March 3, 2021
Is your small business taking advantage of every tax deduction it qualifies for? Here are 36 deductions that may help your business save money on taxes.
Also referred to as tax write-offs, business deductions are allowable expenses that you can use to lower your business’s taxable income. Many of the most common tax-deductible business expenses, like startup costs and home office expenditures, are closely related to your business operations. Others, such as healthcare and dependent care costs, aren’t as closely related, but they’re equally legitimate. Some expenditures qualify as deductions under some circumstances but not under others.
This article is for small business owners who want to know which tax deductions they can and cannot take.
If you’re like most business owners, you’re always looking for ways to reduce your tax liability. One way to do this is to take advantage of as many business tax deductions as you can. The list of these deductions is extensive, and knowing which items are on that list is good preparation for meeting with your tax professional at tax time.
What are small business tax deductions?
Small business tax deductions are allowable expenses that can reduce your business’s taxable income. These deductible business expenses are also referred to as tax write-offs.
The IRS taxes businesses on their net income, which is calculated by subtracting business expenses from gross income. Many operating expenses are tax deductible, but some are not or are deductible only under certain conditions.
According to the IRS, no expense can be deductible unless it’s both ordinary and necessary. An ordinary expense is one that’s common and accepted in your business. For example, if you own a bakery, the cost of flour and sugar is an ordinary expense. A necessary expense is one that’s helpful and appropriate for your trade and business, such as travel expenses to attend an annual industry convention.
It’s also a good idea to be aware of which tax deductions come with restrictions or prerequisites. This is especially true because of the many tax changes that have occurred as a result of recent tax reform and because improperly trying to claim a deduction can trigger an audit by the Internal Revenue Service.
Remember, you can use business tax deductions to reduce your business’s taxable income and, in turn, its tax liability. All expenses deducted must be both ordinary and necessary.
Business tax deduction checklist
Here’s a list of 36 small business deductions, from A to Z. Discuss these options with your CPA or tax professional to find out which ones your business qualifies for.
1. Advertising and marketing
There’s good news when it comes to advertising and marketing expenses. Not only are these expenses 100% deductible, but the list of allowable deductions is long.
That list includes (but isn’t limited to) the cost of a business logo design, printing (e.g., business cards or brochures), online and print ad space, website design/creation, social media marketing campaigns, event sponsorship and promotional mailings for existing and potential customers.
However, you can’t deduct any expenditures you incurred to sponsor a political campaign or event in your business’s name.
2. Bank fees
It’s fine to deduct service charges, funds transfer fees and overdraft fees associated with your business bank or credit card account. The same holds true of merchant or transaction fees paid to a third-party payment processor.
3. Bonus depreciation
Through 2022, you can deduct 100% of the cost of qualified property. This means tangible property with a recovery period of 20% or less. Examples include off-the-shelf computer software; certain film, television and theatrical production costs; and some plants that bear fruit and nuts.
4. Business gifts
Holiday gifts for clients, customers and other business associates are considered deductible business expenses. However, you can deduct only $25 annually for business gifts given to any one individual. Promotional items, like pens and calendars, don’t count toward the limit if each one costs $4 or less, has your business’s name clearly and permanently imprinted on it and is one of a number of identical widely distributed items.
5. Business income
Business owners who report their operations on Schedule C of their personal income tax return qualify for a 20% deduction on their business income. The deduction phases out for high-income earners (over $160,000 for single filers, $160,725 for married filing separately and $321,400 for joint filers).
6. Business insurance premiums
Premiums paid on business interruption, business vehicle, liability, professional liability/malpractice and workers’ compensation insurance policies fall into this category. So do employee health, dental, vision and life insurance premiums. One caveat: Life insurance premiums aren’t deductible if you or your business is the beneficiary on the policy.
7. Business meals
You can deduct 50% of “qualifying” food and beverage costs. “Qualifying” means the meal must be an ordinary and necessary part of conducting your business – for example, to discuss your services with a prospective client or show your company’s new merchandise to an existing or potential customer. It can’t be lavish or extravagant, and you or one of your employees must be present at the restaurant or other venue when the food and beverages are consumed.
