Tax season is stressful for any business owner. You got into business to make money and sell what you love, not become an accountant. However, no matter what type of small business you own, tax deductions play an important role in your life.
Also known as “tax write-offs”, business owners subtract these expenses from their taxable income to lower their tax bill. Any expense that is relevant and necessary to your trade or business can be tax-deductible.
This article will show all the small business tax deductions available to you when filing taxes for the 2021 fiscal year, so you can lower your taxable income and save money.
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Note: This guide is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional accountant.
What is a tax deduction?
A tax deduction, or tax write-off, reduces the amount of income your business is taxed on by state and federal governments. Deductions are business expenses you incur throughout the year that are subtracted from your gross income. This determines how much tax you owe.
All ordinary and necessary expenses are write-offs that will reduce the company's taxable income. So keep track of all your business expenses and keep those receipts.
How tax deductions work for small businesses
The IRS lets you deduct “ordinary and necessary” expenses (O & NE) from your taxable income. O & NE expenses are any costs incurred by owning a business or engaging in a trade.
“All businesses, including self-employed, can deduct expenses that are both ordinary and necessary,” says Justyna Mueller, a CPA who specializes in business tax services. Justyna explains:
“An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.”
- Wages or salaries paid to employees
- Money allocated to employer-sponsored retirement plans
- Rental expenses
- Employment taxes
- Loan interest
- Computer software
According to the IRS, you cannot deduct:
- Federal income taxes
- Estate and gift taxes
- State inheritance, legacy, and succession taxes
To claim as many tax deductions as possible, consult a tax professional like a Certified Public Accountant (CPA) or tax preparer. They will help you understand the deductions available and how you can take advantage of them in your business.
It’s essential that you track expenses and have a professional work on your returns. Dan Luthi, Partner at Ignite Spot Accounting, explains, “you get certain types of deductions in different areas that are more beneficial for you.”
He points out that small-business owners make simple tax mistakes, like wrongfully claiming a meal deduction or misrepresenting a work event. If you don’t track expenses accurately, you “start losing immediately” in those categories, says Luthi.
If you put on an event, you want to make sure that the event is managed and represented as an event. Not just a team outing at Dave & Busters for fun. You need to make sure it was used specifically for business purposes. If not, you may not get the benefit of the money spent.
How to maximize tax deductions for your business
There are many ways to maximize tax deductions for your business. However, Mueller notes that the first step is to keep good records. “Messy books often lead to missed deductions, or can cause the IRS to disallow a deduction in case of an audit,” she explains.
Once you have good accounting software in place to manage your books, you can focus on the following tax deductions.
Leverage start-up costs
The IRS allows certain deductions for starting a new business. Keep in mind that the business must take off in order to write off its expenses. You cannot deduct startup costs if you never actually start the business. You can deduct up to $5,000 in startup costs in the first year of active business.
Startup costs include, but are not limited to:
- Customer surveys
- Market research
- Product research
- Employee wages and salaries for training
- Equipment costs
If you set up a corporation, partnership, or LLC, you can write off organizational costs including:
- Incorporation fees
- Partnership filing fees
- Accounting fees
- Legal fees related to the organization of partnership or LLC
- The cost of meetings and temporary directors
“All businesses can deduct any ordinary and necessary business expense when starting a new business,” says Melissa Pedigo, CPA and finance writer.
Pay an attorney to get your corporate documents filed? Yes, that's deductible. Pay an accountant to get your business taxes set up? Yes, that's deductible. Pay a marketing agency to design a logo and brand book? Yes, that's deductible.
However, there are certain activities that you can’t write off. Pedigo explains that, “if you paid to put your dog in doggie daycare while you worked on getting your business set up, that's not deductible. Although you might think it's necessary, it's not ordinary.”
Deduct advertising expenses
Small businesses can deduct all ordinary and necessary expenses, including marketing and advertising costs. Promotional expenses are 100% deductible and include:
- Buying ad space in newspapers, TV, or magazines.
- Hiring someone to create your business logo and website.
- Public relations expenses, such as sponsorships and promotional items like mugs and shirts.
- Online advertising such as PPC ads, SEO services, or social media advertising.
- Costs of producing and printing business cards.
Any expense for promoting your business to customers is tax-deductible.
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Make charitable donations
Got a charity you love and donate to regularly? Charitable donations and gifts from businesses to nonprofits can qualify for a tax deduction. To qualify, your charity needs to be a bona fide 501(c) (3) organization.
Use the IRS’s Tax Exempt Organization Search tool to see if a potential charity is registered. Generally, most religious, environmental, animal, educational, and health-related charities qualify.
There are three types of charitable gifts you can deduct:
- Property or equipment.
