Being a small business owner comes with its fair share of challenges and rewards. One of the major challenges we hear from small business owners is, without a doubt, tax season.
The more money your business brings in, the more taxes you’re liable to pay. However, as a small business owner, you can write-off tax deductions to help offset the cost of doing business.
It’s essential to know which business expenses can be lawfully deducted and which expenses cannot be deducted, so you can keep the most profits in your pocket while still paying your dues. In this guide, we’ll walk you through the best small business tax deductions so you can get a head start on saving the most on taxes.
One caveat: unless your small business happens to be an accounting firm, it’s always beneficial to hire an accountant who can advise on federal tax laws, prepare or review your tax return, and ensure your business is not leaving any tax deductions off the table.
The best part about using an accountant for your business? It’s a fully tax-deductible expense. Until you meet with your accountant, it’s best to plan ahead and have a good grasp on what common small business tax deductions can include so you can start tracking expenses accordingly.
Tax deductions are business expenses that must be both ordinary and necessary. For a better understanding of what the IRS means by that, this is their official definition:
“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. An expense does not have to be indispensable to be considered necessary.”
Rent, advertising, payroll and office supplies are all examples of tax-deductible expenses. However, some business expenses are only partially deductible, such as meals (only allowed a 50% deduction in most cases), and gifts (only up to $25 per person is allowed as a deduction).
The more tax deductions you claim, the less taxable income you’ll have, and less taxable income equals fewer taxes owed. Keep reading to see the best tax deductions for small businesses and how to track and record your expenses so you can write them off come tax season.
All business expenses must be well documented with a bill or receipt showing the amount, date, payee, and business purpose. In the event that your business is audited, the IRS will not accept any expenses as deductions if proof of the transactions can’t be provided.
While keeping hundreds of paper receipts doesn’t sound very practical or convenient, it’s an unfortunate reality. You can also use an app-based service to keep track of all your expenses digitally. Everlance’s expense management is the perfect solution for keeping track of receipts. Just use your phone to take pictures of each receipt and they are securely stored in the cloud forever. You can also manually add expenses and classify them accordingly.
With a paid membership, you can even link your bank account or credit cards, and it can automatically grab your expenses. When tax time rolls around, you can export and download the data into a PDF or Excel file and easily hand it off to your tax preparer or import it directly into your tax preparation software.
If you manage a small business, these small business tax deductions are for you. Some require certain business licensing, others are relevant for anyone—LLC owner or “solopreneur”—that is self-employed. If you’re not sure, be sure to consult a tax professional for details on your specific situation.
The qualified business income deduction is one of the most common small business deductions to take, but making sure you qualify for it can be tricky. If you’re not sure, you may want to check with a certified tax professional to get specific advice for your situation. In general, if you own a sole proprietorship (solopreneur, freelancer, etc.), partnership, S corporation or some trusts and estates, you likely qualify.
The qualified business income deduction allows you to deduct up to 20% of your qualified business income from your taxes. For all the details, check the IRS explanation of the qualified business income deduction.
If you have insurance for your business, the insurance premiums are tax deductible. These are considered an ordinary and necessary expense in many industries. There’s a variety of insurances that are deductible, including:
If you’re starting a new business, many of the costs associated with starting up a new business are tax-deductible. In order to deduct startup costs, they must meet both of the following requirements:
The IRS has a breakdown of startup costs and how to deduct them from your taxes on their website.
If you drive for work (and if you’re self-employed, you probably do), you can take car and mileage deductions—and these can add up fast!
There are two ways to calculate this deduction:
The first one is much easier, and is meant to “cover” all of the expenses and maintenance that goes along with owning a car. For the standard mileage rate deduction, you’ll simply keep a mileage log of every mile you drive for work. At the end of the year, multiply the number of work miles by the standard IRS mileage rate (currently 62.5 cents per mile) and that’s the amount of deductions you can take.
For the actual expenses deduction, you’ll need to keep track of all of your car-related expenses: things like gas, repairs, maintenance, oil changes, tires, lease payments, insurance costs, registration fees and so on. However—if you use your car for a mix of business and personal usage, you’ll only be allowed to deduct the “business” portion of these expenses.
As a result, you still need to keep a mileage log—of all the miles you drive—and then calculate the percentage of your total mileage that was for business. Let’s say it was 40% work mileage and 60% personal. Then you can deduct 40% of all your car ownership costs.
For most people, the standard IRS mileage rate based on driven business mileage will be a much easier—and often larger—deduction.
Need a hand recording your mileage and keeping everything IRS-compliant? Everlance—the #1 rated mileage tracking app—can easily and automatically record your mileage, total it up, provide tax-ready reports, help you keep track of expenses and deductions, and more.