The cost of meals for employees is also deductible. You can deduct 100% of the cost of food and beverages served at office social events, such as parties and picnics. Meals provided to employees for other reasons – for example, dinner when they’re working late – are 50% deductible.
8. Business use of your vehicle
The entire cost of operating your vehicle qualifies as deductible if it’s driven only for business purposes, rather than for both business and personal purposes. Otherwise, you can deduct just the costs related to business use – for example, gas and tolls paid while driving to appointments with clients but not while transporting your family to the beach.
The IRS allows two methods to calculate deductions in cases where a vehicle is used for business and personal reasons:
9. Charitable contributions
Sole proprietors, limited liability companies (LLCs) and partnerships can’t deduct contributions as a business expense, but you, as the business owner, may be able to claim the deduction on your Schedule A. The donation must be to a qualified organization. Corporations can deduct charitable contributions of up to 25% of their taxable income.
10. Child and dependent care
To qualify for this deduction, the person receiving the care you’re paying for must be a child under 13 or a spouse or other dependent who’s physically or mentally unable to care for himself or herself. The credit is worth 25% to 30% of your allowable expenses, depending on your income.
11. Cleaning supplies and janitorial services
You’re allowed this business deduction for any expenses related to keeping your business sanitized. That means cleaning supplies, trash removal, recycling and sanitation.
All properties cleaned are eligible. For example, if you own a retail store and an office, you can deduct all expenses related to keeping both facilities clean and sanitized.
If you have a home office, you can also deduct a portion of your payment to an individual or cleaning service you’ve hired to clean your house. The deduction is calculated based on the square footage of the office.
12. Contract labor
Payments to freelancers and independent contractors are deductible. Supply a 1099-MISC form to any individual who delivers $600 or more worth of services to your company in any tax year.
13. Cost of goods sold
This isn’t a standard deduction; instead, it’s factored into reporting revenue from the sale of inventory. You don’t deduct the cost of your inventory items (i.e., the cost of goods sold); rather, you reduce your gross receipts from the sale of inventory items so your income is modified accordingly.
Thanks to tax reform, business owners no longer need to depreciate the cost of assets over a period of years. Instead, they can write off the entire cost of new purchases of items such as computers, furniture and equipment. The cost of these items used is now 100% deductible, too.
The IRS allows you to fully deduct education costs if incurring these expenses adds value to your business by helping to maintain or enhance the expertise and skills needed to operate it. Examples of valid business education expenses include classes, workshops, seminars and webinars that pertain to your field; subscriptions to trade or professional publications; and books tailored to your industry.
Transportation to classes or other educational sessions also qualify for the full deduction, but education expenditures that would qualify you for a new career or that are unrelated to your business do not.
16. Family and medical leave (paid)
Under the Tax Cuts and Jobs Act, business owners can claim a credit for wages paid to employees on family and medical leave. The credit starts at 12.5% for payments of 50% of a person’s salary and increases to up to 25% if the leave payment rate is 100% of the normal rate.
17. Health insurance
If you are self-employed, you can deduct the costs of your personal health insurance premiums. However, you need to meet certain criteria:
18. Healthcare out-of-pocket expenses
In addition to healthcare premiums, self-employed business owners can deduct other out-of-pocket medical expenses, like office co-pays and prescriptions. These costs are classified as itemized deductions on Schedule A.
19. Home office
Regularly and exclusively designating part of your home to perform administrative or managerial activities for your business gives you the right to claim a home office deduction for utilities, rent, mortgage interest, real estate taxes, depreciation and cleaning/repair fees. The deduction is calculated based on the area of your home multiplied by $5 and has a cap of $1,500.
If you take out a loan or use a credit card to cover business expenses, you’re entitled to deduct interest paid to the lender or credit card company. There are a few caveats, though. You must be legally liable for the debt; if someone else gets a loan or mortgage to help you out, you’re not legally liable for the debt even if you make payments on it. You and the lender must intend for the debt to be repaid; you can’t take a gift of funds from a relative or friend and call it a loan.
You and the lender also must have a true “debtor/creditor” relationship, with a schedule of regular payments. If a loan is part business and part personal, you can deduct only the portion of the loan that’s for business.
21. Legal and professional fees
You can take a deduction for legal and professional fees charged by accountants, attorneys, bookkeepers, online bookkeeping service providers and tax preparers. Their services must be necessary for and directly related to running your business.