- Travel expenses incurred when helping an organization.
Keep your business and personal cash flow in mind when using this tax deduction method. For example, if you donate $500 and get a $150 tax savings, you’re giving away the other $350.
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29 small businesses tax deductions
Sole proprietorships, C-corps and S-corps, partnerships, and LLCs can claim the following business deductions. There may be different rules for each legal structure.
Browse this list of popular small business tax cuts you can claim this year.
- Home office
- Office supplies
- Retirement plans
- Business travel
- Bad debt
- Employee benefits and salaries
- Business vehicle
- Medical expenses
- Business meals
- Business insurance
- Leasehold improvements
- Bank and transaction fees
- Independent contractors
- Depreciation on equipment
- Professional fees
- Moving expenses
- Phone and internet
- Taxes and licenses
- Loan interest
- Employee gifts
- Conventions and tradeshows
💡 PRO TIP: Have you heard of the section 179 tax deduction? With it, you claim immediate tax relief for equipment you’ve purchased throughout the fiscal year–including your Shopify POS subscription costs, apps, and hardware.
1. Home office
If you use a part of your home for business purposes, the IRS lets you write off rent, utilities, real estate taxes, repairs, maintenance, mortgage interest, and other related expenses for the portion of the home used for business.. You can claim this deduction whether you own or rent a home.
The home office deduction also applies to freestanding structures such as a studio, garage, or shed, as long as it meets the regular and exclusive use requirements. It’s a deduction that Justyna says businesses do not take advantage of, saying that owners who “use part of their home exclusively and routinely for business activities” may be able to deduct a portion of the above expenses, including “depreciation of their home”.
2. Office supplies
To deduct office expenses on your tax return, you need to show they are “ordinary and necessary” business expenses, not personal ones. Ordinary means that the supplies are common in your industry, such as computers, printers, printer cartridges, pens, paper, postage, storage devices, and more. You can deduct 100% of the cost of office supplies and materials used over the year.
3. Retirement plans
The IRS allows you to deduct your contributions to a tax-qualified retirement account from your income taxes. This does not include Roth IRAs and Roth 401Ks. If you’re a sole proprietor or LLC member, you can write-off personal income contributions to your retirement account.
4. Business travel
The cost of business travel is also tax-deductible. Your trip must consist “mostly” of business; if you go away for five days, for example, three of those days should be spent meeting clients or suppliers.
You can only write off “ordinary and necessary” business expenses, and you need to plan the trip in advance. You also need to be away from your tax home for longer than one work day, with the intention of doing business elsewhere.
Some business travel deductions include:
- Plane, train, and bus tickets between your home and destination
- Laundry and dry cleaning
- Rental car costs
- Baggage fees
- Hotel and Airbnb costs
- 100% of eligible business meals
Subscriptions to professional, technical, and trade journals that deal with your industry are deductible business expenses. For example, a retail store owner could deduct the cost of subscribing to Retail Dive or Entrepreneur.
6. Bad debt
If a business or organization owes you money and can’t pay, you have bad debt. It’s common amongst businesses that lend credit to customers. Uncollectible accounts are written off directly as expenses for income tax purposes.
7. Employee benefits and salaries
If you have employees, you can claim a business expense dedication for their wages. You can also write off other benefits provided, such as:
- Paid holidays and vacations
- Discounted goods or services
- Health insurance
- Contributions to employee retirement plans
- Fringe benefits (taxis, coffee breaks, etc.)
- Educational assistance
8. Business vehicle
If you buy a vehicle intended to use for business, you can write off some of the car expenses and purchase. You can also write off the number of miles driven for business.
For tax year 2021, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 56 cents per mile. You can choose to write off a business vehicle by tracking actual expenses like gas, oil, miles, tolls, and repairs.
9. Medical expenses
If you’re self-employed and pay for your health insurance, you can deduct both medical and dental insurance premiums.
Like equipment purchases, fixtures and furniture can be deductible. You can write them off in year one, or, treating them as a depreciated asset, deduct portions of the cost over time.
- Display cases
- Window displays
Retail packaging and shipping costs can be deducted on your tax return. This includes envelopes, boxes, paper, packing material, tape, labels, markers, and printer ink.
12. Business meals
The Consolidated Appropriations Act (2021) increased the business meal deduction from 50% to 100% in 2021 and 2022, if specific conditions are met. Make sure to document the amount of each expense, the date and place of the meal, and the business relationship of the person that joined you.
13. Business insurance
Most businesses must carry some type of insurance, depending on state laws, regulations, or contracts. Retailers need a variety of insurances, such as:
- Business property
- Liability or malpractice insurance
- Workers compensation insurance
- Life insurance to cover employees
- Business income coverage
You can deduct the cost of an insurance policy as an expense if it's for your business.