It’s always a good idea to have separate bank accounts and credit cards for your business. If those accounts charge annual or monthly fees, these are deductible. You can also deduct any fees paid to third-party payment providers, like Paypal and Stripe.
If you have employees on payroll—whether it’s a full-time employee, independent contractor or freelancers, these salaries and wages paid to employees are tax-deductible. Certain employee benefit programs, like education assistance, life insurance, adoption assistance, some retirement plan accounts and other plans are tax-deductible as well.
If you don’t have anyone on payroll but contribute to your own (qualified) retirement plan, there are tax deductions available for that as well (see Form 1040 for help calculating).
Work from home? If you work for yourself or have a small business, you can take advantage of the home office deduction. Here’s how to know if you’re eligible:
Fit the description? There’s two ways to calculate the home office deduction:
To calculate the second option, first find the percentage of your home that your home office occupies by dividing your home office square footage by your home’s total square footage. Then, multiply the percentage you calculated by the total of your home’s allowable expenses (this can include things like rent, mortgage interest, insurance, utilities and so on).
Keep in mind that this deduction is regularly abused and therefore can be a red flag for the IRS and frequently trigger an IRS audit. Therefore, it’s essential that you ensure you’re eligible for it before claiming it.
Any marketing or advertising you do for your business is tax-deductible: ad spend, flyers, having a website, all of it.
If you’ve incurred any legal fees or other professional fees over the course of the year, these are tax-deductible. This includes anything related to your business and non-personal, including any rental properties for your business.
A bad debt occurs when someone owes you money that you can’t collect. Figuring out if the money you’re owed is a bad debt or not can be confusing, so here are some examples:
The following are typically NOT bad debts:
The following are examples of bad debt:
Generally, bad debts can be deducted from your annual business income to lower your taxable income. For more details on bad debts, check the IRS website or consult a tax professional.
If you travel for work outside of your city, you can deduct travel expenses and meals that are relevant to your business. Things like business meals, transportation costs (mileage, flight costs, train tickets, Ubers, etc.), lodging and more are all deductible.
In order for a trip to qualify as a business expense, it needs to meet at least the following criteria:
If your business requires you to be a part of any clubs, memberships or professional groups, you can deduct the cost of such fees or dues from your taxes.
Remember, business expenses must be necessary and ordinary in order to be considered tax deductible. So for example, a personal chef that’s part of the US Professional Chef Association would be able to deduct the annual fee from their taxes. However, they likely wouldn’t be able to deduct their monthly snack subscription box.
Similarly, any business-related subscriptions are tax deductible as well. This can include things like:
If you took out a loan to start your business—or help your business get through the Covid-19 pandemic—or for a variety of other reasons, you can deduct the interest paid on that loan from your taxes.
Some caveats apply. For example, for interest to be tax-deductible, you must meet all of the following criteria:
For more details on how to deduct business loan interest from taxes, check the IRS guide to business tax deductions.
If you need to rent or lease any equipment, tools, machinery or other supplies for your business, you can write off the amount of the rental costs.
Remember, this only applies if the cost is an ordinary and necessary expense for your business in your industry.
Similarly, if you rent or lease office space, land, buildings, or other physical space for operating your business, you can deduct these business expenses from your taxes as well.
As with the home office deduction, for these spaces to be tax-deductible, they must be primary places of business for you and they must be used only for your business during the time you were paying for them.
Most industries require some form of ongoing education or certification to run a successful business. As a result, any education or certification required to manage your business is tax deductible.
Deductible education includes any courses, certifications, conferences or classes that:
Educational costs you can deduct include:
If you make a donation on behalf of your business—whether that’s a monetary donation or a donation of inventory or products, you can write off the cost of that donation on your taxes.
If you have an inventory-based business, you can deduct the cost of your inventory, or the cost of the goods you sell from your taxes. In order to do so, you must keep careful records. You’ll need to value inventory at the beginning and end of each tax year to calculate the cost of your goods sold.
For example, these are some expenses you might include in calculating the cost of goods:
Whether your small business is just getting off the ground or well-established, taxes (and tax deductions can be tricky).
Instead of managing multiple expense management tools or keeping boxes of receipts piled away in your office, making tracking mileage and expenses for tax deductions as easy as 1, 2, 3.
Did you know the average Everlance user saves $6,500 a year on their taxes? Make taxes easy—and less expensive—with Everlance.
If you didn’t track your expenses well throughout the year and are now trying to play catch up before you file your taxes, just use our Instant Deduction Finder to find deductible expenses easily, in just minutes!