How to Make the Most of Small Business Tax Deductions

What Are Small Business Tax Deductions?

Uncle Sam knows starting a small business is hard. So the government offers ways for you to save money. These tax breaks are designed to help your business succeed—which in turn, can help America’s economy.

The problem is deductions are easy to miss if you’re not an accountant or working with one. Tax software can point you in the right direction, but if you memorize the deductions I’ve listed below, you can keep track of them throughout the year. Organization and planning make tax season easier and faster.

What Qualifies as a Small Business Tax Deduction?

When it comes to small business tax deductions, it can be tough to know what can and can’t be claimed. While we’ll talk about some of the most common tax deductions in a moment, let’s take some time to talk about what the IRS considers to be a deductible expense.

In general, the IRS considers a business expense to be ordinary and necessary to running your small business. Let’s dive deeper into what that means:

• Ordinary means that the expense is common and standard to your business type or trade

• Necessary means that 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 that’s not typically standard within your industry. If, however, you purchased a truck or a work van, you’d likely be able to claim it as a small business tax deduction without much hassle from the IRS.

The 20 Most Common Small Business Tax Deductions

1. Startup 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.

Depending on how much you spend, you can also spread out the deductions over a certain number of years.

2. Home office.

Does 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. It has to be a space completely devoted to your business—and nothing else. It can be a full room or part of a room; all you have to do is measure the square footage of the space and divide it by the size of your home. You can use this percentage when you write off home insurance and other home expenses.

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

3. Rent.

If you rent space for a brick-and-mortar store or another small business location, you can deduct that amount. However, here are some things to keep in mind when deducting rental expenses.

4. Utilities.

Keep track of your heating bills, electricity charges, phone bill, and other utilities used for business. You’ll want to deduct these costs, as well.

5. Cleaning expenses.

If you work with a cleaning service or janitorial company to spruce up your location, remember to deduct the cost of their services. Just like with every other expense, keep your records handy.

6. Vehicles and mileage.

If you use your vehicle for work-related purposes, you can write off all costs associated with operating and maintaining it. Gas. Parking. Mileage. Tolls. Auto repairs. Things like that. If you used your car partly for work and partly for personal reasons, you can only deduct costs that are related 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 58.5 cents per mile. That’s up from 56 cents per mile in 2021.

7. Travel and meals.

If you head to trade shows or conferences, you can deduct your travel expenses, including airfare, lodging, and meals. If you’re shipping trade show materials, you can also deduct these expenses. Keep all of your receipts and records.

8. Office supplies and materials.

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

9. Computer hardware and software.

Desktops. Laptops. Tablets. Pretty much every type of business uses some type of electronic device. Not to mention the software that goes on it.

Whether you’re a freelance writer using Microsoft Office, a graphic designer who relies on Adobe, or an architect working in CAD, you can write off any software program you use for your business. This includes hiring software like Freshteam. Accounting software like QuickBooks. And more.

10. Office furniture and equipment.

If you’re buying new furniture for your office, like employee desks, chairs, and conference tables, you can write the costs off too. This is especially helpful because office furniture can have a big price tag. You can also deduct office equipment, like computers, projectors, and video conferencing devices.

11. Machinery and equipment rental.

For landscapers, builders, and restaurant owners, it might make sense to rent equipment rather than buying it outright. If that’s you, keep your records and remember to deduct these expenses at tax time.

12. Tools.

The IRS considers tools different from equipment. Tools can be 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 deducted. Tools with a useful life of more than one year must be depreciated. Remember to track and keep receipts as you buy them.

13. Advertising, marketing, and promotions.

Most businesses do some sort of advertising and marketing to secure customers. Track your expenses related to website hosting, business cards, flyers, billboards, and sponsorships. The only exception is political advertising; you cannot deduct this type of marketing.

14. Loan interest.

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

15. Employee wages and benefits.

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

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

No matter what type of work you do, 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 premiums.

