize tax deductions.
- Keep good records. Save receipts, invoices, and notes related to business expenses. This information can help you calculate the deduction and is useful in case of a tax audit.
- Consult tax advice. Consulting with a tax professional can help you determine applicable tax deductions and calculate the appropriate amount. Alternatively, you can refer to IRS guidelines regarding business expenses and deductions.
- Use another method for home office deduction. There are two methods used to calculate the home office deduction: the simplified method or the regular method. The regular method uses the actual office space expenses. The simplified method allows a total deduction of $1,500.
Business owner tax deductions FAQ
What deductions can I take on my taxes?
Ordinary and necessary business expenses are eligible as tax deductions. They include rental payments, office supplies, home office expenses, travel expenses, professional development costs, health insurance premiums, and retirement contributions.
What are the 4 most common tax deductions?
The standard deduction is a common tax deduction because it does not require documentation. Other common tax deductions for small businesses include the home office deduction, health insurance premiums, and retirement contributions.
What are the best tax deductions?
The best tax deductions are those you can take before your adjusted gross income is calculated. These include business expenses, student loan interest paid, health insurance payments paid as a self-employed business owner, and retirement contributions.
What can I claim without receipts?
You can claim a home office deduction without receipts using the simplified method to calculate the amount. Individuals can also claim deductions for retirement contributions and self-employed health insurance premiums paid.
What are the easiest tax deductions?
The easiest deductions include the standard deduction that reduces your adjusted gross income. This is a standard number that can change every tax year. The deduction amount depends on your filing status. Another easy tax deduction is deducting the health insurance premiums paid as a self-employed individual.