How to Make the Most of Small Business Tax Deductions

What Qualifies as Small Business Tax Deductions?

When it comes to small business tax deductions, it can be tough to know what can and can’t be claimed.

In general, the IRS considers a business expense to be ordinary and necessary to run your small business.

• Ordinary means the expense is common and standard to your business type or trade.
• Necessary means the expense is helpful, and again, common to your business type or trade.

For example, if you’re a general contractor and you buy a small car as a business expense, the IRS might raise an eyebrow, as a small car is not typically considered ordinary or necessary within your industry. If, however, you purchased a truck or a work van, you’re more likely to be able to claim it as a small business tax deduction without much hassle from the IRS.

Common Small Business Tax Write Offs

1. Start-up expenses.

If you launched a new business in the latest tax year, you can deduct as much as $5,000 in start-up expenses. This includes costs associated with deposits put down on utilities and leased space, creating your business website, promoting your business, hiring an attorney, and more, just as long as these costs were incurred to help get your business off the ground.

2. Home office.

Does your self-employment require you to work tucked away in a home office? Good news. You may be able to write off the business part of your home.

Other work-from-home tax deductions may include mortgage interest, insurance, utilities, repairs, maintenance, and depreciation.

A quick tip: Speak with an accountant and do careful research on this deduction first. It can get complicated quickly, and you’ll want to avoid an IRS audit.

3. Vehicles and mileage.

If you use your vehicle for work-related purposes, you can write off all costs associated with operating and maintaining it, such as gas, parking, mileage, tolls, and repairs. If you used your car partly for work and partly for personal reasons, you can deduct costs that are related only to business usage.

You can claim the mileage you use for business either by deducting the actual miles or by using the standard mileage deduction rate of 65.5 cents per mile.

4. Travel and meals.

If you head to trade shows or conferences, your travel expenses may be considered for a small business tax deduction. This can include airfare, lodging, and meals. If you’re shipping trade show materials, you may also be able to deduct these expenses.

5. Office supplies and materials.

Printer ink. Paper. Envelopes. Basically anytime you head to your local office supply store, file away that receipt. You can likely deduct these expenses, as long as they’re solely used for your business.

6. Computer hardware and software.

The Section 179 deduction covers the cost of computers, business equipment and machinery, and office furniture. There is an annual limit that’s often adjusted each year, so it’s a good idea to check with the IRS or a tax professional to see if this could apply to your business.

7. Tools.

The IRS considers tools different from equipment. Tools are generally less expensive and include anything from hammers, to paint supplies, to mixers, and baking pans.

The general rule is small tools with a useful life of less than one year can be considered small business tax deductions. Other equipment and tools with a useful life of more than one year must be depreciated and are therefore not considered for a small business tax deduction. Remember to track and keep receipts as you purchase them.

8. Advertising, marketing, and promotions.

To attract new customers, most businesses do some type of advertising and marketing. Track your expenses related to website hosting, business cards, flyers, billboards, and sponsorships. They may be deductible.

9. Loan interest.

If you’ve taken out a loan to start your business, you may be able to deduct the interest you pay on that loan. But this applies only to a loan for your business, not a personal loan.

10. Employee wages and benefits.

If you have employees, you can deduct their wages and salaries as business tax write-offs. If you’re fortunate enough to offer your employees stellar benefits, like childcare and education assistance, you can typically write off these expenses too.

11. Insurance premiums (health, life, business, and auto).

Regardless of what type of work you do, having business insurance is usually a good idea. It can cover you if there’s an accident, health issue, property damage, lawsuit, and more. As long as your insurance is considered “ordinary and necessary,” you can deduct the cost of the premiums.

One quick note: Whether you're shopping for business insurance or you just want to see if you're getting the best price on your current insurance, our free quote comparison tool can help. Just enter a few details about your business to begin comparing policy options from some of the nation's most trusted insurance providers.

12. Charitable deductions.

If generosity is part of your company mission, there’s good news. You also can deduct a percentage of your charitable donations. These donations need to have monetary value, though, as the IRS doesn’t allow deductions for donating your time.

13. Employee and client gifts.

If you run a successful business, you may want to reward the employees who help you run it and the customers who keep it running. While there may not be any limits to your generosity, there are limits regarding what gifts can be deducted.

Which Small Business Tax Deductions Could Trigger an Audit?

It’s tough to identify which exact signals could trigger an IRS audit, as they tend to keep that fairly secretive. However, there is enough data out there that might hint at which deductions could increase the likelihood of getting that dreaded audit notification from the IRS.

Here are some of the deductions, errors, and other signals that could trigger an IRS audit:

1. Home office.

Unfortunately, if you claim a home office, your odds of getting audited by the IRS are likely to go up. That’s because it actually can be fairly complicated to calculate how much of your home office expenses should be deducted from your taxes and many people tend to make mistakes on this one.

If you want to claim a home office, it’s recommended that you reach out to a financial professional for help. You also can also take some initial guidance on the home office deduction here.

2. Excessive meal and entertainment expenses.

If you’re claiming a lot of meal and entertainment expenses, this activity is more likely to put you on the IRS’s radar. If you happen to entertain clients a lot or take them out to dinner, track those expenses carefully and keep those receipts.

3. Suspiciously high deductions.

If your small business makes $100K per year but you claim $30K in charitable deductions, the IRS may want to take another look at your tax return. Make sure your deductions are in line with your business expenses to avoid running the risk of an audit.

4. Claiming a business loss.

Incurring a loss isn’t unheard of for a small business, and using it as a tax deduction can be acceptable. However, reporting recurring losses can become an audit trigger.

How likely is an audit?

Small businesses tend to have a higher risk of getting audited by the IRS. The average person’s audit risk is relatively low, at about 1%. But if you run a small business, that risk increases to about 2.5%.

For that reason, if you don’t feel confident taking small business tax deductions or you don’t trust tax software to help, it’s a good idea to seek professional help with your taxes.

Don't Miss Out on Your Small Business Tax Deductions

This is by no means a comprehensive list of small business tax deductions — it’s just a few tips to help you learn what to track. When in doubt, keep your receipts, invoices, and other records. File them all away on your computer and in a locked filing cabinet. It can be good information to have if you’re audited, but it’s also just good business practice.

As with all things related to taxes, we recommend consulting with an accountant or tax professional to make sure you are filing appropriately.

Looking for more information regarding taxes or small business in general? Check out the wealth of helpful guides, tools, and templates in our online Resource Center.