Crucial tax deduction and write off tips for small business owners

For most people, the term “tax season” doesn’t evoke the same heartwarming feelings that phrases like “holiday season” or even “football season” do.

But tax season comes every year, ready or not. 

You may be able to turn dread into anticipation by focusing on what you stand to benefit from. For many entrepreneurs, the upside of tax season is tax deductions. Working with your accountant or using accounting software, you may be able to write off expenses that can lower the amount of income taxes you must pay. 

The more deductions you can take, the lower your taxable income.

The more deductions you take, the lower your taxable income. And ultimately that can mean a smaller tax bill or a bigger refund. Win win! 

Many legitimate tax deductions go unclaimed year after year, perhaps because taxpayers are unclear if they are eligible for them or simply because they are unaware that they exist. 

Tax Breaks: Tax Deductions vs Tax Credits

To make sure we’re on the same page here, a tax deduction is an expense you can subtract from your business income to reduce your tax liability. 

The IRS explains that deductible business expenses are “…both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.”

Tax deductions lower your taxable income, essentially reducing the amount of income subject to tax. For example, if you’re in the 25% tax bracket, a $1,000 deduction saves you $250 in taxes.

Tax credits can also save you money on taxes, but they aren’t the same. 

Tax credits, on the other hand, directly reduce your tax bill dollar-for-dollar. A $1,000 tax credit cuts your tax bill by exactly $1,000, making credits generally more valuable than deductions. 

While we’re focused in this article on tax deductions, don’t forget to explore tax credits for your small business. Two examples: the Small Business Health Care Tax Credit if you provide health insurance to employees, or the Work Opportunity Tax Credit when hiring from certain targeted groups. The Earned Income Tax Credit may also apply if your business income falls within certain thresholds. 

This information is for educational purposes only. Please consult your CPA or tax professional, or review IRS instructions, to understand your specific situation.

Top Small Business Tax Deductions

Here are the top deductions you’ll want to look into:

1. Startup costs. It’s important to record business expenses from the very beginning of your venture, because certain startup costs may be deductible. There are limits, though, and you’ll need to make sure you keep meticulous records of these expenses, such as business-related equipment, marketing expenses and more. If you qualify, you may be able to deduct up to $5000 in startup expenses and up to $5000 in organizational expenses to set up your business entity. 

2. Home office expenses.  You may qualify for a home office deduction if you have a true designated space in your dwelling that is used exclusively as your principal place of business. If it’s your dream to work from home but you don’t have a home office, you might want to consider reinvesting funds from your next tax refund to set up a home office space. Paying this expense now could save you money in the long run, and could make you eligible for a home-based business deduction in the future. (Learn more about this deduction below, in the FAQs.)

3. Business use of a vehicle. There are two ways to claim vehicle expenses: the actual expense method and the standard mileage rate method. For 2024, the standard business mileage rate is 67 cents per mile and rises to 70 cents per mile in 2025. If you use your vehicle for business purposes at all, record every trip you take by logging the date, miles traveled and business purpose. In addition you may be able to deduct actual expenses for parking and tolls as long as they are not classified as commuting expenses. Keep good records of those too. 

4. Phone and internet expenses. You may be able to deduct some or all of the cost of your cell phone bill depending on whether you use it exclusively for business. And you may be able to depreciate the cost of your cell phone. Same goes for your internet service. Plus you may be able to deduct internet-related expenses like web hosting for your business website or your business email account. 

5. Business insurance. Businesses may pay for a variety of different types of insurance, ranging from general liability insurance to business property insurance to business interruption insurance. These expenses are likely tax deductible. Group medical insurance for employees and worker’s compensation insurance premiums are other examples of deductible insurance. Self-employed individuals may also be able to deduct insurance for medical and dental insurance and qualified long-term care insurance for themselves, their spouse, and their dependents.

6. Legal fees. Expenses related to forming a business entity (such as an LLC or S Corporation), having an attorney create or review contracts, and other legal fees may be tax deductible. 

7. Accounting expenses. If you use bookkeeping software or bookkeeping services, tax preparation software, or you hire a CPA or Enrolled Agent to prepare your business taxes, you can then write those costs off.  

8. Business meals. For 2021 and 2022 only, businesses were generally allowed to deduct the full cost of business-related food and beverages purchased from a restaurant. In 2023 this reverted to the usual limit of 50% of the cost of the meal. Otherwise, this deduction is generally limited to 50% of the cost of the meal. There are some additional restrictions (meals can’t be extravagant, for example), but a couple of examples for self-employed individuals and business owners include meals while traveling away from home on business (whether you eat alone or with others) or meals at a business convention.

9. Business interest. If you get a small business loan and use it to pay for business expenses, you will likely be able to deduct the interest. You must be legally liable for the debt and there must be a “true debtor-creditor relationship.” If you qualify you may be able to deduct the cost of that interest— including for business credit card debt. Business bank account fees are also often deductible.

10. Advertising and marketing. Whether you are using paid advertising or social media marketing to help bring customers to your business those expenses can be deducted from your business income. 

