If you operate a pass-through entity like a sole proprietorship, general partnership, or LLC, there are several business expenses you can make on your personal tax return to lessen your tax liability. What expenses are tax deductions for small businesses? Here are 18.
18 tax deductions for small businesses
Typically, you can deduct 50% of the cost of a business meal. However, for 2021 and 2022 only, the IRS allows for a full 100% deduction of business meal costs if dining in at a restaurant.
So what, exactly, counts as a business meal? It is any meal where work is the primary discussion, including meals with clients and employees. Other meal deductions include food items provided for the office, catered food for employees or clients, or meals purchased while on business trips.
Business-Related Travel Expenses
Business travel is defined as leaving your “tax home” for longer than a work day, with the time away used primarily for business purposes. The IRS allows “ordinary” and “necessary” expenses to be fully deducted. often includes flights, rental cars, and hotel expenses related to business travel can be fully deducted.
But don’t be quick to invite along travel companions and expect deductions — deductions can’t be made for spouses or dependents if they join you for any business travel.
Work-Related Vehicle Use
Do you use a car for business purposes? If the car is used only for business expenses, you can deduct all costs for owning and operating the vehicle.
If you use your vehicle for both personal and business use, you can claim this deduction, but only for the portion used for business. There are two options for claiming this deduction — the standard mileage rate method or the actual expense method.
If you rely on the IRS standard mileage rate deduction, you’ll need to keep records of your mileage. Popular bookkeeping software have mileage-tracking capabilities to make this easy.
Premiums for business insurance can be deducted, including:
- Property insurance
- Liability coverage
- Malpractice insurance
- Auto insurance
Home Office Space
If you are a business owner running your business from your home, you can deduct your home office space, whether a homeowner or renter.
The IRS lays out specific requirements for deducting a home office space, noting that “there generally must be exclusive use of a portion of the home for conducting business on a regular basis.” For example, if you have a room dedicated specifically as a home office, you can deduct that space.
The IRS allows for two methods of calculating your home office deduction:
- “The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.
- When using the regular method, deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.”
Software Purchases and Subscriptions
Almost every business will incur software expenses (like email software and CRM tools), and the good news is that you can deduct these costs.
Office Rent and Utilities
If your business has a dedicated office space, office rent and utilities, like water, trash, electricity, internet, and phone service are deductible.
Office Supplies and Office Furniture
Sticky notes may not cost much, but office supplies add up — and are tax deductible. Desks and office lamps: yep. Office furniture counts, too.
Bank and Other Payment Fees
Bank or credit card service charges and transfer fees are tax deductions for small businesses. Additionally, transaction fees exacted by third-party payment processors, like PayPal or Stripe, can be deducted.
Professional Service Fees
You can deduct fees charged by lawyers, accountants, or bookkeepers.
Employee Salaries and Benefits
While you, as a business owner (whether a sole proprietor, partnership, or LLC member), cannot deduct your own personal income from the business, if you have any employees on the payroll, you’re in luck. Employee salaries and benefits, including bonuses and commissions, are tax deductions for small businesses.
Even if you don’t have W-2 employees, you can still deduct the cost of contract labor and freelancers. Keep in mind that you must issue a MISC-1099 to any contractor who receives $600 or more from you each tax year.
Education costs related to your field — whether for yourself or employees — are fully deductible. These included classes, seminars, webinars, workshops, and even books or subscriptions to professional publications. Additionally, you can deduct the transportation expenses incurred while traveling to and from a class.
Marketing and Advertising
Marketing and advertising costs, whether print or digital, can be deducted, so long as these expenses are intended to generate or retain customers. Additionally, the IRS allows you to deduct certain advertising expenses meant for the “goodwill” of the public, like “the cost of advertising that encourages people to contribute to the Red Cross.”
Employee Social Events
Hosting an employee appreciation event isn’t just great for morale — it can also get you a tax break. Costs from employee events are all 100% deductible. Go ahead and start party planning.
The IRS allows you to deduct up to $5,000 in startup costs. This applies to expenses incurred prior to a business launch.
The IRS offers the following cost examples:
- An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
- Advertisements for the opening of the business.
- Salaries and wages for employees who are being trained and their instructors.
- Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
- Salaries and fees for executives and consultants, or for similar professional services.
Health Insurance Costs
Paying for your own independent health insurance plan? You can deduct your premiums for both yourself and your family members.
You can claim a deduction on… taxes you’ve paid? While this may seem like a contradiction, the answer is yes.
Certain taxes, like the employer-paid portion of payroll taxes for W-9 employees, can be claimed as a deduction, even if you operate as a pass-through entity. State and local income taxes or state and local sales tax (but not both!) can also be deducted. But no — you cannot deduct federal income taxes from your federal income taxes.
Other deduction possibilities include:
- State income or sales taxes
- Personal property taxes
- Real estate taxes paid on business property
- Excise taxes
- Fuel taxes
We recommend working with a CPA to determine which of these potential tax deductions for small businesses apply to you.
Reduce your tax obligation by claiming all applicable tax deductions for small businesses
When you DIY your own tax return, you could be missing out on valuable tax deductions. Work with a Landmark CPA to save money by ensuring you claim all applicable small business tax deductions.