Tax Write-Offs and Deductions for Small Businesses to Know
Whether your small business is a pass-through tax entity or you are subject to corporate tax, you can benefit from business-related tax write-offs or deductions. Unfortunately, many entrepreneurs are unaware of all the small business tax deductions they are eligible for.
Any owner who doesn’t take advantage of tax write-offs for small businesses leaves a significant amount of money on the table every tax season.
Taking full advantage of small business tax deductions requires some planning, organization, and possibly input from a tax professional. However, the ability to reduce your tax liability is well worth the effort.
What is a Small Business Tax Write-Off?
Tax deductions for small businesses are costs and expenses that lower your taxable income. This is the amount that the IRS uses to estimate how much taxes small businesses pay in a given tax year. If your business spends money on products or services that are essential and ordinary for business, the IRS will allow you to “write off” or exclude these expenses from your income.
Write-offs are not limited to business expenses. If a client goes bankrupt and cannot pay their bill, small businesses can write off unpaid invoices and minimize their losses. Small businesses can also deduct other types of taxes on their state and federal returns.
Benefits of Taking Tax Write-Offs
Tax deductions are a legal way to lower your tax bill. Eligible business expenses reduce your taxable income. In some situations, deductions can push you into a lower tax bracket and shave several percentages of your tax bill.
How Business Tax Write-Offs Work
Owners who want to take advantage of small business tax write-offs must record and track all of their eligible expenses. A good bookkeeping system or professional accountant can store all receipts and documentation.
At the end of the tax year, these expenses should be entered into the correct tax form. Business deductions will lower the taxable income, but this doesn’t translate into a dollar-for-dollar reduction in tax owed. For this reason, business tax refunds are uncommon.
Common Types of Small Business Tax Write-Offs
Most entrepreneurs and small business owners make purchases to create and deliver their products and services. Common business expenses include website hosting fees, business cards, office supplies, or software subscription fees.
Here is a non-exhaustive list of typical small business tax deductions:
Business Insurance
Many companies are required to hold specific types of insurance policies in order to operate. For example, brick-and-mortar stores may purchase commercial property and general liability insurance to protect their products and customers. Small businesses with employees may have to buy workers’ compensation policies. Insurance premiums are an accepted small business write-off.
Work Travel and Car Expenses
While both employees and small business owners use their vehicles for work, only the self-employed can deduct automobile expenses. If a car is used only for business purposes, all associated costs such as insurance, maintenance, and gasoline are deductible.
If a vehicle is used for both personal and professional reasons, then only work-related travel costs are deductible. Small business owners who claim business expenses on personal vehicles should keep very detailed records of their mileage.
Other eligible travel expenses include flights, accommodation, and car rental fees for business trips.
Business Meals and Entertainment
If business owners treat their clients or employees to a meal, party, or another form of entertainment, some or all of these expenses may be deductible.
Some meals are 100% deductible. For example, small businesses can claim the entire cost of providing employees with free work lunches. Food and beverages for free promotional events are completely deductible.
Other meals are only 50% percent deductible. One-off dinners with clients or meal compensation for a traveling employee are a few examples. Client entertainment expenses have been 0% deductible since 2018.
Accounting Fees
All businesses must have their bookkeeping in order. For this reason, the IRS recognizes accounting fees as necessary expenses. Accounting fees can range from a few hundred dollars a month for accounting software to thousands of dollars for professional CPA retainer fees.
Generally, the more profitable a business is, the more it should spend on its accounting expenses. The same applies to businesses with more complex setups, such as clients in multiple states or countries.
Home Office Expenses
Although technically, a desk and computer in any room of the house can serve as a home office, the IRS has a much more narrow definition. Home offices must be exclusively used for business purposes. So, other everyday functions, like sitting down to eat or sleeping cannot take place there.
Small businesses that operate from eligible home office spaces can deduct a percentage of their utilities, home insurance premiums, rent, or mortgage interest. There is also the option to deduct a flat rate of $5 per square foot of office space. This deduction maxes out at 300 square feet.
Internet and Phone
Most small businesses need internet access and phone service to deliver their services. If a small business operates out of a qualifying home office, then a portion of the household phone and internet bills are deductible. Other deductible costs include subscription services for commercial spaces, data packages for necessary technology and equipment, and Wi-Fi connection fees while traveling.
