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 alas, taxes are a necessary obligation we all face. Rather than dwell on it, consider the positive side of the situation. For many entrepreneurs, the upside is tax deductions. Working with your accountant or using tax preparation software, you can ferret out deductions that can reduce the amount of income taxes you must pay.
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!
Unfortunately, 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.
And just to be 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 when you file your small business income tax return.
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.”
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 2023, the standard business mileage rate is 65.5 cents per mile. 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.
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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 reverts 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.
Tax Deduction FAQs
As a Small Home Based Business, What Is The Best Deduction For My Taxes?
The home office deduction can be a terrific deduction for home-based business owners.
Whether you own or rent, if you use part of your home for business, you may be able to deduct expenses for the business use of your home.
There are two methods to determine this deduction. The regular method allows you to deduct actual expenses based on the percentage of your home used for business, while the simplified method allows you to base your deduction on the square footage of your home used for business purposes.
Taxpayers using the regular method, instead of the optional simplified method, must determine the actual expenses of their home office such as mortgage interest, insurance, utilities, repairs, and depreciation. The simplified method offers a standard deduction of $5 per square foot of home used for business (maximum 300 square feet).
Either way, you must meet two basic requirements in order to qualify for this deduction:
1. Regular and exclusive use.
2. Principal place of your business.
You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.
But if the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.
If you’re considering taking this deduction talk to your tax professional and review IRS Publication 587, Business Use of Your Home.
How Many Deductions Should I Claim?
You may claim as many tax deductions as you qualify for. There are many tax deductions that may be available to you as a small business owner. (Here’s a list of 23 deductions work-from-home entrepreneurs may qualify for.) You can claim as many as you qualify for, and that you can substantiate.
Tax Write Offs For Service Based Business Owners
Service-based business owners may still qualify for a variety of tax deductions including:
Home-based business (if a portion of your home is your principal place of business).
Business use of your vehicle if you use it for qualified business purposes.
Cell phone/internet used for business
Advertising and marketing
Interest on business loans and financing
Are There Any Hidden Business Tax Write Offs Small Business Owners Can Take Advantage Of?
If you’re worried you may be missing out on tax deductions for your business, here’s the good news. The IRS publishes a lot of helpful information for small businesses to help them understand federal income tax filing requirements and potential deductions.
Most tax software includes questions and tax tips to help business owners (including independent contractors and sole proprietors) identify possible deductions. And if you work with a tax professional, they can also help you figure out what to deduct.
How Do Tax Deductions Work?
Tax deductions can reduce your taxable income. How you report these deductions (and which ones you can take) will depend in part on your business structure, whether you operate as a sole proprietorship, partnership, Limited Liability Company (LLC) or corporation.
Sole proprietors report income and expenses on Schedule C.
LLCs may use different forms depending on how many members they have and whether they elect to be taxed as a corporation. A single-member LLC that has not elected to be taxed as a corporation will usually file Schedule C or Schedule E with their personal tax return.
S Corporation shareholders usually file Form 1120-S and file a K-1 with their personal tax return.