22. Local transportation
Local transportation costs, like Uber fare to visit a vendor or prospective customer or client, are deductible.
23. Maintenance and repairs
Maintenance and repairs to your business premises are fully deductible, but expenditures for capital improvements, such as a new roof, may not be immediately deductible. If you have a home office, you can deduct a percentage of what you spend on maintenance and repairs to your home, based on its square footage.
24. Moving expenses
Any costs to move business equipment, supplies and inventory from one business location to another qualifies as a deduction.
25. Organizational costs
This is a deduction you can leverage during your first year in business, and it’s up to $5,000. Organizational costs include expenses you incur in forming your business structure, such as fees for forming a legal entity.
26. Real estate losses
You can deduct up to a certain amount of losses against your income if you actively participate in renting your property, depending on your adjusted gross income. A real estate loss would be when expenses pertaining to a rental property exceed the rental income. If you are a real estate professional, i.e., you spend more than half your working hours – a minimum of 751 hours in a year – in the real estate business, you can deduct real estate losses without a cap.
Rent paid for any location used to conduct business, as well as equipment rental costs, can be deducted as a business expense. But if you rent your home, you can’t take a deduction for payments to the landlord, even if you have a home office. These payments can be deducted as a part of home office expenses.
28. Research and development
You can claim this credit for expenses you incur in seeking information that’s technological in nature and will help you develop a new or improved business component. For example, if you owned a catering business, you’d qualify for the research and development credit if you invested in developing equipment that automates a food preparation process.
29. Retirement plans
You can take deductions on contributions to your own retirement plan and to retirement plans you’ve set up for employees. You’re also entitled to a tax credit equal to 50% of the first $1,000 you invest in starting a retirement plan.
30. Salaries, wages and benefits
Payments to employees – including salaries, wages, bonuses, commissions and taxable fringe benefits – are deductible business expenses. If you own a C corporation or an S corporation and perform more than minor services there, you can be considered a salaried employee, and your salary is also deductible. But sole proprietors, partners and members of an LLC aren’t employees, and any monies paid to them can’t be written off.
31. Startup costs
Startup costs include expenditures to start a business or to investigate opening or acquiring a business. Travel and other expenditures related to finding suppliers, customers and distributors, along with the cost of advertisements announcing a new business, also fall into this bucket. There is a $5,000 deduction for startup costs.
Go ahead and deduct the cost of items your small business uses in its day-to-day operations, like ingredients for a catering company or cleaning supplies for a janitorial service.
33. Taxes and licenses
Here is a list of taxes and licensing fees that qualify as deductible business expenses:
34. Telephone and internet
Telephone and internet services that are integral to conducting your company’s business are considered deductible business expenses. If you use a landline at home, you can’t deduct the cost of your first line, even if it’s used only for work. However, you can deduct the cost of a second line devoted to business.
If your cell phone and internet connection are used for personal and business reasons, the entire cost can’t be deducted – just the percentage of the cost that’s allocable to your business.
Whether incurred by you or your employees, the costs of airfare, meals, lodging and miscellaneous business travel expenses are fully deductible.
Examples of miscellaneous expenses include the use of your car or other transportation services while in the business destination, parking, tolls, dry cleaning, tips, business calls and shipping of materials or samples to the city where you’re doing business. However, the cost of commuting to and from work daily is not deductible.
36. Work opportunity credit
You can take advantage of the work opportunity credit if your business pays first- and second-year wages to targeted employees, like veterans, long-term recipients of family assistance funds from the government and youths hired for summer jobs.
The credit is calculated as a percentage of the employees’ wages and ranges from $2,400 to $9,600 per employee, depending on the type of targeted employee.
Remember, deductible expenses vary. Use this list as a jumping-off point, with the understanding that not all options will apply to your business and that you should seek the advice of a tax professional.
This year’s taxes can be complicated. Don’t take a chance and leave it to a tax professional. Don’t have one or want to work with a new one this year? Contact our office and speak with one of our team members. Wey will be happy to help you. At Louis Mamo & Company we have been providing solutions for businesses and individuals since 1982.
(Sources: Business News Daily, IRS and U.S. Department of the Treasury)