If you buy a cell phone solely for business purposes, you can write off any depreciation. Online communication tools, such as a Zoom subscription or a Skype number, are 100% deductible.
Business License Fees
Many states, counties, and municipalities require businesses operating in their jurisdiction to obtain a business license. This is usually applicable to small businesses that have a physical location, sell a product, or operate in a regulated profession. License fees may be a one-time cost or an annually occurring charge.
Either way, claiming deductions for business license fees is slightly less straightforward than other expenses. It's best to talk to a licensed tax preparer before writing off these costs.
Bank Fees and Interest
Bank fees and interest are some of the easiest small business tax deductions to claim because they should be linked directly to the business’ bank account. Eligible deductions include account startup and maintenance fees, overdraft fees, and costs for additional services, such as lines of credit.
Professional Services
Receiving professional services is distinct from contracting or hiring workers. Professional consultants and firms provide a service that is outside a company’s usual course of business. Typical examples include lawyers, marketing firms, accountants, and graphic designers. Consultant fees are 100% deductible, as long as the service is only used for business purposes.
Charitable Donations
Corporate donation programs have two notable purposes. Companies can support local nonprofits and lower their tax liabilities at the same time. Charitable donations can include pro-bono services, volunteer hours, cash, or goods with a monetary value.
Claiming charitable contributions is a different process for corporations than it is for pass-through entities. Small business owners should consult with an experienced tax preparer before claiming any donations.
Education
Small business tax write-offs for education can be a bit tricky to claim. Courses or programs that are required by law or improve the business are typically deductible. However, business owners cannot deduct expenses to enter a new career. The cost to obtain minimum qualifications is also not tax deductible.
Here’s an example. An established hairdresser can claim professional development courses that improve their technique. However, a beginner cannot claim the cost of an entry-level cosmetology program needed for licensing.
Health Insurance Premiums
Small business owners often pay for their own health insurance out-of-pocket. Policy premiums for the owner and any covered employees are tax deductible.
Individual Retirement Account (IRA) Contributions
IRAs are tax-advantaged accounts that enable business owners to set aside money for retirement. Small business owners can contribute a maximum of between $6,500 and $7,500 per year to a traditional IRA.
401k contribution limits are much higher. In 2023, the IRS raised limits to $66,000 per year for people under 50 and $73,500 per year for older account holders.
Contributions to both owner and employee retirement accounts are tax-deductible.
Mortgage Interest and Rent
Businesses that operate out of commercial premises can deduct overhead costs, such as rent and mortgage interest. Rent costs don’t only apply to buildings. Equipment and vehicle leases considered necessary for the business are also deductible.
Marketing and Advertising
Companies need to get their services or products in front of potential customers to increase their sales. As a result, marketing and advertising are considered eligible business expenses. Marketing and advertising costs are very broad. Common expenses include paid social media ads, print ads, and commercials. The cost of hiring a marketing firm or social media manager would also fall into this expense category.
There are some limits. Lobbying and other types of politically-influenced marketing are not deductible.
Startup Costs
New small businesses often incur large upfront expenses before they are profitable. Startup costs can be hard to categorize, but they include any data collection, training, or travel costs associated with developing a business plan and establishing a company. Not all start-up costs are deductible.
Moving Expenses
Deductible moving expenses are strictly limited to the costs associated with office relocation. Personal moving costs for owners and employees are not eligible. Pass-through entities may be able to deduct moving costs if the new location increases the commute by at least 50 miles and the owner works in the space for a minimum number of weeks.
FAQs
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The best tax write-offs for a small business are expenses that are considered reasonable, necessary, and ordinary by the IRS. This includes employer-paid employee benefits, rent, equipment purchases, and advertising.
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Client entertainment costs, education to enter a new industry, and personal moving expenses are never deductible.
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Receipts prove to the IRS that you made the purchases you claimed on your return. If you fail to produce receipts for each deduction, the IRS may reject the claim. If the claimed expense is obviously in the business owner’s possession, the IRS may use the Cohan rule and only deduct the minimum cost for the item or service.
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Expense categories are some of the most common business tax terms for bookkeeping and accounting. Expense categories allow owners to lump similar small business tax write offs together. This makes them easier to track and manage. Most bookkeeping software will categorize expenses automatically.