11. Contractor and consultant expenses. Have you hired freelancers or an agency to help with marketing, business development, creating your brand logo, or other services? If so you can deduct those expenses. Keep in mind you may need to file 1099 forms to report those payments to the IRS. 

12. Education expenses. Costs you incur to increase your business expertise including seminars and workshops, subscriptions, industry books and other similar expenses can be deducted. If you pay or reimburse education expenses for an employee, you can deduct the payments if they are part of a qualified educational assistance program. 

While tax time will probably never be an occasion when you feel like breaking out your party decorations and confetti, it also doesn’t have to be a time of great stress. By taking advantage of the many deductions that may be available to you, tax season may end up feeling like a game you’re equipped to win.

Use accounting software to stay up-to-date and organized on your business income and expenses so you can take advantage of potential tax savings. Keeping good records and using the right tools can help you file your business taxes with confidence.

Tax Implications of Different Filing Statuses

Your filing status significantly impacts your tax situation as a business owner. If you’re a married couple, filing jointly often provides better tax rates and higher deduction thresholds than filing separately. However, in specific situations—such as when one spouse has significant medical expenses or business losses—married filing separately might lower your overall tax burden.

For sole proprietors, your business income flows through to your personal tax return, making your personal filing status particularly important. Single filers face different tax brackets than heads of household, potentially affecting how much of your business profit goes to taxes. Review your filing status annually, especially after major life changes like marriage, divorce, or having children, as these events can open up new tax-saving opportunities for your business.

Capital Gains and Investment Considerations

Smart investment strategies can significantly reduce your tax burden as your business grows. When you sell business assets held longer than a year, you’ll pay long-term capital gains rates (0%, 15%, or 20% depending on your income level) rather than higher ordinary income tax rates. This makes strategic timing of asset sales crucial for tax planning.

For business owners who reinvest profits, understanding the tax implications of different investment vehicles matters. Some investments generate tax-exempt income, such as municipal bonds, while others might qualify for preferential tax treatment. If you’re considering selling your business in the future, you may qualify for the Small Business Stock Capital Gains Exclusion (Section 1202), which can exclude up to 100% of eligible gains from federal taxation if specific requirements are met.

State and Local Taxes for Small Business

When we think of taxes, most of us think of federal taxes and the IRS. But your business may also have to pay state tax and/or local taxes. 

These taxes can add up. The Tax Cuts & Jobs Act (TCJA) capped the State and Local Tax (SALT) deduction at $10,000 for those who take itemized deductions on their personal returns (rather than the standard deduction), potentially affecting business owners in high-tax states whose business income flows through to their personal returns.

Property taxes on business real estate remain fully deductible as a business expense if the property is used for business purposes. For home-based businesses, you can deduct the business portion of your property taxes as part of your home office deduction. Sales taxes paid on business purchases are generally deductible as business expenses as well.

Many states offer their own tax incentives for small businesses, including credits for job creation, research and development, or investing in specific geographic areas. These state-level incentives can sometimes provide more immediate benefits than federal programs, especially for locally-focused businesses. Research your state’s small business tax incentives or work with a local tax professional familiar with region-specific opportunities to ensure you’re not leaving money on the table.

Retirement Planning Tax Benefits for Business Owners

While it may be tempting to plow all your business income back into growing your business, or just increasing your personal income by taking a larger paycheck, don’t forget to overlook saving for retirement. 

Not only will you help secure your future, you may be able to take advantage of tax deductions that make retirement savings even more rewarding. 

The easiest way to contribute to a retirement account when you’re self-employed is often through an IRA. A traditional IRA contribution allows you to deduct that amount from your taxable income, lowering your tax bill for the tax year for which you make the contribution. For 2024 and 2025, you can contribute up to $7.000 ($8,000 if you’re 50 or older). There is a phase-out on deductions based on your income level, though. 

For business owners seeking to save more aggressively, a SEP IRA (Simplified Employee Pension) allows much higher contribution limits—up to 25% of your net self-employment income or $69,000 for 2024, whichever is less. These contributions are tax-deductible for your business, reducing both your income tax and self-employment tax liability. SEP IRAs are particularly attractive for their simplicity and minimal paperwork compared to other retirement plans.

The Solo 401(k), designed for business owners with no employees (except a spouse), offers even greater flexibility. This plan allows you to contribute both as an employer and employee, potentially enabling total contributions up to $66,000 in 2024 or $70,000 in 2025m with an additional $7,500 if you are 50 years of age or older. Those age 60 to 63 can contribute an additional $11,250 in 2025.

You also have the option of a Roth IRA or Roth Solo 401(k) instead. While contributions aren’t tax-deductible now, your withdrawals in retirement will be completely tax-free. This can be particularly strategic for growing businesses anticipating higher future income.

If you have a high-deductible health plan, a Health Savings Accounts (HSAs) offers another powerful tax benefit. HSA contributions are tax-deductible, grow tax-free, and withdrawals for qualified medical expenses are also tax-free—a rare triple tax advantage. In 2024, self-only coverage allows contributions up to $4,150, while family coverage permits up to $8300, with additional catch-up contributions of up to $1000 for those 55 and older.

Frequently asked questions