14. Leasehold improvements
Leasehold improvements refer to any renovations or work done to your business to make it more functional. These improvements are expensed in one tax year and depreciated over time. How you deduct leasehold improvements depends on the total project cost and your tax strategy.
- Built-in shelving
- Electrical work
- Carpeting and flooring
- Architecture and design fees
- Required permits
15. Bank and transaction fees
You can also write off any fees associated with your business bank or credit card, such as monthly and annual service fees. Merchant or transaction fees paid to a third-party payment processor, such as Stripe or PayPal, are also deductible.
16. Independent contractors
Contractor labor refers to individuals paid for services rendered, but who are not on your payroll, like freelancers. Contractors work under a specific contract and invoice for completed work. Fees paid to independent contractors are deductible. You must provide them with the IRS tax form 1099-MISC and give the IRS Form 1096 to show how much you paid them.
17. Depreciation on equipment
Depreciation refers to the continual decline in the value of an asset, due to age, wear and tear, or decay. You can list depreciation as an expense on your income statement. For example, if you buy a $30,000 piece of equipment, you can deduct depreciation over time, eventually claiming the full cost.
You can also deduct education expenses for your business or trade. If you take a course that maintains or improves your skills, or is required by law to keep your licenses in good standing, you can deduct those fees as a business expense. Employee training and workshops are also included in this tax deduction.
19. Professional fees
Fees charged by lawyers, accountants, and online bookkeeping services directly related to your business are deductible as expenses.
20. Moving expenses
If you relocate your business, you can write off the total cost of the move from your taxes.
This includes the cost of moving equipment, supplies, and inventory from one location to another, and any relevant costs involved in buying or renting a new location.
21. Phone and internet
You can deduct your entire phone and internet bills if you use them for business purposes only. If you mix personal and business use, you can only deduct the percentage used for business.
It has to be reasonable. For example, if you’re using your phone to call grandma and play Wordle, 100% of your bill isn’t business-related. If you’re unsure about your percentage, underestimate your business usage to avoid any red flags from the IRS.
If you rent an office space, you can deduct the amount you pay for rent. You can also deduct any rent payments for equipment. If you need to pay a fee to cancel a lease, you can deduct that as well.
23. Taxes and licenses
Whether you’re starting a clothing boutique or wine shop, you will need to obtain the required licenses to operate legally. You can deduct the cost of all federal, state, and local licenses related to your business. You can also deduct various taxes, including:
- State income taxes
- Sales taxes
- Payroll taxes
- Real estate taxes
- Excise taxes
Sometimes inventory becomes obsolete, damaged, spoiled, stolen or lost. In these cases, you can write off the inventory. Two methods of writing off inventory are: (1) expensing it directly to your cost of goods sold (COGS) account. (2) Using the allowance method, where you record a journal entry with a credit to a contra asset account offsetting the asset account in which the cost of the inventory item in question is recorded.
Recently, I helped several retailers with an election to expense their inventory purchases. Under certain conditions, small businesses are not required to capitalize their inventory and expense the cost of it as it is being sold. Instead, they can make an election to deduct inventory cost when incurred. This election can greatly improve cash flow in the year it is made!
From water to electricity, heat, and sewage, all utility costs of running your small business are fully deductible.
Any reasonable expenses related to decorating your store are also deductible. These include, but are not limited to:
- Curtains and rugs
- Art and wall hangings
- Plants, posts, and hangers
- Candles and lamps
- Other decorative items
27. Loan interest
Paying interest on a small business loan you took out? Those interest payments are tax-deductible, assuming the loan is used to cover business expenses. The loan must be through a traditional lender, not a family member or friend.
28. Employee gifts
Your gifts to employees are also tax-deductible, up to $25 per recipient each year. For example, you could deduct gift cards or holiday gift baskets.
29. Conventions and trade shows
Educational events like seminars, trade shows, and conferences often come with a high price tag–but the cost may be 100% deductible at tax time. Meals, lodging, transportation costs, and other related business expenses incurred at the event are also deductible.
Claim tax deductions for your business
Few truths are more painful than realizing that a tax deduction could have lowered your tax bill, whether it's your fifth or first year in business.
Small business owners who don’t take write-offs seriously risk having less cash in the bank and lower profits. While taxes are stressful, they don’t always have to be. Track your expenses accurately, hire an accountant, and take advantage of the tax deductions discussed above.
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With Shopify POS, it’s easy to create reports and review your finances including sales, returns, taxes, payments, and more. View your financial data for all sales channels from the same easy-to-understand back office.