If you own a small business, tax season no longer peaks on April 15th. The fun extends all year with sales tax reports and quarterly filings.
Fortunately, tax season in the United States doesn’t hurt as much as it could, thanks to small business tax deductions.
According to the IRS, business expenses are deductible from your taxes when your business exists to make a profit. The list of small business tax deductions is guided by a seemingly simple but opaque rule: business expenses are deductible when they are necessary and ordinary.
Ordinary expenses are those that crop up all the time and are a standard part of operating. Necessary costs are those that are helpful for running your business. The expense doesn’t need to be mandatory to fall into the realm of “necessary.”
There are hundreds of individual deductions you could make to your taxes. Read through 12 of the broader categories here:
Twelve Small Business Tax Deductions
Are you missing out on one of these deductions? Use this list as a guide to save as much as possible
1. Startup Costs
Are you in the first year of your business? You’re probably struggling to become profitable in part because of the startup costs.
The IRS is friendly to new businesses, and you can write off up to $5,000 on your tax return when your overall startup costs are $50,000 or less.
2. Home Office Deduction
Work from home in a dedicated office space? You might be able to write it off on your taxes.
The home office deduction is a gold mine, but only if you qualify. You’ll need to demonstrate that your home office is:
- Used solely as an office
- Used regularly (not after leaving your primary office)
- Used to conduct your most crucial business functions
If your office qualifies, deduct $5 for each square foot of your office. The deduction is capped at 300 square feet.
Your inventory itself isn’t tax deductible unless you use the cash method. If your business earned an average of under $10 million for the past three years, you could potentially write off your inventory as supplies and materials, which are tax deductible.
The change isn’t simple. If you’ve filed before and treated your inventory as goods sold and want to switch, you’ll need to ask the IRS for permission to change your accounting method using IRS Form 3115.
4. Bad Debt
Write off your bad business debt straight from your Form 1040 Schedule C. You don’t need an additional form, just deduct the bad debts from your gross income.
Don’t write off bad debt associated with nonbusiness purposes. The IRS doesn’t allow you to write off even part of your nonbusiness debt.
5. Accounting Fees
Taxes are mandatory, and accountants save you both time and money. But that doesn’t mean the accountant’s bill doesn’t sting when it arrives.
Fortunately, any accounting fees associated with your business are considered to be small business tax deductions. You can deduct costs for accounting up services like:
- Setting up shop
- Tax prep and filing
- Tax advice
Note: legal fees are also tax deductible. The same rules apply – personal legal costs don’t count, but any legal fees associated with your business are a deduction.
6. Health Insurance
Health insurance premiums are always small business tax deductions. It doesn’t matter whether you pay the premiums through your business or personal accounts: it’s a business deduction.
If you’re claiming a business loss, then you’ll claim this expense through the Schedule A form by listing yearly premiums as an itemized deduction.
Several types of insurance are included: dental, medical, and long-term care premiums all count. You can also write off not only your own deductibles but also the costs of your spouse and dependents’ deductibles.
7. Self-Employment Taxes
A small business is defined by the IRS as being one under 500 employees, but most small businesses are self-employed people who don’t have anyone else on the payroll. Indeed, out of the 28 million small businesses in the United States, 22 million of those are self-employed people.
If you’re one of those 22 million, this deduction is for you.
The self-employment tax deduction refers to what is known as the self-employment tax – the Social Security and Medicare contributions that your boss would otherwise pay on your behalf minus the 7.65% you pay as an employee. But you’re your own boss, so you’re hit with the 15.30% tax.
The 15.30% tax on top of your gross income tax is always a shock to the system. But there’s good news: these taxes are one of the most significant small business tax deductions.
You can deduct half of the owed self-employment tax from your net income because the IRS treats 7.65% as a business tax.
Additionally, you don’t pay 7.65% on everything. One of the benefits of self-employment is the business expense deductions. So, you’ll only pay 7.65% tax on 92.35% of your net income (income after expenses).
Self-employment deductions are massive – so don’t miss out!
While most deductions must be claimed in the financial year in which you’re filing, some small business tax deductions can be carried over.
Carryovers are those that can be used in the present year but may not have been used in previous years. If you’ve missed out on the home office, passive activity, capital losses, or charitable contributions deductions, you may be able to claim them this year if you qualify.
9. Meal and Entertainment Expenses
Meals and entertainment trigged by businesses can be written off as small business tax deductions, but it’s not a hall pass to write off every evening out. You can write off meals and entertainment when:
- You’re engaged in business travel
- You’re at a dinner with a client, partner, vendor (or potential client/partner/vendor)
- You bought food for the group at the workplace or a work event
To make the deduction, you’ll need meticulous records of these instances including receipts and other ancillary evidence when available (travel confirmations, emails, etc.). You don’t need to submit your calendars with your taxes, but they’re handy to have in the event of an audit.
Before you get too excited, let’s talk about some caveats.
First, you’ll rarely get to write off the whole bill. If you’re out for dinner with a client, you’re allowed to write off 50%. If you’re on a business trip, only 50% of the bill of a meal out by yourself is deductible.
The only time you’ll unlock the 100% deduction is when you buy food for the workplace. Work meetings outside the office don’t count: staff lunches at a restaurant is still limited to 50% of the total bill. Get the lunch catered, however, and write off the whole bill.
10. Retirement Contribution
As a small business (sole proprietor, LLC member, or partner in a partnership) you’re allowed to deduct the contributions you make from your personal income into your qualifying investment account.
Limits of the deduction vary depending on the type and number of retirement accounts you have. For example, you can’t write off Roth IRA contributions, but the proceeds are then tax-free when you withdraw at retirement.
You can write off IRA contributions, but the size of the small business tax deductions is limited according to your income. Employer 401k contributions are also deductible, but as a small business, you won’t have an employer contributing to a 401k in your name, so it’s not something to worry about.
11. Furniture, Supplies, and Equipment
Office furniture, supplies, and equipment are all business expenses and all qualify as small business tax deductions.
Here’s what you need to know:
Office furniture is deductible when it is necessary for an outside office. Some pieces valued under $2,500 fall under the ‘supplies’ category.
It’s also possible to deduct furniture purchased for your home office, but you need to be certain it stays in your home office. Any decor purchased for your office but moved elsewhere becomes a personal expense and is not tax deductible.
Office supplies include traditional items like paper, ink, pens, and any other things you add to your Office Max list. Small pieces of furniture (valued below $2,500) also fall into supplies.
All of these can be written off of your taxes; keep your receipts.
Shipping supplies aren’t always office supplies. Instead, shipping-related items fall under the umbrella of ‘cost of goods sold,’ which is separate from your general expenses.
Section 179 allows for deducting the full price of business equipment purchased or financed during the tax year you’re filing in.
New and used equipment are both included and the limit on equipment purchases is $1,000,000. After that, the deduction is reduced, or you begin to qualify as a large business.
Equipment may include physical equipment like machinery, but it also includes off-the-shelf software required for your business like CAD products.
Depreciation also comes into play, but it deserves its own heading.
- Computer Software
You’ll find more on depreciation in the Modified Cost Recovery System (MACRS) in IRS Publication 946.
Save Money on Taxes with Small Business Tax Deductions
Taxes are inevitable, but if you’re a small business, they don’t need to be painful.
These are just twelve of the many small business tax deductions available. Have you been making the most of them?
Share your tax tips in the comments below.