One quick note: Whether you're shopping for business insurance or 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 start comparing policy options from the nation's most trusted insurance providers.

17. Education.

When you own a small business, the market can be competitive. That’s why it’s so important to regularly attend seminars, conferences, workshops, and classes in your industry. Just remember, when it comes to tax time, you can deduct any education costs.

18. Charitable deductions.

If generosity is part of your company mission, there’s good news. You can also deduct charitable donations. These need to be of monetary value though, as the IRS does not allow tracking the donation of your time.

19. Intellectual property.

It can cost quite a lot to secure a copyright, trademark, or patent. Remember to deduct these expenses.

20. 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 in regard to what can be deducted.

If you provide them with a perk, like a work bonus, or give out a gift, those expenses can be deducted. Just remember to keep track of all the gifts and bonuses to ensure that you take advantage of the deduction.

Small Business Tax Deductions: Do It Yourself, or Hire an Accountant?

Running a small business involves focusing on every expense going out the door, and managing them enough that you’re making money at the end of the day.

So when it comes to hiring an accountant to find your small business tax deductions, it makes sense that you may want to do it yourself.

Here’s the deal: I can’t recommend one option over the other, since you know your business best. But in general, the more complex your business, the more likely it is that you’ll need an accountant or other financial professional to help you with your tax prep.

Here’s why: small businesses tend to have a higher risk of getting audited by the IRS. According to IRS data, 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%.

It may not seem like much, but that tiny percentage increase reflects thousands of additional businesses getting audited. And if you happen to be one of these small businesses on the receiving end of an audit, it’s not exactly a comfort to know you’re a rarity!

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 out professional help with your taxes.

Plus, an accountant can help you find the deductions you didn’t even know you could take - and that could save you major money over the long run.

Small Business Tax Deductions for the Self-Employed

If you’re self-employed, you technically are a small business owner. However, the rules can be a little different for self-employed individuals, especially if you’re structured as a sole proprietor.

For the most part, self-employed individuals can claim many of the small business tax deductions as a larger business. However, you may be taxed differently as a sole proprietor than, say, a small business registered as an LLC.

You can learn more about the most common self employment tax deductions here. If you have additional questions about what you can claim on your taxes, it’s recommended that you reach out to an accountant or financial professional for help.

What Deductions Could Trigger an Audit?

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

Here are the deductions, mistakes, 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 going to go up. That’s because it actually can be pretty complicated to calculate how much of your home office expenses should be deducted from your taxes, meaning 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 can also look at home office deduction advice here.

2. Excessive meal and entertainment expenses.

If you’re claiming a lot of meal and entertainment expenses - especially in this past year, when much of business and client travel was shut down due to the pandemic - you may end up on the IRS’s radar. If you happen to entertain clients a lot or take them out to dinner, keep a very good track of your receipts in case of an IRS audit.

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 that your deductions are in line with your business expenses to avoid running the risk of an audit.

4. You’ve been audited in previous years.

Unfortunately, if your small business has been audited in the past, you have a higher likelihood of being audited in the future. If that’s the case, keep track of all receipts, hire an accountant or financial professional, and stay calm - eventually, you’ll be left alone!

Does Tax Software Help With Small Business Tax Deductions?

Yes! Many of today’s tax prep software can help small business owners manage their taxes, as well as identify deductions that they may be able to take. I’ve used tax software in the past that gave me helpful prompts to see if there were any deductions I could claim.

If you’re comfortable using tax software to find small business tax deductions, that works. However, it’s still recommended that you check with an accountant or tax preparation firm to ensure that you’re claiming everything your small business is entitled to.

Don't Miss Out On Your Small Business Tax Deductions!

Keep in mind, this isn’t the complete 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. You’ll be thankful if the IRS ever audits you, as this can be an expensive and time-consuming process.

If you ever question if you can deduct an expense, or how to deduct it, seek a good accountant. A professional can walk you through the deductions above and help you find more areas to save money.